1
As Filed Pursuant to Rule 424(B)(2)
Registration No. 333-56850
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 23, 2001)
52,389,000 SHARES OF CLASS A COMMON STOCK
$550,000,000 4.75% CONVERTIBLE SENIOR NOTES DUE 2006
[CHARTER COMMUNICATIONS LOGO]
CHARTER COMMUNICATIONS, INC.
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We are offering 52,389,000 shares of our Class A common stock. Concurrently
with the Class A common stock offering, we are offering $550,000,000 aggregate
principal amount of 4.75% convertible senior notes due 2006. The offering of the
Class A common stock and the offering of the notes are independent offerings and
are not conditioned on each other.
The notes will mature on June 1, 2006. We will pay interest on the notes on
December 1 and June 1 of each year, beginning on December 1, 2001. You may
convert the notes into shares of our Class A common stock at any time before
June 1, 2006 or their prior redemption or repurchase by us. The conversion rate
is 38.0952 shares per each $1,000 principal amount of notes, subject to
adjustment in specified circumstances. This is equivalent to a conversion price
of $26.25 per share. The notes will rank equally with all of Charter
Communications, Inc.'s existing and future unsubordinated and unsecured
indebtedness, but will be structurally subordinated to all existing and future
indebtedness and other liabilities of our subsidiaries.
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Our Class A common stock is traded on the Nasdaq National Market under the
symbol "CHTR." On May 23, 2001, the last reported sale price of the Class A
common stock on the Nasdaq National Market was $20.92 per share.
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INVESTING IN THE CLASS A COMMON STOCK OR THE NOTES INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE S-17.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THE CLASS A COMMON STOCK OR THE NOTES OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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OFFERING OF CLASS A COMMON STOCK
PER SHARE TOTAL
--------- -----
Public offering price....................................... $21.000 $1,100,169,000
Underwriting discount....................................... $ 0.735 $ 38,505,915
Proceeds, before expenses, to us............................ $20.265 $1,061,663,085
We have granted to the underwriters for the Class A common stock offering
the right to purchase up to an additional 7,858,350 shares to cover
over-allotments. The underwriters expect to deliver the shares of Class A common
stock to purchasers on May 30, 2001.
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OFFERING OF CONVERTIBLE SENIOR NOTES DUE 2006
PER NOTE TOTAL
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Public offering price....................................... 100.00% $550,000,000
Underwriting discount....................................... 2.75% $ 15,125,000
Proceeds, before expenses, to us............................ 97.25% $534,875,000
We have granted to the underwriters for the notes offering the right to
purchase up to an additional $82,500,000 principal amount of notes to cover
over-allotments. The underwriters expect to deliver the notes to purchasers on
May 30, 2001.
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JOINT BOOK-RUNNERS AND JOINT LEAD UNDERWRITERS
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
------------------------
BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
JPMORGAN
CREDIT LYONNAIS SECURITIES (USA) INC. FLEET SECURITIES, INC.
BMO NESBITT BURNS DRESDNER KLEINWORT WASSERSTEIN
May 23, 2001
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
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Forward-Looking Statements......... S-3
About this Prospectus Supplement... S-3
Prospectus Supplement Summary...... S-4
Risk Factors....................... S-17
Use of Proceeds.................... S-32
Price Range of Common Stock and
Dividend Policy.................. S-33
Ratio of Earnings to Fixed
Charges.......................... S-34
Dilution........................... S-34
Capitalization..................... S-35
Unaudited Pro Forma Financial
Statements....................... S-38
Selected Historical Financial
Data............................. S-55
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ S-57
Business........................... S-78
Regulation and Legislation......... S-95
Management......................... S-102
PAGE
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Principal Shareholders............. S-113
Shares Eligible for Future Sale.... S-115
Certain Relationships and Related
Transactions..................... S-116
Description of Certain
Indebtedness..................... S-126
Description of Capital Stock and
Membership Units................. S-140
Description of Notes............... S-141
Certain United States Tax
Considerations for Non-United
States Holders of Class A Common
Stock............................ S-153
Summary of Certain United States
Federal Income Tax Considerations
for Holders of Notes............. S-156
Underwriting....................... S-162
Legal Matters...................... S-166
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PROSPECTUS
PAGE
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Disclosure Regarding Forward-Looking
Statements........................ 3
About this Prospectus............... 4
Additional Information.............. 4
Our Business........................ 5
Use of Proceeds..................... 6
Ratio of Earnings to Fixed
Charges........................... 6
PAGE
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Description of Debt Securities...... 7
Description of Capital Stock and
Membership Units.................. 17
Plan of Distribution................ 31
Indemnification of Directors and
Officers.......................... 33
Legal Matters....................... 34
Experts............................. 34
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FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
incorporated by reference include forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial. 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 prospectus supplement, the
accompanying prospectus and the documents incorporated by reference may be
identified by the use of forward-looking words such as "believe," "expect,"
"anticipate," "should," "planned," "will," "may," "intend," "estimated" and
"potential," among others. Important factors that could cause actual results to
differ materially from the forward-looking statements we make in this prospectus
supplement, the accompanying prospectus and the documents incorporated by
reference are set forth in this prospectus supplement, the accompanying
prospectus and in reports or documents that we file from time to time with the
United States Securities and Exchange Commission, or the SEC, and include, but
are not limited to:
-- our plans to offer advanced products and services;
-- our anticipated capital expenditures for our upgrades and new
equipment and facilities;
-- our ability to fund capital expenditures and any future
acquisitions;
-- our beliefs regarding the effects of governmental regulation on our
business;
-- our ability to effectively compete in a highly competitive and
changing environment; 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.
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ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement contains the terms of the Class A common stock
offering and the terms of the notes offering. Certain additional information
about Charter Communications, Inc. is contained in the accompanying prospectus.
This prospectus supplement, or the information incorporated by reference in the
accompanying prospectus, may add, update or change information in the
accompanying prospectus. If the information in this prospectus supplement or the
information incorporated by reference in the accompanying prospectus is
inconsistent with the accompanying prospectus, this prospectus supplement or the
information incorporated by reference in the accompanying prospectus, as
applicable, will apply and will supersede the information in the accompanying
prospectus.
It is important for you to read and consider all information contained in
this prospectus supplement and the accompanying prospectus in making your
investment decision. You should also read and consider the information in the
documents we have referred you to in "Additional Information" on page 4 of the
accompanying prospectus.
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with information that is different from
that contained or incorporated by reference in this prospectus supplement or the
accompanying prospectus. The information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus is
accurate only as of the date of such information, regardless of the time of
delivery of this prospectus supplement or of any sale of the Class A common
stock or the notes.
This prospectus supplement and the accompanying prospectus do not
constitute an offer or solicitation by anyone in any jurisdiction in which an
offer or solicitation is not authorized or in which the person making an offer
or solicitation is not qualified to do so, or to anyone to whom it is unlawful
to make an offer or solicitation.
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary contains a general discussion of our business, the
offering of the Class A common stock, the offering of the notes and summary
financial information. It likely does not contain all the information that is
important to you in making a decision to invest in the Class A common stock or
the notes. For a more complete understanding of the offerings, you should read
this entire prospectus supplement and the accompanying prospectus.
Unless stated otherwise, the discussion of our business in this prospectus
supplement includes Charter Communications, Inc. and its direct and indirect
subsidiaries. Unless otherwise stated in this prospectus supplement, the
operating and financial data included in this prospectus supplement and the
accompanying prospectus do not include the effect of the pending AT&T
transactions and assume no exercise of the underwriters' over-allotment options.
OUR BUSINESS
We are the fourth largest operator of cable systems in the United States,
serving approximately 6.4 million customers.
We offer a full range of traditional analog cable television services in
all of our systems. In an increasing number of our systems, we are offering
digital cable television services, along with an array of advanced products and
services, such as interactive video programming, which allows information to
flow in both directions, high-speed Internet access and video-on-demand. We
continue to explore opportunities to offer telephony through our broadband
network. The introduction and roll-out of these 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 the 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%.
Our principal executive offices are located at 12444 Powerscourt Drive,
Suite 100, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555 and
our Web site is located at www.charter.com. The information on our Web site is
not part of this prospectus supplement, the accompanying prospectus or the
documents incorporated by reference.
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BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
-- upgrade the bandwidth capacity of our systems to 550 megahertz or
greater to enable greater channel capacity and add two-way capability
to facilitate interactive communication;
-- expand the array of services we offer to our customers through the
implementation of our Wired World vision;
-- maximize customer satisfaction by providing reliable, high-quality
service offerings, superior customer service and attractive
programming choices at reasonable rates; and
-- employ innovative marketing programs tailored to local customer
preferences to generate additional revenues.
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CHARTER ORGANIZATIONAL STRUCTURE
The chart below sets forth our organizational structure and that of our
direct and indirect subsidiaries. Our cable systems are owned by certain of our
wholly owned subsidiaries. Equity ownership and voting percentages are
calculated as of May 10, 2001.
[CHARTER COMMUNICATIONS FLOW CHART]
* Includes 25,096,176 shares of our Class A common stock issued in
connection with certain acquisitions. These shares are unregistered and
are subject to certain restrictions on transfer.
** These membership units are exchangeable at any time for shares of our
Class B common stock which are in turn convertible into shares of our
Class A common stock.
*** Certain former owners of Bresnan own a minority equity interest in
Charter Communications Holding Company and other former owners of
Bresnan own 100% of the preferred equity interests in CC VIII, LLC, a
subsidiary of the Avalon notes issuers. These equity interests are
exchangeable at any time for shares of our Class A common stock on a
one-for-one basis. See "Business--Organizational Structure--Sellers of
Bresnan Cable Systems."
For a more detailed description of each entity and how it relates to us,
see "Business--Organizational Structure."
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RECENT EVENTS
ACQUISITIONS
In 2000, we completed five acquisitions of cable systems for an aggregate
purchase price of $3.3 billion. Our most significant acquisition in 2000 was of
Bresnan Communications Company for a purchase price of $3.1 billion. The systems
we acquired in 2000 had a total of 781,400 customers at year end 2000 and total
annual revenues of $370.2 million for the year ended December 31, 2000. See
"Business -- Acquisitions Completed in 2000."
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 509,400 customers for the Charter cable systems.
In the pending AT&T transactions, we expect to acquire cable systems from AT&T
Broadband serving approximately 571,900 customers in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. We expect to use a portion of the
net proceeds from the offering of Class A common stock described in this
prospectus supplement to pay a portion of the purchase price ($501.5 million) of
the pending AT&T transactions in lieu of issuing Class A common stock to AT&T.
The AT&T transactions are expected to close in the second and/or third quarters
of 2001, subject to certain closing conditions and regulatory review. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pending AT&T Transactions."
CHARTER HOLDINGS 2001 SENIOR BRIDGE LOAN COMMITMENT
Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation entered into a commitment letter with affiliates of the
underwriters to provide senior increasing rate bridge loans of up to $2 billion
for capital expenditures, general corporate purposes, and, if necessary, to fund
the cash portion of the pending AT&T transactions. If any of the pending AT&T
transactions are not completed, the commitment will be reduced by the amount of
the commitment allocated to such portion of the transaction, up to $1 billion.
On May 10, 2001, Charter Holdings, Charter Capital and the prospective lenders
under the committed facility amended the commitment letter. After giving effect
to this amendment, the current availability under the committed facility is
approximately $1 billion. The aggregate commitments of the prospective lenders
will be reduced by the net proceeds received by Charter Communications, Inc.
from the offering of the Class A common stock described in this prospectus
supplement (except for $501.5 million of the net proceeds that we expect to use
to pay a portion of the purchase price of the pending AT&T transactions) and the
net proceeds received by Charter Communications, Inc. from the offering of the
notes described in this prospectus supplement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Charter Holdings
2001 Senior Bridge Loan Facility."
CHARTER HOLDINGS MAY 2001 SENIOR NOTES
On May 15, 2001, Charter Holdings and Charter Capital issued 9.625% senior
notes due 2009 in the aggregate principal amount of $350 million, 10.000% senior
notes due 2011 in the aggregate principal amount of $575 million and 11.750%
senior discount notes due 2011 in the aggregate
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principal amount at maturity of $1.018 billion in Rule 144A and Regulation S
private placements. A portion of the net proceeds were used to repay amounts
outstanding under the revolving credit facilities of our subsidiaries. The
remainder of the net proceeds are intended to be used to pay approximately $1.1
billion of the purchase price of the pending AT&T transactions and for general
corporate purposes, including capital expenditures. See "Description of
Indebtedness -- Existing Public Debt."
CHARTER HOLDINGS JANUARY 2001 SENIOR NOTES
In January 2001, Charter Holdings and Charter Capital issued 10.750% senior
notes due 2009 in the aggregate principal amount of $900 million, 11.125% senior
notes due 2011 in the aggregate principal amount of $500 million and 13.500%
senior discount notes due 2011 in the aggregate principal amount at maturity of
$675 million in Rule 144A and Regulation S private placements. The net proceeds
were used to repay all remaining amounts outstanding under the Charter Holdings
2000 senior bridge loan facility and the CC VI (Fanch) revolving credit facility
and a portion of the amounts outstanding under Charter Operating and CC VII
(Falcon) revolving credit facilities. In March 2001, Charter Holdings and
Charter Capital exchanged the notes for new notes with substantially similar
terms, except that the new notes are registered under the Securities Act of
1933. See "Description of Certain Indebtedness -- Existing Public Debt."
CHARTER COMMUNICATIONS, INC. SALE OF CONVERTIBLE SENIOR NOTES
In October and November 2000, we issued 5.75% convertible senior notes due
2005 in the total principal amount of $750.0 million in a Rule 144A private
placement. All of the proceeds from the sale of the convertible senior notes
were contributed to Charter Communications Holding Company, LLC in exchange for
two mirror convertible notes in an equal total amount and subsequently the net
proceeds were used to repay an intercompany amount due to Charter Holdings and
to make a contribution for additional equity to Charter Holdings. Charter
Holdings used the proceeds it received to repay a portion of the amounts
outstanding under the Charter Holdings 2000 senior bridge loan facility. The
convertible senior notes were registered for resale with the SEC in February
2001.
BRESNAN/AVALON COMBINATION
In December 2000, Charter Holdings contributed all of its equity interests
in CC VIII, LLC to CC V Holdings, LLC, combining the cable systems acquired in
the Avalon and Bresnan acquisitions below CC V Holdings. In connection with this
combination, in January 2001 all amounts due under the CC V (Avalon) credit
facilities were repaid and such credit facilities were terminated. At the same
time, the CC VIII (Bresnan) credit facilities were amended and restated to,
among other things, increase borrowing availability by $550 million. See
"Description of Certain Indebtedness--Existing Credit Facilities."
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THE OFFERING OF CLASS A COMMON STOCK
Shares of Class A
common stock offered........ 52,389,000
Shares of common stock to be
outstanding after the
offering:
Class A common stock........ 286,162,798
Class B common stock........ 50,000
Use of proceeds............... We expect to use the net proceeds of the Class
A common stock offering to fund a portion of
the purchase price for the pending AT&T
transactions (which we otherwise would have
paid by issuing to AT&T shares of our Class A
common stock valued at $501.5 million) and the
remainder for working capital purposes and
capital expenditures. See "Use of Proceeds."
Voting rights................. Each holder of Class A common stock is entitled
to one vote per share.
Each holder of Class B common stock is entitled
to a number of votes determined by a formula
based on the number of outstanding shares of
Class B common stock and outstanding membership
units exchangeable for Class B common stock.
The result of this formula is that Mr. Allen is
entitled to ten votes for each share of Class B
common stock and each membership unit held by
him or his affiliates.
Mr. Allen currently controls approximately
93.5% of the voting power of all of our capital
stock.
Control by Paul G. Allen...... Mr. Allen will continue to own all of the
outstanding shares of our Class B common stock
following the offering of Class A common stock.
By virtue of Mr. Allen's ownership of all of
Charter Communications, Inc.'s Class B common
stock and the ownership by Mr. Allen's
affiliates of Charter Communications Holding
Company membership units, Mr. Allen will
continue to control the corporate actions of
Charter Communications, Inc., such as electing
its board of directors, amending its
certificate of incorporation and controlling
all fundamental corporate decisions.
Nasdaq National Market
symbol........................ "CHTR"
If the underwriters exercise their over-allotment option in full, the total
number of shares of Class A common stock outstanding after the offering will be
294,021,148.
In this prospectus supplement, in calculating the number of shares of each
class of Charter Communications, Inc. common stock and the membership units in
Charter Communications Holding Company and the ownership and voting percentages,
we have assumed no exercise of outstanding options and no exchange of membership
units in our subsidiaries for shares of common stock. The number of shares of
Class A common stock listed above does not include outstanding Charter
Communications Holding Company membership units. These membership units are
exchangeable for shares of Class A common stock on a one-for-one basis, except
that Mr. Allen and his affiliates may exchange membership
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units for shares of Class B common stock on a one-for-one basis. Shares of Class
B common stock are convertible into shares of Class A common stock at any time
on a one-for-one basis.
CONCURRENT NOTES OFFERING
Concurrently with the offering of the Class A common stock, we are also
offering $550 million aggregate principal amount of 4.75% convertible senior
notes due 2006. The offering of Class A common stock and the offering of the
notes, however, are independent offerings and are not conditioned on each other.
No requirement exists that we sell the notes in order to sell the Class A common
stock.
RISK FACTORS
You should carefully consider all of the information in this prospectus
supplement and the accompanying prospectus. In particular, you should evaluate
the specific risk factors under "Risk Factors" for a discussion of risks
associated with an investment in the shares of Class A common stock.
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THE OFFERING OF CONVERTIBLE SENIOR NOTES
Securities offered............ $550,000,000 aggregate principal amount of
4.75% convertible senior notes due 2006.
Offering price................ 100% of the principal amount of the notes.
Interest...................... 4.75% per year on the principal amount, payable
semi-annually on December 1 and June 1 of each
year, commencing December 1, 2001.
Conversion.................... The holders of the notes may convert notes into
shares of our Class A common stock at any time
before June 1, 2006 or their prior redemption
or repurchase by us at a conversion rate of
38.0952 shares of Class A common stock per
$1,000 principal amount of notes, which is
equivalent to a conversion price of $26.25 per
share. See "Description of Notes -- Conversion
Rights."
Ranking....................... The notes will rank equally with all existing
and future unsubordinated and unsecured
indebtedness of Charter Communications, Inc.,
but will be structurally subordinated to all
existing and future indebtedness and other
liabilities of our subsidiaries.
Optional redemption by Charter
Communications, Inc......... We may redeem the notes, at our option, in
whole or in part, after June 4, 2004, at the
redemption prices set forth in this prospectus
supplement plus accrued and unpaid interest to
the redemption date. See "Description of
Notes -- Optional Redemption."
Repurchase at option of
holders upon a change of
control..................... Upon a "change of control," as that term is
defined in "Description of Notes -- Repurchase
at Option of Holders Upon a Change of Control,"
you will have the right, subject to certain
conditions and restrictions, to require us to
repurchase your notes, in whole or in part, at
100% of their principal amount plus accrued
interest to the repurchase date. The repurchase
price is payable in cash or, at our option, and
subject to certain conditions, in shares of
Class A common stock. If we pay the repurchase
price in Class A common stock, the Class A
common stock will be valued at 95% of the
average closing sale price of the Class A
common stock for the five trading days
preceding and including the fifth trading day
prior to the repurchase date. See "Description
of Notes -- Repurchase at Option of Holders
Upon a Change of Control."
Use of proceeds............... We expect to use the net proceeds of the notes
offering for working capital purposes and
capital expenditures. See "Use of Proceeds."
Nasdaq National Market symbol
for Class A common stock...... The Class A common stock is listed on the
Nasdaq National Market under the symbol "CHTR."
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We have granted to the underwriters for the notes offering the right to
purchase up to an additional $82,500,000 principal amount of notes to cover
over-allotments.
CONCURRENT CLASS A COMMON STOCK OFFERING
Concurrently with the offering of the notes, we are offering 52,389,000
shares of our Class A common stock. The offering of the notes and the offering
of Class A common stock, however, are independent offerings and are not
conditioned on each other. No requirement exists that we sell the Class A common
stock in order to sell the notes.
RISK FACTORS
You should carefully consider all of the information in this prospectus
supplement and the accompanying prospectus. In particular, you should evaluate
the specific risk factors under "Risk Factors" for a discussion of risks
associated with an investment in the notes.
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UNAUDITED SUMMARY PRO FORMA DATA
You should read the following unaudited summary pro forma financial data of
Charter Communications, Inc. in conjunction with the historical financial
statements and other financial information appearing elsewhere in this
prospectus supplement and the accompanying prospectus, including
"Capitalization," "Unaudited Pro Forma Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNAUDITED PRO FORMA DATA
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2001
----------------------------------------------------------------------------------------------
EQUITY
CHARTER PENDING OFFERING NOTES OFFERING
COMMUNICATIONS, INC. ACQUISITIONS SUBTOTAL ADJUSTMENT ADJUSTMENT TOTAL
-------------------- ------------ -------- ---------- -------------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
STATEMENT OF OPERATIONS:
Revenues.......................... $ 873,797 $ 71,410 $ 945,207 $ -- $ -- $ 945,207
----------- -------- ----------- -------- -------- ------------
Operating expenses:
Operating, general and
administrative................ 472,147 48,156 520,303 -- -- 520,303
Depreciation and amortization... 695,895 34,515 730,410 -- -- 730,410
Option compensation expense..... 6,038 -- 6,038 -- -- 6,038
Corporate expense charges....... 13,721 4,850 18,571 -- -- 18,571
----------- -------- ----------- -------- -------- ------------
Total operating expenses...... 1,187,801 87,521 1,275,322 -- -- 1,275,322
----------- -------- ----------- -------- -------- ------------
Loss from operations.............. (314,004) (16,111) (330,115) -- -- (330,115)
Interest expense.................. (340,501) (3,648) (344,149) 3,640 (7,606) (348,115)
Interest income................... 92 -- 92 -- -- 92
Other expense..................... (59,917) (36) (59,953) -- -- (59,953)
----------- -------- ----------- -------- -------- ------------
Loss before minority interest in
loss of subsidiary.............. (714,330) (19,795) (734,125) 3,640 (7,606) (738,091)
Minority interest in loss of
subsidiary(a)................... 385,940 10,735 396,675 (1,974) 4,125 398,826
----------- -------- ----------- -------- -------- ------------
Net loss.......................... $ (328,390) $ (9,060) $ (337,450) $ 1,666 $ (3,481) $ (339,265)
=========== ======== =========== ======== ======== ============
Loss per common share, basic and
diluted(b)...................... $ (1.19)
============
Weighted-average common shares
outstanding, basic and diluted
(c)............................. 286,166,675
============
OTHER FINANCIAL DATA:
EBITDA(d)......................... $ 321,974 $ 18,368 $ 340,342 $ 340,342
EBITDA margin(e).................. 36.8% 25.7% 36.0% 36.0%
Adjusted EBITDA(f)................ $ 401,650 $ 23,254 $ 424,904 $ 424,904
Cash flows from operating
activities...................... (154,087) 137,907 (16,180) (16,180)
Cash flows used in investing
activities...................... (530,527) 3,383 (527,144) (527,144)
Cash flows from (used in)
financing activities............ 573,333 (144,192) 429,141 429,141
Capital expenditures.............. 524,523 2,165 526,688 526,688
Cash interest expense............. 239,297
Deficiency of earnings to cover
fixed charges(g)................ 738,091
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets...................... 23,727,914 715,518 24,443,432 343,359 550,000 25,336,791
Total debt........................ 14,576,537 205,716 14,782,253 (205,310) 550,000 15,126,943
Minority interest(h).............. 4,783,692 119,307 4,902,999 103,533 -- 5,006,532
Shareholders' equity.............. 2,852,311 382,193 3,234,504 445,136 -- 3,679,640
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGE):
Homes passed(i)................... 10,258,300 955,787 11,214,087 11,214,087
Basic customers(j)................ 6,349,823 509,368 6,859,191 6,859,191
Basic penetration(k).............. 61.9% 53.3% 61.2% 61.2%
Premium units(l).................. 5,199,721 686,849 5,886,570 5,886,570
Premium penetration(m)............ 81.9% 134.8% 85.8% 85.8%
Average monthly revenue per basic
customer(n)..................... $45.93
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UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------
CHARTER 2000 PENDING
COMMUNICATIONS, INC. ACQUISITIONS SUBTOTAL ACQUISITIONS
-------------------- ------------ -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
STATEMENT OF OPERATIONS:
Revenues............................ $ 3,249,222 $ 49,752 $ 3,298,974 $ 279,705
----------- -------- ----------- -----------
Operating expenses:
Operating, general and
administrative.................. 1,651,353 29,312 1,680,665 188,658
Depreciation and amortization..... 2,473,082 46,845 2,519,927 141,148
Option compensation expense....... 40,978 -- 40,978 --
Corporate expense charges......... 55,243 707 55,950 12,088
----------- -------- ----------- -----------
Total operating expenses........ 4,220,656 76,864 4,297,520 341,894
----------- -------- ----------- -----------
Loss from operations................ (971,434) (27,112) (998,546) (62,189)
Interest expense.................... (1,249,040) (24,381) (1,273,421) (63)
Interest income..................... 7,348 (49) 7,299 (1)
Other expense....................... (31,729) (77) (31,806) (477)
----------- -------- ----------- -----------
Loss before minority interest in
loss of subsidiary................ (2,244,855) (51,619) (2,296,474) (62,730)
Minority interest in loss of
subsidiary(a)..................... 1,212,583 27,033 1,239,616 34,018
----------- -------- ----------- -----------
Net loss............................ $(1,032,272) $(24,586) $(1,056,858) $ (28,712)
=========== ======== =========== ===========
Loss per common share, basic and
diluted(b)........................
Weighted-average common shares
outstanding, basic and
diluted(c)........................
OTHER FINANCIAL DATA:
EBITDA (d).......................... $ 1,469,919 $ 19,656 $ 1,489,575 $ 78,482
EBITDA margin (e)................... 45.2% 39.5% 45.2% 28.1%
Adjusted EBITDA (f)................. $ 1,597,869 $ 20,440 $ 1,618,309 $ 91,047
Cash flows from operating
activities........................ 1,131,210 84,112 1,215,322 48,363
Cash flows used in investing
activities........................ (4,053,968) (38,924) (4,092,892) (154,733)
Cash flows from (used in) financing
activities........................ 2,919,754 (79,321) 2,840,433 107,727
Capital expenditures................ 2,825,126 93,951 2,919,077 156,128
Cash interest expense...............
Deficiency of earnings to cover
fixed charges (g).................
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ 24,401,524 -- 24,401,524 500,718
Total debt.......................... 14,424,986 -- 14,424,986 417
Minority interest(h)................ 5,185,404 -- 5,185,404 (112,973)
Shareholders' equity................ 3,131,456 -- 3,131,456 614,473
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGE):
Homes passed (i).................... 10,219,300 955,924
Basic customers (j)................. 6,346,200 511,279
Basic penetration (k)............... 62.1% 53.5%
Premium units (l)................... 4,936,800 718,288
Premium penetration (m)............. 77.8% 140.5%
Average monthly revenue per basic
customer (n)......................
UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------
EQUITY NOTES
OFFERING OFFERING
ADJUSTMENT ADJUSTMENT TOTAL
---------- ---------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
STATEMENT OF OPERATIONS:
Revenues............................ $ -- $ -- $ 3,578,679
------- --------- ------------
Operating expenses:
Operating, general and
administrative.................. -- -- 1,869,323
Depreciation and amortization..... -- -- 2,661,075
Option compensation expense....... -- -- 40,978
Corporate expense charges......... -- -- 68,038
------- --------- ------------
Total operating expenses........ -- -- 4,639,414
------- --------- ------------
Loss from operations................ -- (1,060,735)
Interest expense.................... -- (30,425) (1,303,909)
Interest income..................... -- -- 7,298
Other expense....................... -- -- (32,283)
------- --------- ------------
Loss before minority interest in
loss of subsidiary................ -- (30,425) (2,389,629)
Minority interest in loss of
subsidiary(a)..................... -- 16,499 1,290,133
------- --------- ------------
Net loss............................ $ -- $ (13,926) $ (1,099,496)
======= ========= ============
Loss per common share, basic and
diluted(b)........................ $ (3.85)
============
Weighted-average common shares
outstanding, basic and
diluted(c)........................ 285,792,320
============
OTHER FINANCIAL DATA:
EBITDA (d).......................... $ 1,568,057
EBITDA margin (e)................... 43.8%
Adjusted EBITDA (f)................. $ 1,709,356
Cash flows from operating
activities........................ 1,263,685
Cash flows used in investing
activities........................ (4,247,625)
Cash flows from (used in) financing
activities........................ 2,948,160
Capital expenditures................ 3,075,205
Cash interest expense............... 991,718
Deficiency of earnings to cover
fixed charges (g)................. 2,389,629
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ 548,669 550,000 26,000,911
Total debt.......................... -- 550,000 14,975,403
Minority interest(h)................ 297,543 -- 5,369,974
Shareholders' equity................ 251,126 -- 3,997,055
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGE):
Homes passed (i).................... 11,175,224
Basic customers (j)................. 6,857,479
Basic penetration (k)............... 61.4%
Premium units (l)................... 5,655,088
Premium penetration (m)............. 82.5%
Average monthly revenue per basic
customer (n)...................... $43.49
---------------
(a) 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 of an indirect
subsidiary of Charter Communications, Inc. issued to certain Bresnan
sellers. These membership units are exchangeable on a one-for-one basis for
shares of our Class A common stock.
(b) 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
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Holding Company or preferred membership units in an indirect subsidiary of
Charter Communications, Inc. held by certain Bresnan sellers as of March
31, 2001, are exchanged for shares of our Class A common stock, none of the
October and November 2000 convertible senior notes and notes offered hereby
are converted into shares of our 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 our Class A
common stock are exercised. If the membership units were exchanged, notes
converted or options exercised, the effects would be antidilutive.
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, 2001 DECEMBER 31, 2000
-------------- ------------------
Converted loss per Class A common share..................... $ (1.14) $ (3.68)
============ ============
Weighted average Class A common shares
outstanding -- converted.................................. 649,478,898 649,104,543
Converted loss per Class A common share assumes all common membership units
of Charter Communications Holding Company and preferred membership units in
an indirect subsidiary of Charter Communications, Inc. held by certain
Bresnan sellers as of March 31, 2001, are exchanged for shares of our Class
A common stock. If all these shares are exchanged, minority interest would
equal zero. Converted loss per Class A common share is calculated by
dividing loss before minority interest by the weighted average Class A
common shares outstanding -- converted. Weighted average Class A common
shares outstanding -- converted assumes the total common membership units
in Charter Communications Holding Company totaling 339,096,474 and
24,215,749 preferred membership units in an indirect subsidiary of Charter
Communications, Inc. held by certain Bresnan sellers are exchanged for
shares of our Class A common stock. Converted loss per Class A common share
assumes no conversion of our 2000 convertible senior notes or the notes
offered hereby and no exercise of any options.
(c) Represents historical weighted average shares outstanding for the period,
plus Class A common stock as described in this prospectus supplement issued
at a price of $21.00 per share, assuming such shares were outstanding for
the entire period.
(d) 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. 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.
(e) EBITDA margin represents EBITDA as a percentage of revenues.
(f) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges, management fees and other expenses. Adjusted EBITDA is
presented because it is a widely accepted financial indicator of a cable
company's ability to service its 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.
(g) Earnings include net income (loss) plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component of rent
expense.
(h) Minority interest consists primarily of (1) total members' equity of
Charter Communications Holding Company multiplied by 54.2% on a pro forma
basis at March 31, 2001, the ownership percentage of Charter Communications
Holding Company not owned by us and (2) preferred equity in a subsidiary of
Charter Communications, Inc. held by certain Bresnan sellers. Gains
(losses) arising from the issuance by Charter Communications Holding
Company of its membership units are recorded as capital transactions,
thereby increasing/(decreasing) shareholders' equity and
(decreasing)/increasing minority interest.
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(i) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(j) Basic customers are customers who receive basic cable service.
(k) Basic penetration represents basic customers as a percentage of homes
passed.
(l) Premium units represent the total number of subscriptions to premium
channels.
(m) Premium penetration represents premium units as a percentage of basic
customers.
(n) 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 the end of the period.
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RISK FACTORS
An investment in shares of Class A common stock or the notes entails the
following risks. You should carefully consider these risk factors, as well as
the other information contained in this prospectus supplement and the
accompanying prospectus.
THE OFFERING OF THE CLASS A COMMON STOCK AND THE OFFERING OF THE NOTES ARE
INDEPENDENT OFFERINGS AND ARE NOT CONDITIONED ON EACH OTHER. IF YOU ARE A
PROSPECTIVE PURCHASER OF CLASS A COMMON STOCK, WE CANNOT ASSURE YOU THAT THE
NOTES OFFERING WILL OCCUR. IF YOU ARE A PROSPECTIVE PURCHASER OF THE NOTES, WE
CANNOT ASSURE YOU THAT THE CLASS A COMMON STOCK OFFERING WILL OCCUR.
OUR STRUCTURE
MR. ALLEN HAS THE ABILITY TO CONTROL MATTERS ON WHICH ALL OF CHARTER
COMMUNICATIONS, INC.'S SHAREHOLDERS MAY VOTE AND HAS THE EXCLUSIVE RIGHT TO VOTE
ON SPECIFIC MATTERS.
Mr. Allen controls approximately 93.5% of the voting power of Charter
Communications, Inc.'s capital stock. Accordingly, Mr. Allen controls Charter
Communications, Inc. Although Class A common shareholders, other than Mr. Allen,
have an equity interest in Charter Communications, Inc. of more than 96.2%,
Class A common shareholders have a very limited voting interest in Charter
Communications, Inc. and a limited indirect equity interest in Charter
Communications Holding Company. The purposes of our structure are, among other
things, to enable Mr. Allen to take advantage for tax purposes of the losses
expected to be generated by Charter Communications Holding Company and to enable
him to maintain control of our business.
Mr. Allen has the ability to control fundamental corporate transactions
requiring equity holder approval, including, but not limited to, the election of
all of our directors, approval of merger transactions involving us and the sale
of all or substantially all of our assets. Mr. Allen's control may continue in
the future through the high vote Class B common stock even if Mr. Allen owns a
minority economic interest in our business.
As the owner of all of our Class B common stock, Mr. Allen is entitled to
elect all but one member of Charter Communications, Inc.'s board of directors.
As an owner of 3.8% of our Class A common stock and owner of all of our Class B
common stock, Mr. Allen presently has voting control in the election by holders
of Class A and Class B common stock, voting together as a single class, of the
remaining member of our board of directors. In addition, because of the
exclusive voting rights granted to holders of Class B common stock for specific
matters, he has the sole power to amend a number of important provisions of
Charter Communications, Inc.'s certificate of incorporation, including
provisions restricting the scope of our business activities. See "Description of
Capital Stock and Membership Units."
MR. ALLEN MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS.
Mr. Allen's control over our management and affairs could create conflicts
of interest if he is faced with decisions that could have implications for both
him and for us and the holders of Class A common stock and the notes. Further,
through his effective control, Mr. Allen could cause us to enter into contracts
with another entity in which he owns an interest or cause us to decline a
transaction that he (or another entity in which he owns an interest) ultimately
enters into.
Mr. Allen may engage in other businesses involving the operation of cable
television systems, video programming, high-speed Internet access, telephony or
electronic commerce, which is business and financial transactions conducted
through broadband interactivity and Internet services. Mr. Allen may also engage
in other businesses that compete or may in the future compete with us. In
addition, Mr. Allen currently engages and may engage in the future in businesses
that are complementary to our cable business.
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Accordingly, conflicts could arise with respect to the allocation of
corporate opportunities between us and Mr. Allen. Current or future agreements
between us and Mr. Allen or his affiliates may not be the result of arm's-length
negotiations. Consequently, such agreements may be less favorable to us than
agreements that we could otherwise have entered into with unaffiliated third
parties. Further, many past and future transactions with Mr. Allen or his
affiliates are informal in nature. As a result, there will be some discretion
left to the parties, who are subject to the potentially conflicting interests
described above. We cannot assure you that the interests of either Mr. Allen or
his affiliates will not conflict with interests of the holders of our Class A
common stock or the notes. We have not instituted any formal plans to address
conflicts of interest that may arise.
WE ARE NOT PERMITTED TO ENGAGE IN ANY BUSINESS ACTIVITY OTHER THAN THE CABLE
TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR. ALLEN AUTHORIZES US TO PURSUE
THAT PARTICULAR BUSINESS ACTIVITY. THIS COULD ADVERSELY AFFECT OUR ABILITY TO
OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF THE CABLE TRANSMISSION BUSINESS AND
ENTER INTO NEW BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Charter Communications, Inc.'s certificate of incorporation and Charter
Communications Holding Company's limited liability company agreement provide
that Charter Communications, Inc. and Charter Communications Holding Company and
their subsidiaries cannot engage in any business activity outside the cable
transmission business except for specified businesses. This will be the case
unless the opportunity to pursue the particular business activity is first
offered to Mr. Allen, he decides not to pursue it and he consents to our
engaging in the business activity. The cable transmission business means the
business of transmitting video, audio, including telephone services, and data
over cable television systems owned, operated or managed by us from time to
time. These provisions may limit our ability to take advantage of attractive
business opportunities. Consequently, our ability to offer new products and
services outside of the cable transmission business and enter into new
businesses could be adversely affected, resulting in an adverse effect on our
growth, financial condition and results of operations. See "Certain
Relationships and Related Transactions -- Allocation of Business Opportunities
with Mr. Allen."
MR. ALLEN'S CONTROL AND CHARTER COMMUNICATIONS, INC.'S ORGANIZATIONAL DOCUMENTS
MAY INHIBIT OR PREVENT A TAKEOVER OR A CHANGE IN MANAGEMENT THAT COULD RESULT IN
A CHANGE OF CONTROL PREMIUM OR FAVORABLY IMPACT THE MARKET PRICE OF THE CLASS A
COMMON STOCK AND THE NOTES.
As a result of his controlling voting interest, Mr. Allen will have the
ability to delay or prevent a change of control or changes in our management
that our other shareholders, including the holders of our Class A common stock,
may consider favorable or beneficial. Provisions in our organizational documents
may also have the effect of delaying or preventing these changes, including
provisions:
- authorizing the issuance of "blank check" preferred stock;
- restricting the calling of special meetings of shareholders; and
- requiring advanced notice for proposals for shareholder meetings.
If a change of control or change in management is delayed or prevented, the
market price of our Class A common stock and the notes could suffer or holders
of such securities may not receive a change of control premium over the
then-current market price of the Class A common stock or the notes.
WE COULD BE DEEMED AN "INVESTMENT COMPANY" UNDER THE INVESTMENT COMPANY ACT OF
1940. THIS WOULD IMPOSE SIGNIFICANT RESTRICTIONS ON US AND WOULD BE LIKELY TO
HAVE A MATERIAL ADVERSE IMPACT ON OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF
OPERATION.
If anything were to happen which would cause us to be deemed an investment
company, the Investment Company Act would impose significant restrictions on us,
including severe limitations on our ability to borrow money, to issue additional
capital stock and to transact business with affiliates. In addition, because our
operations are very different from those of the typical registered investment
company, regulation under the Investment Company Act could affect us in other
ways that are extremely difficult to predict. In sum, if we were deemed to be an
investment company it could become impractical for us to continue our business
as
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currently conducted and our growth, our financial condition and our results of
operations could suffer materially.
Our principal asset is our equity interest in Charter Communications
Holding Company. If our membership interest in Charter Communications Holding
Company were to constitute less than 50% of the voting securities issued by
Charter Communications Holding Company, then our interest in Charter
Communications Holding Company could be deemed an "investment security" for
purposes of the Investment Company Act. This may occur, for example, if a court
determines that the Class B common stock is no longer entitled to special voting
rights and, in accordance with the terms of the Charter Communications Holding
Company limited liability company agreement, our membership units in this
company were to lose their special voting privileges. A determination that such
investment was an investment security could cause us to be deemed to be an
investment company under the Investment Company Act, unless an exclusion from
registration were available or we were to obtain an order of the SEC excluding
or exempting us from registration under this Act.
IF A COURT DETERMINES THAT THE CLASS B COMMON STOCK IS NO LONGER ENTITLED TO
SPECIAL VOTING RIGHTS, WE WOULD LOSE OUR RIGHTS TO MANAGE CHARTER COMMUNICATIONS
HOLDING COMPANY. IN ADDITION TO THE INVESTMENT COMPANY RISKS DISCUSSED ABOVE,
THIS COULD MATERIALLY IMPACT THE VALUE OF THE CLASS A COMMON STOCK AND THE
NOTES.
If a court determines that the Class B common stock is no longer entitled
to special voting rights, Charter Communications, Inc. would no longer have a
controlling voting interest in, and would lose its right to manage, Charter
Communications Holding Company. If this were to occur:
- we would retain our proportional equity interest in Charter
Communications Holding Company but would lose all of our powers to direct
the management and affairs of Charter Communications Holding Company and
its subsidiaries;
- Class A common shareholders would lose any right they had at that time or
might have had in the future to direct, through equity ownership in us,
the management and affairs of Charter Communications Holding Company; and
- we would become strictly a passive investment vehicle.
This result, as well as the impact of being treated by investors as an
investment company, could materially adversely impact:
- the liquidity of the Class A common stock and the notes;
- how the Class A common stock and the notes trade in the marketplace;
- the price that purchasers would be willing to pay for the Class A common
stock in a change of control transaction or otherwise; and
- the market price of the Class A common stock and the notes.
Uncertainties that may arise with respect to the nature of our management
role and voting power and organizational documents, including legal actions or
proceedings relating thereto, may also materially adversely impact the value of
the Class A common stock and the notes.
THE SPECIAL TAX ALLOCATION PROVISIONS OF THE CHARTER COMMUNICATIONS HOLDING
COMPANY LIMITED LIABILITY COMPANY AGREEMENT MAY CAUSE US IN SOME CIRCUMSTANCES
TO PAY MORE TAXES THAN IF THE SPECIAL TAX ALLOCATION PROVISIONS WERE NOT IN
EFFECT.
Charter Communications Holding Company's limited liability company
agreement provides that through the end of 2003, tax losses of Charter
Communications Holding Company that would otherwise have been allocated to us
based generally on our percentage of outstanding membership units of Charter
Communications Holding Company will instead be allocated to the membership units
held by Vulcan Cable III Inc. and Charter Investment. The purpose of these
special tax allocation provisions is to allow Mr. Allen to take
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advantage for tax purposes of the losses expected to be generated by Charter
Communications Holding Company. The limited liability company agreement further
provides that beginning at the time that Charter Communications Holding Company
first becomes profitable (as determined under the applicable federal income tax
rules for determining book profits), tax profits that would otherwise have been
allocated to us based generally on our percentage of outstanding membership
units of Charter Communications Holding Company will instead be allocated to
membership units held by Vulcan Cable III Inc. and Charter Investment. In some
situations, the special tax allocation provisions could result in our having to
pay taxes in an amount that is more than if Charter Communications Holding
Company had allocated losses and profits to us based generally on our percentage
of outstanding membership units from the time of the completion of our initial
public offering. See "Description of Capital Stock and Membership
Units -- Special Tax Allocation Provisions."
OUR MANAGEMENT MAY BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND MAY
NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD GIVE RISE TO CONFLICTS
OF INTEREST AND IMPAIR OUR OPERATING RESULTS.
Mr. Allen and certain other of our affiliates may from time to time in the
future acquire cable systems in addition to those owned by us. We, as well as
some of our officers who currently manage our cable systems, may have a
substantial role in managing outside cable systems that may be acquired in the
future. As a result, the time we devote to managing Charter Communications
Holding Company's systems may be correspondingly reduced. This could adversely
affect our growth, financial condition and results of operations. Moreover,
allocating our managers' time and other resources and those of Charter
Communications Holding Company between our systems and outside systems that may
be held by our affiliates could give rise to conflicts of interest. Neither we
nor Charter Communications Holding Company have or plan to create formal
procedures for determining whether and to what extent cable systems acquired in
the future will receive priority with respect to personnel requirements.
OUR BUSINESS
WE AND OUR SUBSIDIARIES HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR
SUBSTANTIAL ADDITIONAL DEBT, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH
AND OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR
BUSINESS.
We and our subsidiaries have a significant amount of debt. As of March 31,
2001, on a pro forma basis giving effect to the sale of the May 2001 Charter
Holdings notes and the application of the net proceeds therefrom and the closing
of the pending AT&T transactions, our total debt was $14.8 billion, our total
shareholders' equity was approximately $3.2 billion and the deficiency of our
earnings available to cover fixed charges was approximately $0.7 billion. As of
March 31, 2001, on a pro forma basis giving effect to the sale of the May 2001
Charter Holdings notes and the application of the net proceeds therefrom and the
closing of the pending AT&T transactions, and as further adjusted for the
offering of Class A common stock and the offering of the notes and the
application of the net proceeds therefrom, our total debt would have been
approximately $15.1 billion, our total shareholders' equity would have been
approximately $3.7 billion and the deficiency of our earnings available to cover
fixed charges would have been approximately $0.7 billion. Since March 31, 2001,
we have incurred significant additional debt to fund our capital expenditures.
Our significant amount of debt could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations under the notes,
to the lenders under our subsidiaries' credit facilities and to the
holders of our existing public notes and the public notes of our
subsidiaries;
- increase our vulnerability to general adverse economic and cable industry
conditions, including interest rate increases, because a significant
portion of our borrowings are and will continue to be at variable rates
of interest;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce our funds available
for working capital, capital expenditures and other general corporate
expenses;
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- limit our flexibility in planning for, or reacting to, changes in our
business and the cable industry;
- place us at a disadvantage compared to our competitors that have
proportionately less debt; and
- limit our ability to borrow additional funds in the future, if we need
them, due to applicable financial and restrictive covenants in our debt.
The indenture governing the notes will not prohibit us from incurring
additional debt. Further, the agreements and instruments governing our
subsidiaries' debt allow for the incurrence of substantial additional debt by
our subsidiaries, all of which would be structurally senior to the notes. We
anticipate that we may incur significant additional debt, including through our
subsidiaries, in the future to fund the expansion, maintenance and upgrade of
our cable systems. If current debt levels increase, the related risks that we
and you now face will intensify.
CHARTER COMMUNICATIONS, INC. IS A HOLDING COMPANY WHICH HAS NO OPERATIONS AND
WILL DEPEND ON ITS OPERATING SUBSIDIARIES FOR CASH TO MAKE PAYMENTS ON THE
NOTES. OUR SUBSIDIARIES ARE LIMITED IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR
THE PAYMENT OF THE NOTES, OUR OTHER OBLIGATIONS AND DIVIDENDS OR OTHER
DISTRIBUTIONS TO HOLDERS OF CLASS A COMMON STOCK.
As a holding company, we will depend entirely on cash from our operating
subsidiaries to satisfy our obligations under the notes. These operating
subsidiaries may not be able to make funds available to us.
Our principal asset is an approximate 41% equity interest and a 100% voting
interest in Charter Communications Holding Company. We do not hold any
significant assets other than our direct and indirect interests in our
subsidiaries. Our cash flow depends upon the cash flow of our operating
subsidiaries and the payment of funds by these operating subsidiaries to Charter
Communications Holding Company and Charter Communications, Inc. This could
adversely affect our ability to meet our obligations to any holder of the notes
or to our other creditors or to make dividends and other distributions to
holders of Class A common stock. We have never paid and do not expect to pay any
cash dividends on our Class A common stock in the foreseeable future.
Our operating subsidiaries are separate and distinct legal entities and are
not obligated to make funds available for payment of the notes in the form of
loans, distributions or otherwise. In addition, our operating subsidiaries'
ability to make any such loans, distributions or other payments to us will
depend on their earnings, business and tax considerations and legal
restrictions. Furthermore, covenants in the indentures and credit agreements
governing the debt of our subsidiaries restrict their ability to make loans,
distributions or other payments to us. This could adversely impact our ability
to pay interest and principal due on the notes. See the risk factors below and
"Description of Certain Indebtedness."
THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR SUBSIDIARIES' DEBT CONTAIN
RESTRICTIONS AND LIMITATIONS THAT COULD SIGNIFICANTLY IMPACT OUR ABILITY TO
OPERATE OUR BUSINESS AND ADVERSELY AFFECT THE HOLDERS OF THE NOTES.
The credit facilities of our subsidiaries and the indentures governing the
publicly held notes of our subsidiaries contain a number of significant
covenants that could adversely impact our business and adversely affect the
holders of the notes. In particular, the credit facilities and indentures of our
subsidiaries restrict our subsidiaries' ability to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- pledge assets.
Furthermore, in accordance with our subsidiaries' credit facilities, a
number of our subsidiaries are required to maintain specified financial ratios
and meet financial tests. The ability to comply with these
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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 prohibit distributions to us to pay amounts due on the
notes.
OUR SUBSIDIARIES ARE LIMITED IN THEIR ABILITY TO MAKE DISTRIBUTIONS TO US TO
FUND INTEREST AND PRINCIPAL PAYMENTS ON THE NOTES.
Because of the restrictions in our subsidiaries' credit facilities on their
ability to pay dividends or make other distributions to Charter Communications,
Inc. or Charter Communications Holding Company, giving effect to our application
of the net proceeds from the notes offering described in this prospectus
supplement, our subsidiaries will be permitted to make distributions sufficient
to fund interest payments on the notes only for the first 36 months of their
term. These limitations would also restrict our subsidiaries' ability to make
distributions to us to fund change of control offers or principal payments upon
the occurrence of a default. To fully fund interest payments on the notes for
their entire term and the repayment of the notes, we or our subsidiaries will
need to raise additional funds through the issuance of additional debt or equity
securities or our subsidiaries will have to obtain amendments to their credit
facilities to permit them to make the necessary distributions to Charter
Communications Holding Company and/or to us. We cannot assure you that we will
be able to raise such additional funds or obtain such amendments on a timely
basis. If we are unable to raise such additional funds or obtain such amendments
on a timely basis, we might not be able to repay or make any remaining payments
on the notes.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE STRUCTURALLY
SUBORDINATED TO ALL LIABILITIES OF OUR SUBSIDIARIES.
The borrowers and guarantors under the Charter Operating credit facilities,
the CC VI (Fanch) credit facilities, the CC VII (Falcon) credit facilities and
the CC VIII (Bresnan) credit facilities are our indirect subsidiaries. A number
of our subsidiaries are also obligors under other debt instruments, including
Charter Holdings, which is a co-issuer of senior notes and senior discount notes
issued in March 1999, January 2000, January 2001 and May 2001. As of March 31,
2001, on a pro forma basis giving effect to the sale of the May 2001 Charter
Holdings notes and the application of the net proceeds therefrom and the closing
of the pending AT&T transactions, our total debt would have been approximately
$14.8 billion. As of March 31, 2001, on a pro forma basis giving effect to the
sale of the May 2001 Charter Holdings notes and the application of the net
proceeds therefrom and the closing of the pending AT&T transactions, and as
adjusted further for the offering of the notes, our total debt would have been
approximately $15.1 billion, $13.8 billion of which would have been structurally
senior to the notes. The lenders under all of these credit facilities and the
holders of the other debt instruments and all other creditors of our
subsidiaries will have the right to be paid before us from any of our
subsidiaries' assets. In addition, if we caused a subsidiary to pay a dividend
to enable us to make payments in respect of notes, and such transfer were deemed
a fraudulent transfer or an unlawful distribution, the holders of the notes
could be required to return the payment to (or for the benefit of) the creditors
of our subsidiaries. In the event of the bankruptcy, liquidation or dissolution
of a subsidiary, following payment by such subsidiary of its liabilities, such
subsidiary may not have sufficient assets remaining to make any payments to us
as an equity holder or otherwise. This will adversely affect our ability to make
payments to the holder of the notes. In addition, the notes are unsecured and
therefore will be effectively subordinated in right of payment to any future
secured debt we may incur to the extent of the value of the assets securing such
debt.
IF OUR SUBSIDIARIES DEFAULT UNDER THEIR CREDIT FACILITIES OR PUBLIC NOTES, WE
MAY NOT HAVE THE ABILITY TO MAKE PAYMENTS ON THE NOTES.
In the event of a default under our subsidiaries' credit facilities or
public notes, our subsidiaries' creditors could elect to declare all amounts
borrowed, together with accrued and unpaid interest and other fees, to be due
and payable. In such event, our subsidiaries' credit facilities and indentures
will not permit our subsidiaries to distribute funds to Charter Communications
Holding Company or Charter Communications, Inc. to pay interest or principal on
the notes. If the amounts outstanding under such credit facilities and public
notes are accelerated, all of our subsidiaries' debt and liabilities would be
payable from our subsidiaries' assets,
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prior to any distribution of our subsidiaries' assets to pay the interest and
principal amounts on the notes and we might not be able to repay or make any
payments on the notes. Any default under any of our subsidiaries' credit
facilities or public notes might adversely affect the holders of the notes and
our growth, financial condition and results of operations.
OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO PAY INTEREST
AND PRINCIPAL AMOUNTS ON THE NOTES, SERVICE OUR OTHER DEBT AND THE DEBT OF OUR
SUBSIDIARIES, AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on the notes, our other debt and the debt of
our subsidiaries, and to fund our planned capital expenditures for upgrading our
cable systems and our ongoing operations will depend on our ability to generate
cash and to secure financing in the future. This, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors beyond our control. If our business does not generate sufficient
cash flow from operations, and sufficient future distributions are not available
to us from borrowings under the credit facilities of our subsidiaries or from
other sources of financing, we may not be able to make interest payments on the
notes or repay the notes, to service our other debt or the debt of our
subsidiaries, to grow our business or to fund our other liquidity needs.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES.
CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE FUTURE OPERATIONS.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. We expect our net losses to increase as a
result of our closed acquisitions and our planned upgrades and other capital
expenditures. We reported losses before minority interest in loss of subsidiary
of $22.5 million for 1998, $638.8 million for 1999 and $2.1 billion for 2000. On
a pro forma basis giving effect to (1) the sale of the January 2001 and May 2001
Charter Holdings notes and the application of the net proceeds therefrom, (2)
the sale of our convertible senior notes in October and November 2000 and the
application of the net proceeds therefrom, and (3) acquisitions in 2000, we had
a net loss before minority interest in loss of subsidiary of $2.3 billion for
2000 and $0.7 billion for the three months ended March 31, 2001. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT
SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE.
We commenced active operations in 1994 and have grown rapidly since then
through acquisitions of cable systems. As of December 31, 2000, our systems
served approximately 400% of the number of customers served as of December 31,
1998. As a result, historical financial information about us may not be
indicative of the future or of results that we can achieve with the cable
systems which will be under our control. Our recent growth in revenues over our
short operating history is not necessarily indicative of future performance.
THE FAILURE TO OBTAIN NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER
CLOSING CONDITIONS, COULD IMPEDE THE CONSUMMATION OF THE PENDING AT&T
TRANSACTIONS. THIS WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS
AND INCREASE REVENUES.
Our pending AT&T transactions are subject to federal, state and local
regulatory approvals. We cannot assure you that we will be able to obtain any
necessary approvals. These pending transactions are also subject to a number of
other closing conditions. We cannot assure you as to when, or if, each such
transaction will be consummated. Any delay, prohibition or modification could
adversely affect the terms of a pending transaction or could require us to
abandon an otherwise attractive opportunity.
WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW CABLE SYSTEMS THAT WE ACQUIRE
AND THE CUSTOMERS THEY SERVE WITH OUR EXISTING CABLE SYSTEMS. THIS COULD
ADVERSELY AFFECT OUR OPERATING RESULTS AND GROWTH STRATEGY.
We have grown through acquisitions of cable systems, and now own and
operate cable systems serving approximately 6.4 million customers. We may
acquire more cable systems in the future, through acquisitions,
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system swaps or otherwise. The integration of the cable systems we have recently
acquired or anticipate acquiring, including in the pending AT&T transactions,
poses a number of significant risks, including:
- our acquisitions may not have a positive impact on our cash flows from
operations;
- the integration of these new systems and customers will place significant
demands on our management and our operations, information services, and
financial, legal and marketing resources. Our current operating and
financial systems and controls and information services may not be
adequate, and any steps taken to improve these systems and controls may
not be sufficient;
- acquired businesses sometimes result in unexpected liabilities and
contingencies which could be significant; and
- our continued growth will also increase our need for qualified personnel.
We may not be able to hire such additional qualified personnel.
We cannot assure you that we will successfully integrate any acquired
systems into our operations.
IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
If we are unable to grow our cash flow sufficiently, we may be unable to
make interest payments on the notes or repay the notes or our other debt,
including the debt of our subsidiaries, to grow our business or to fund our
other liquidity needs. We expect that a substantial portion of our future growth
will be achieved through revenues from new products and services. We may not be
able to offer these new products and services successfully to our customers and
these new products and services may not generate adequate revenues.
OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE
INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND
OPERATING MARGINS.
Programming has been, and is expected to continue to be, our largest single
expense item. In recent years, the cable industry has experienced a rapid
escalation in the cost of programming, particularly sports programming. This
escalation may continue, and we may not be able to pass programming cost
increases on to our customers. The inability to pass these programming cost
increases on to our customers would have an adverse impact on our cash flow and
operating margins. In addition, as we upgrade the channel capacity of our
systems and add programming to our basic, expanded basic and premium programming
tiers, we may face additional market constraints on our ability to pass
programming costs on to our customers. Basic programming includes a variety of
entertainment and local programming. Expanded basic programming offers more
services than basic programming. Premium service includes unedited,
commercial-free movies, sports and other special event entertainment
programming.
THE PROSPECTIVE LENDERS' COMMITMENTS TO LEND TO US UNDER THE CHARTER HOLDINGS
2001 SENIOR BRIDGE LOAN FACILITY ARE SUBJECT TO A NUMBER OF CONDITIONS.
The Charter Holdings 2001 senior bridge loan facility for which we have
received commitments will not close unless specified closing conditions are
satisfied. Some of these closing conditions are not under our control, and we
cannot assure you that all closing conditions will be satisfied. For example,
the closing conditions for these facilities include:
-- the absence of various types of material adverse changes, including
material adverse changes in the financial and capital markets; and
-- receipt of required approvals from third parties.
If funding is not available under the Charter Holdings 2001 senior bridge
loan facility, we would need to arrange other sources of financing to fund our
anticipated capital expenditures and meet our other obligations, and we cannot
assure you that alternate financing sources will be available to us.
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WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND
OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW
PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Without giving effect to the pending AT&T transactions, in 2001, 2002 and
2003, we expect to spend approximately $2.9 billion, $1.75 billion and $950
million 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. The amount that we spend on these types of capital expenditures
will depend on the level of growth in digital cable customers and in the
delivery of other advanced services.
We cannot assure you that our anticipated levels of capital expenditures
will be sufficient to accomplish our planned system upgrades, maintenance and
expansion, or to roll out advanced services. If we borrow the full amount
available under the amended Charter Holdings 2001 senior bridge loan facility or
if we receive approximately $1 billion of net proceeds from the offerings
described in this prospectus supplement (exclusive of $501.5 million of net
proceeds from the Class A common stock offering that we expect to use for
payment to AT&T), we will have sufficient capital to satisfy our previously
projected funding shortfall of $300 million to $500 million. If there is
accelerated growth in digital cable customers or in the delivery of other
advanced services however, we may need additional capital. If we cannot obtain
such capital from increases in our operating cash flow, additional borrowings or
other sources, we may not be able to fund any accelerated growth or offer
advanced services on a timely basis. Consequently, our growth, financial
condition and results of operations could suffer materially. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Expenditures."
WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS AND
SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. CONSEQUENTLY, OUR
GROWTH, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER MATERIALLY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that we will be
able to fund the capital expenditures necessary to keep pace with technological
developments, or that we will successfully anticipate the demand of our
customers for products and services requiring new technology. This type of rapid
technological change could adversely affect our plans to upgrade or expand our
systems and respond to competitive pressures. Our inability to upgrade, maintain
and expand our systems and provide enhanced services in a timely manner, or to
anticipate the demands of the market place, could adversely affect our ability
to compete. Consequently, our growth, financial condition and results of
operations could suffer materially.
WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR
CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR
GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The expansion and upgrade of our existing systems and the systems we plan
to acquire will require us to hire contractors and enter into a number of
construction agreements. We may have difficulty hiring civil contractors, and
the contractors we hire may encounter cost overruns or delays in construction.
Our construction costs may increase significantly over the next few years as
existing contracts expire and as demand for telecommunications construction
services continues to grow. We cannot assure you that we will be able to
construct new systems or expand or upgrade existing or acquired systems in a
timely manner or at a reasonable cost. This may adversely affect our growth,
financial condition and results of operations.
WE DEPEND ON THIRD-PARTY EQUIPMENT AND SOFTWARE SUPPLIERS. IF WE ARE UNABLE TO
PROCURE THE NECESSARY EQUIPMENT, OUR ABILITY TO OFFER OUR SERVICES COULD BE
IMPAIRED. THIS COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We depend on vendors to supply the set-top terminals for analog and digital
cable services. This equipment is available from a limited number of suppliers.
We typically purchase set-top terminals under purchase orders placed from time
to time and do not carry significant inventories of set-top terminals. If
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demand for set-top terminals exceeds our inventories and we are unable to obtain
required set-top terminals on a timely basis and at an acceptable cost, our
ability to recognize additional revenue from digital services could be delayed
or impaired. In addition, if there are no suppliers who are able to provide
set-top terminals devices that comply with evolving Internet and
telecommunications standards or that are compatible with other products or
components we use, our business would be impaired.
THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR
OBLIGATIONS IN THE FUTURE.
In the past, Mr. Allen and his affiliates have contributed funds to us and
our subsidiaries. There is no expectation that Mr. Allen or his affiliates will
contribute funds to us or to our subsidiaries in the future.
A SALE BY MR. ALLEN OF HIS DIRECT OR INDIRECT EQUITY INTERESTS COULD ADVERSELY
AFFECT OUR ABILITY TO MANAGE OUR BUSINESS.
Mr. Allen is not prohibited by any agreement from selling the shares of
Class A or Class B common stock he holds in Charter Communications, Inc. or
causing Charter Investment, Inc. or Vulcan Cable III Inc. to sell their
membership units in Charter Communications Holding Company. We cannot assure you
that Mr. Allen or any of his affiliates will maintain all or any portion of his
direct or indirect ownership interests in Charter Communications, Inc. and
Charter Communications Holding Company. In the event he sells all or any portion
of his direct or indirect ownership interest in Charter Communications, Inc. or
Charter Communications Holding Company, we cannot assure you that he would
continue as Chairman of Charter Communications, Inc.'s board of directors or
otherwise participate in our management. The disposition by Mr. Allen or any of
his affiliates of these equity interests or the loss of his services by Charter
Communications, Inc. and/or Charter Communications Holding Company could
adversely affect our growth, financial condition and results of operations, or
adversely impact the market price of our Class A common stock and the notes.
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN ADVERSELY AFFECT
OUR BUSINESS AND OPERATIONS.
The industry in which we operate is highly competitive. In some instances,
we compete against companies with fewer regulatory burdens, easier access to
financing, greater personnel resources, greater brand name recognition and
long-standing relationships with regulatory authorities. Mergers, joint ventures
and alliances among any of the following businesses could result in providers
capable of offering cable television, Internet and other telecommunications
services in direct competition with us:
- cable television operators;
- local and regional telephone companies;
- long distance telephone service providers;
- direct broadcast satellite (DBS) companies;
- electric utilities;
- providers of cellular and other wireless communications services; and
- Internet service providers.
We face competition within the subscription television industry, which
includes providers of paid television service employing technologies other than
cable, such as direct broadcast satellite or DBS. We also face competition from
broadcast companies distributing television broadcast signals without assessing
a subscription fee and from other communications and entertainment media,
including conventional radio broadcasting services, newspapers, movie theaters,
the Internet, live sports events and home video products.
We cannot assure you that upgrading our cable systems will allow us to
compete effectively. Additionally, as we expand and introduce new and enhanced
services, including Internet and telecommunications services, we will be subject
to competition from telecommunications providers and Internet service providers.
We
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cannot predict the extent to which competition may affect our business and
operations in the future. See "Business -- Competition."
THE LOSS OF MR. ALLEN OR MR. KENT COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE
OUR BUSINESS.
Our success is substantially dependent upon the retention and the continued
performance of Mr. Allen, Chairman of our board of directors, and Jerald L.
Kent, our President and Chief Executive Officer. The loss of the services of Mr.
Allen or Mr. Kent could adversely affect our growth, financial condition and
results of operations.
REGULATORY AND LEGISLATIVE MATTERS
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION.
THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY
AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Additionally, many aspects of these regulations are currently the subject
of judicial proceedings and administrative or legislative proposals. There are
also ongoing efforts to amend or expand the state and local regulation of some
of our cable systems, which may compound the regulatory risks we already face.
Certain states and localities are considering new telecommunications taxes that
could increase operating expenses. We cannot predict whether in response to
these efforts any of the states or localities in which we now operate will
expand regulation of our cable systems in the future or how they will do so.
WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE
PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY
AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND
SERVICES.
A number of companies, including telephone companies and Internet service
providers (ISPs), have requested local authorities and the Federal
Communications Commission to require cable operators to provide access to
cable's broadband infrastructure, which allows cable to deliver a multitude of
channels and/or services, so that these companies may deliver Internet services
directly to customers over cable facilities. A federal district court in
Virginia, a federal district court in Florida and a federal circuit court in
California recently struck down as unlawful "open access" requirements imposed
by a variety of franchising authorities. Each of these decisions struck down the
"open access" requirements on different legal grounds. In response to the
federal circuit decision, the Federal Communications Commission recently
initiated an inquiry to determine the appropriate classification and regulatory
treatment of the provision of Internet service by cable operators. The Federal
Trade Commission recently imposed certain "open-access" requirements on Time
Warner and AOL in connection with their merger, but those requirements are not
applicable to other cable operators.
We believe that allocating a portion of our bandwidth capacity to other
Internet service providers:
- would impair our ability to use our bandwidth in ways that would generate
maximum revenues;
- would strengthen our Internet service provider competitors; and
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- may cause us to decide not to upgrade our systems which would prevent us
from introducing our planned new products and services.
In addition, we cannot assure you that if we were required to provide
access in this manner, it would not have a significant adverse impact on our
profitability. This could impact us in many ways, including by:
- increasing competition;
- increasing the expenses we incur to maintain our systems; and/or
- increasing the expense of upgrading and/or expanding our systems.
OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL
OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR
BUSINESS IN A KEY MARKET.
Our cable systems generally operate pursuant to franchises, permits or
licenses granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and monetary penalties for non-compliance. In many cases, franchises
are terminable if the franchisee fails to comply with material provisions set
forth in the franchise agreement governing system operations. Franchises are
generally granted for fixed terms and must be periodically renewed. Local
franchising authorities may resist granting a renewal if either past performance
or the prospective operating proposal is considered inadequate. Franchise
authorities often demand concessions or other commitments as a condition to
renewal, which have been and may continue to be costly to us. In some instances,
franchises have not been renewed at expiration, and we have operated under
either temporary operating agreements or without a license while negotiating
renewal terms with the local franchising authorities.
We cannot assure you that we will be able to comply with all material
provisions of our franchise agreements or that we will be able to renew our
franchises in the future. A termination of and/or a sustained failure to renew a
franchise could adversely affect our business in the affected geographic area.
WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION
IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
Our cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, such
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which we hold franchises. In some cases municipal utilities may legally
compete with us without obtaining a franchise from the local franchising
authority. The existence of more than one cable system operating in the same
territory is referred to as an overbuild. These overbuilds could adversely
affect our growth, financial condition and results of operations by increasing
competition or creating competition where none existed previously. As of
December 31, 2000, we are aware of overbuild situations impacting approximately
139,000 of our basic customers, or 2% of our total basic customers, and
potential overbuild situations in areas servicing approximately 253,000
additional basic customers, or 4% of our total basic customers, together
representing a total of approximately 392,000 customers. Additional overbuild
situations may occur in other systems.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY
CONSTRAINTS ON OUR BUSINESS. THIS COULD FURTHER INCREASE OUR EXPENSES.
In addition to the franchise document, cable authorities in some
jurisdictions have adopted cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases our expenses in
operating our business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. Basic service tier
rates are the prices charged for basic programming services. As of December 31,
2000, we
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had refunded a total of approximately $1.2 million since our inception. We may
be required to refund additional amounts in the future.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE
CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS
COULD CAUSE US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS OR IMPAIR
OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS.
On March 31, 1999, the pricing of expanded basic cable programming packages
was deregulated, permitting cable operators to set their own rates. This
deregulation was not applicable to basic services. However, the Federal
Communications Commission and the United States Congress continue to be
concerned that cable rate increases are exceeding inflation. It is possible that
either the Federal Communications Commission or the United States Congress will
again restrict the ability of cable system operators to implement rate
increases. Should this occur, it would impede our ability to raise our rates. If
we are unable to raise our rates in response to increasing costs, our financial
condition and results of operations could be materially adversely affected.
IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL
REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS.
If we enter the business of offering telecommunications services, we may be
required to obtain federal, state and local licenses or other authorizations to
offer these services. We may not be able to obtain such authorizations in a
timely manner, or at all, and conditions could be imposed upon such licenses or
authorizations that may not be favorable to us. Furthermore, telecommunications
companies, including Internet protocol telephony companies, generally are
subject to significant regulation as well as higher fees for pole attachments.
Internet protocol telephony companies are companies that have the ability to
offer telephone services over the Internet. Pole attachments are cable wires
that are attached to poles.
In particular, cable operators who provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the Federal Communications Commission for determining the rates.
These rates may be higher than those paid by cable operators that do not provide
telecommunications services. The rate increases are to be phased in over a
five-year period beginning on February 8, 2001. If we become subject to
telecommunications regulation or higher pole attachment rates, we may incur
additional costs which may be material to our business. A recent court decision,
currently under appeal to the United States Supreme Court, suggests that the
provision of Internet service may subject cable systems to higher pole
attachment rates. Certain utilities have already proposed vastly higher pole
attachment rates, based in part on the existing court decision.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK AND THE PRICE OF THE NOTES MAY
FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN LOSSES FOR INVESTORS.
The market price of our Class A common stock has been and may continue to
be extremely volatile. We expect the price of the Class A common stock to be
subject to fluctuations as a result of a variety of factors, including factors
beyond our control. These factors include:
- actual or anticipated variations in our revenues and operating results;
- announcements of the development of improved or competitive technologies;
- the use of new products or promotions by us or our competitors;
- the offer and sale by us in the future of additional shares of Class A
common stock or other equity securities;
- changes in financial forecasts by securities analysts;
- new conditions or trends in the cable industry; and
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- market conditions.
THE MARKET PRICE FOR OUR CLASS A COMMON STOCK AND THE NOTES COULD BE ADVERSELY
AFFECTED BY THE LARGE NUMBER OF ADDITIONAL SHARES ELIGIBLE FOR ISSUANCE IN THE
FUTURE.
As of May 10, 2001, 233,773,798 shares of Class A common stock were issued
and outstanding. If we complete the Class A common stock offering described in
this prospectus supplement, an additional 52,389,000 shares of Class A common
stock will be outstanding. Additional shares of Class A common stock will be
issuable under the circumstances described in the section "Shares Eligible for
Future Sale." Substantially all of the shares of Class A common stock issuable
upon exchange of Charter Communications Holding Company membership units and CC
VIII membership units and all shares of Class A common stock issuable upon
conversion of shares of our Class B common stock will have "demand" and/or
"piggyback" registration rights attached to them, including those issuable to
Mr. Allen through Charter Investment, Inc. and Vulcan Cable III Inc. The sale of
a substantial number of shares of Class A common stock or the perception that
such sales could occur could adversely affect the market price for shares of our
Class A common stock and the notes because these sales could cause the amount of
our stock available for sale in the market to exceed the amount of demand for
our stock and could also make it more difficult for us to sell equity securities
or equity-related securities in the future at a time and price that we deem
appropriate. This could adversely affect our ability to fund our current and
future obligations, including under the notes. See "Shares Eligible For Future
Sale."
A sale of convertible debt, convertible preferred stock or other equity
securities by us or the perception that any such sale could occur could
adversely affect the market price of the Class A common stock and the notes
because these sales could cause the amount of our Class A common stock available
for sale in the market to exceed the amount of demand for such stock.
PURCHASERS OF THE CLASS A COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION RESULTING IN THEIR SHARES BEING WORTH LESS ON A PRO FORMA NET TANGIBLE
BOOK VALUE BASIS THAN THE AMOUNT THEY INVESTED.
Purchasers of the Class A common stock offered in this prospectus
supplement will experience an immediate dilution in pro forma net tangible book
value of $50.63 per share of Class A common stock purchased. Accordingly, in the
event we are liquidated, investors may not receive the full amount of their
investment. See "Dilution."
THE OFFERING OF THE NOTES
THERE CURRENTLY EXISTS NO MARKET FOR THE NOTES. WE CANNOT ASSURE YOU THAT AN
ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES.
Prior to the offering, there was no market for the notes. We have been
informed by the underwriters of the notes offering that they intend to make a
market in the notes after the offering is completed. However, the underwriters
of the notes offering may cease their market-making at any time without notice.
We do not intend to apply for listing of the notes on any securities exchange or
for quotation through any automated quotation system. The liquidity of the
trading market in the notes, and the market price quoted for the notes, may be
adversely affected by changes in the overall market for convertible debt
securities generally or the interest of securities dealers in making a market in
the notes and by changes in our financial performance or prospects or in the
prospects for companies in our industry generally. As a result, we cannot assure
you that an active trading market will develop for the notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FULFILL OUR
OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF CONTROL. THIS WOULD PLACE US
IN DEFAULT UNDER THE INDENTURE GOVERNING THE NOTES.
Under the indenture governing the notes, upon the occurrence of specified
change of control events, we will be required to offer to repurchase all
outstanding notes. However, we may not have sufficient funds at the time of the
change of control event to make the required repurchase of the notes and our
subsidiaries are
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limited in their ability to make distributions or other payments to us to fund
any required repurchase. In addition, a change of control under our
subsidiaries' credit facilities and indentures governing their public notes
would require the repayment of borrowings under those credit facilities and
indentures. Because such credit facilities and public notes are obligations of
our subsidiaries, the credit facilities and the public notes would have to be
repaid by our subsidiaries before their assets could be available to us to
repurchase the notes. Our failure to make or complete an offer to repurchase the
notes would place us in default under the indenture governing the notes. You
should also be aware that a number of important corporate events, such as
leveraged recapitalizations that would increase the level of our indebtedness,
would not constitute a change of control under the indenture governing the
notes.
IF WE DO NOT FULFILL OUR OBLIGATIONS TO HOLDERS OF THE NOTES, THEY WILL NOT HAVE
ANY RECOURSE AGAINST MR. ALLEN OR HIS AFFILIATES.
The notes will be issued solely by Charter Communications, Inc. None of our
equity holders, directors, officers, employees or affiliates, including Mr.
Allen, will be an obligor or guarantor under the notes. Furthermore, the
indenture governing the notes expressly provides that these parties will not
have any liability for our obligations under the notes or the indenture
governing the notes. By accepting the notes, the purchasers of the notes waive
and release all such liability as consideration for issuance of the notes.
Consequently, if we do not fulfill our obligations to holders of the notes, they
will have no recourse against any of these parties.
Additionally, our equity holders, including Mr. Allen, will be free to
manage other entities, including other cable companies. If we do not fulfill our
obligations to holders of the notes, they will have no recourse against those
other entities or their assets.
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USE OF PROCEEDS
OFFERING OF CLASS A COMMON STOCK
The net proceeds we will receive from the sale of the 52,389,000 shares of
Class A common stock being offered hereby, after deducting the underwriting
discount and offering expenses, are estimated to be approximately $1.05 billion.
If the underwriters exercise their over-allotment option in full, the net
proceeds from the sale of shares of Class A common stock will be approximately
$1.21 billion.
Concurrently with the closing of the offering of the Class A common stock,
Charter Communications, Inc. will contribute to Charter Communications Holding
Company the net proceeds of the offering, except for a portion of the proceeds
($501.5 million) which we expect to use to pay a portion of the purchase price
of the pending AT&T transactions. Charter Communications, Inc. has committed to
contribute the interests that it acquires to Charter Communications Holding
Company upon completion of the pending AT&T transactions. In exchange for the
contribution of the net proceeds of the offering by Charter Communications, Inc.
and Charter Communications, Inc.'s obligation to contribute to Charter
Communications Holding Company the interests acquired upon completion of the
pending AT&T transactions, Charter Communications Holding Company will issue to
Charter Communications, Inc. 52,389,000 Class B membership units concurrently
with the closing of the offering of the Class A common stock.
Charter Communications Holding Company will use the net proceeds from the
sale of the membership units to Charter Communications, Inc. to purchase common
equity from Charter Holdings, which intends to use the net proceeds for working
capital purposes and capital expenditures. Pending such use of proceeds, we may
invest a portion of the net proceeds of this offering temporarily in short-term
marketable securities.
OFFERING OF CONVERTIBLE SENIOR NOTES
The net proceeds we will receive from the sale of $550,000,000 aggregate
principal amount of notes being offered hereby, after deducting the underwriting
discount and offering expenses, are estimated to be approximately $528,500,000.
The underwriting discount and expenses will be paid by Charter Communications
Holding Company. If the underwriters exercise their over-allotment option in
full, the net proceeds from the sale of the notes will be approximately
$608,731,000.
Upon the closing of the offering of the notes, Charter Communications, Inc.
will use the proceeds of the offering of the notes to purchase from Charter
Communications Holding Company a mirror convertible senior note with terms
substantially similar to the terms of the notes. Under the mirror convertible
senior note, when a holder of notes converts all or any portion of its notes
into shares of Class A common stock of Charter Communications, Inc., a portion
of the mirror convertible senior note (in principal amount equal to the
principal amount of the notes so converted) will convert automatically into
Class B common membership units of Charter Communications Holding Company to be
issued to Charter Communications, Inc.
Charter Communications Holding Company will use the net proceeds of the
sale of the mirror convertible note to purchase common equity from Charter
Holdings, which intends to use the net proceeds for working capital purposes and
capital expenditures. Pending such use of proceeds, we may invest a portion of
the net proceeds of this offering temporarily in short-term marketable
securities.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our Class A common stock is quoted on the Nasdaq National Market under the
symbol "CHTR." The following table sets forth, for the periods indicated, the
range of high ask and low bid price per share of Class A common stock on the
Nasdaq National Market. On May 23, 2001, the last reported sale price per share
of our Class A common stock on the Nasdaq National Market was $20.92.
2001 HIGH LOW
---- -------- --------
First Quarter..................................... $24.1875 $19.0000
Second Quarter (through May 23, 2001)............. 24.0625 18.8750
2000
--------------------------------------------------
First Quarter..................................... 22.6250 14.0000
Second Quarter.................................... 16.5625 10.0000
Third Quarter..................................... 17.0625 12.3750
Fourth Quarter.................................... 24.1875 16.1875
1999
--------------------------------------------------
Period Ended December 31, 1999*................... 27.750 19.500
---------------
* Our Class A common stock began trading on November 9, 1999. The initial public
offering price per share was $19.00.
As of May 10, 2001, there were approximately 2,700 holders of our Class A
common stock of record and one holder of our Class B common stock. No preferred
stock is outstanding.
We have never paid and do not expect to pay any cash dividends on our Class
A common stock in the foreseeable future. Charter Communications Holding Company
is required under certain circumstances to pay distributions pro rata to all its
common members to the extent necessary for any common member to pay 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 of our subsidiaries restrict their ability to make
distributions to us and, accordingly, limit our ability to declare or pay cash
dividends. We intend to cause Charter Communications Holding Company and its
subsidiaries to retain future earnings, if any, to finance the expansion of the
business of Charter Communications Holding Company and its subsidiaries.
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RATIO OF EARNINGS TO FIXED CHARGES
Earnings for the years ended December 31, 1996 and 1997, for the periods
from January 1, 1998 through December 23, 1998 and from December 24, 1998
through December 31, 1998 and for the years ended December 31, 1999 and 2000 and
for the period from January 1, 2001 through March 31, 2001 were insufficient to
cover fixed charges by $2.7 million, $4.6 million, $17.2 million, $5.3 million,
$0.6 billion, $2.1 billion and $0.7 billion, respectively. As a result of such
deficiencies, the ratios of earnings to fixed charges are not presented.
DILUTION
The following table illustrates the dilution in pro forma net tangible book
value on a per share basis. In calculating dilution, we have made the same
assumptions that we made with respect to our unaudited pro forma financial
statements. The pro forma net tangible book value deficit of common stock as of
March 31, 2001 was approximately $9.7 billion or $37.71 per common share. Pro
forma net tangible book value deficit per share of common stock represents the
pro forma amount of our shareholders' equity and minority interest, less
intangible assets of $17.9 billion, divided by 257,680,999 pro forma shares of
common stock outstanding on March 31, 2001.
For purposes of the following table, pro forma dilution per share to new
investors represents the difference between $22.50, which is the weighted
average of the offering price of the Class A common stock ($21.00) and the
conversion price of the notes ($26.25), and the pro forma net tangible book
value deficit per share of common stock after the offerings described in this
prospectus supplement. Assuming conversion of the notes and the issuance of
Class A common stock, the pro forma net tangible book value deficit per share of
common stock would have been $28.13. The following table illustrates this pro
forma dilution per share of common stock:
Weighted average price per share............................ $22.50
Pro forma net tangible book value deficit per share of
common stock before the offerings described in this
prospectus supplement................................ $(37.71)
Increase per share of common stock attributable to the
offering of Class A common stock..................... 5.67
-------
Pro forma net tangible book value deficit per share before
the notes offering........................................ (32.04)
Increase per share of common stock attributable to the
offering of the notes................................ 3.91
-------
Pro forma net tangible book value deficit per share after
the offerings described in this prospectus supplement..... (28.13)
------
Pro forma dilution per share to new investors(a)............ $50.63
======
---------------
(a) Assuming the exercise of the underwriters' over-allotment options in full,
pro forma dilution per share to new investors would be $48.91.
The table above and related discussion assumes no exercise of any options
to purchase membership units of Charter Communications Holdings Company that are
exchangeable for shares of Class A common stock. Membership units received upon
exercise of these options are automatically exchanged for shares of Class A
common stock of Charter Communications, Inc. on a one-to-one basis. As of March
31, 2001, options to purchase 34,667,133 membership units at exercise prices
ranging from $14.31 to $23.09 per unit were outstanding. To the extent that all
or a portion of these options are exercised, no additional dilution of net
tangible book value per share of Class A common stock to the new investors would
occur.
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CAPITALIZATION
The following table sets forth as of March 31, 2001, on a consolidated
basis:
- the actual capitalization of Charter Communications, Inc.; and
- the pro forma capitalization of Charter Communications, Inc. to reflect:
(1) the closing of the pending AT&T transactions;
(2) the issuance and sale of the May 2001 Charter Holdings notes and
the application of the net proceeds therefrom to pay the cash
portion of the purchase price of the pending AT&T transactions
(approximately $1.1 billion) and repay all amounts outstanding
under the Charter Operating, CC VI (Fanch) and CC VIII (Bresnan)
revolving credit facilities and a portion of the CC VII (Falcon)
revolving credit facility; and
(3) the issuance by Charter Communications, Inc. of Class A common
stock to AT&T valued at $501.5 million in payment of a portion of
the purchase price of the pending AT&T transactions.
- the equity pro forma as adjusted capitalization of Charter
Communications, Inc. to reflect:
(1) the issuance and sale by Charter Communications, Inc. of
52,389,000 shares of Class A common stock at $21.00 per share in
the Class A common stock offering described in this prospectus
supplement (not including any proceeds from the notes offering
described in this prospectus supplement);
(2) the purchase by Charter Communications, Inc. of 52,389,000 Class B
membership units in Charter Communications Holding Company, with
the proceeds being contributed to Charter Holdings, which used
such proceeds to repay the remaining portion of the CC VII
(Falcon) revolving credit facility; and
(3) the payment of $501.1 million of the purchase price of the pending
AT&T transactions in cash in lieu of issuing Class A common stock,
as provided in the AT&T transaction documents in the event of an
offering of Class A common stock prior to the closing of the
pending AT&T transactions.
- the notes pro forma as adjusted capitalization of Charter Communications,
Inc. to reflect:
(1) the issuance and sale of the notes as described in this prospectus
supplement (not including any proceeds from the Class A common
stock offering described in this prospectus supplement); and
(2) the repayment of the remaining portion of the CC VII (Falcon)
revolving credit facility.
- the combined pro forma as adjusted capitalization of Charter
Communications, Inc. to reflect the pro forma capitalization of Charter
Communications, Inc. as adjusted for the offerings of both the Class A
common stock and the notes.
The offering of the Class A common stock and the offering of the notes are
independent offerings and are not conditioned on each other.
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This table should be read in conjunction with the "Unaudited Pro Forma
Financial Statements" included elsewhere in this prospectus supplement.
AS OF MARCH 31, 2001
-------------------------------------------------------------------------
EQUITY NOTES COMBINED
PRO FORMA PRO FORMA PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED AS ADJUSTED AS ADJUSTED
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT:
Credit facilities:
Charter Operating................. $ 3,815,000 $ 3,450,000 $ 3,450,000 $ 3,450,000 $ 3,450,000
CC VI -- Fanch.................... 901,000 850,000 850,000 850,000 850,000
CC VII -- Falcon.................. 698,750 694,060 488,750 488,750 488,750
CC VIII -- Bresnan................ 1,005,000 1,000,000 1,000,000 1,000,000 1,000,000
Charter Communications, Inc. 5.75%
convertible senior notes due
2005.............................. 750,000 750,000 750,000 750,000 750,000
Charter Holdings notes(a)........... 6,304,266 6,304,266 6,304,266 6,304,266 6,304,266
Additional Charter Holdings
notes(b).......................... -- 1,500,190 1,500,190 1,500,190 1,500,190
2001 convertible senior notes....... -- -- -- 550,000 550,000
Other notes(c)...................... 233,331 233,737 233,737 233,737 233,737
----------- ----------- ----------- ----------- -----------
Total long-term debt.............. 13,707,347 14,782,253 14,576,943 15,126,943 15,126,943
----------- ----------- ----------- ----------- -----------
MINORITY INTEREST(d)(g)............... 4,783,692 4,902,999(e) 5,006,532(f) 4,902,999(e) 5,006,532(f)
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY:
Class A common stock; $.001 par value;
1.75 billion shares authorized;
233,750,047, 257,630,999,
286,139,047, 257,680,999 and
286,139,047 shares issued and
outstanding, respectively........... 234 258 286 258 286
Class B common stock; $.001 par value;
750 million shares authorized;
50,000 shares issued and
outstanding......................... -- -- -- -- --
Preferred stock; $.001 par value; 250
million shares authorized; no shares
issued and outstanding.............. -- -- -- -- --
Additional paid-in capital............ 4,036,742 4,418,911 4,864,019 4,418,911 4,864,019
Accumulated deficit................... (1,175,580) (1,175,580) (1,175,580) (1,175,580) (1,175,580)
Accumulated other comprehensive
loss................................ (9,085) (9,085) (9,085) (9,085) (9,085)
----------- ----------- ----------- ----------- -----------
Total shareholders'
equity(g).................. 2,852,311 3,234,504(e) 3,679,640(f) 3,234,504(e) 3,679,640(f)
----------- ----------- ----------- ----------- -----------
Total capitalization.............. $21,343,350 $22,919,756 $23,263,115 $23,264,446 $23,813,115
=========== =========== =========== =========== ===========
---------------
(a) Represents the following Charter Holdings notes:
8.250% senior notes due 2007................................ $ 598,807
8.625% senior notes due 2009................................ 1,496,359
9.920% senior discount notes due 2011....................... 1,103,285
10.00% senior notes due 2009................................ 675,000
10.25% senior notes due 2010................................ 325,000
11.75% senior discount notes due 2010....................... 345,307
10.750% senior notes due 2009............................... 899,240
11.125% senior notes due 2011............................... 500,000
13.500% senior discount notes due 2011...................... 361,268
----------
$6,304,266
==========
(b) Represents the following May 2001 Charter Holdings notes:
9.625% senior notes due 2009................................ $ 350,000
10.000% senior notes due 2011............................... 575,000
11.750% senior discount notes due 2011...................... 575,190
----------
$1,500,190
==========
(c) Primarily represents outstanding public notes of our Renaissance and Avalon
subsidiaries. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financing Activities" and
"Description of Certain Indebtedness -- Existing Public Debt."
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(d) Minority interest consists primarily of (1) total members' equity of Charter
Communications Holding Company multiplied by 54.2% at March 31, 2001, the
ownership percentage of Charter Communications Holding Company not owned by
us and (2) preferred equity in a subsidiary of Charter Communications, Inc.
held by certain Bresnan sellers. Gains (losses) arising from the issuance by
Charter Communications Holding Company of its membership units are recorded
as capital transactions, thereby increasing/ (decreasing) shareholders'
equity and (decreasing)/increasing minority interest.
(e) Increase, when compared to actual minority interest and shareholders'
equity, relates to shares of Class A common stock to be issued to finance a
portion of the pending AT&T transactions.
(f) Increase relates to the issuance of Class A common stock as described in
this prospectus supplement.
(g) Assuming the underwriters' option to purchase additional shares of Class A
common stock in the Class A common stock offering is exercised in full and
the net proceeds are used to purchase additional membership units of Charter
Communications Holding Company, total shareholders' equity would increase by
$128.0 million and total minority interest would increase by $31.2 million.
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements of Charter
Communications, Inc. are based on the historical financial statements of Charter
Communications, Inc.
The balance sheet is adjusted on a pro forma basis to reflect the following
transactions as if they had occurred on March 31, 2001:
(1) the closing of the pending AT&T transactions;
(2) the issuance by Charter Communications, Inc. of Class A common stock
valued at $501.5 million in payment of a portion of the purchase price
for the pending AT&T transactions;
(3) the issuance and sale of the May 2001 Charter Holdings notes and the
application of the net proceeds therefrom to repay all amounts
outstanding under the Charter Operating, CC VI (Fanch) and CC VIII
(Bresnan) revolving credit facilities and a portion of the CC VII
(Falcon) revolving credit facility;
(4) the issuance and sale of 52,389,000 shares of Class A common stock at
$21.00 per share, and the contribution of the net proceeds to Charter
Communications Holding Company in exchange for 52,389,000 Class B
membership units in Charter Communication Holding Company;
(5) the payment of $501.5 million of the purchase price of the pending AT&T
transactions in cash in lieu of issuing Class A common stock, as
provided in the AT&T transaction documents in the event of an offering
of Class A common stock prior to the closing of the pending AT&T
transactions; and
(6) the issuance and sale of the notes described in this prospectus
supplement and the proceeds therefrom applied to cash and cash
equivalents.
The statements of operations are adjusted on a pro forma basis to
illustrate the estimated effects of the following transactions as if they had
occurred on January 1, 2000:
(1) our acquisitions and dispositions completed since January 1, 2000;
(2) the closing of the pending AT&T transactions;
(3) the issuance by Charter Communications, Inc. of Class A common stock
valued at $501.5 million in payment of a portion of the purchase price
for the pending AT&T transactions;
(4) the issuance and sale of our October 2000 convertible senior notes and
the application of the net proceeds to repay an intercompany amount due
to Charter Holdings and to make a contribution for additional equity to
Charter Holdings, which used the proceeds it received to repay a
portion of the amounts outstanding under the Charter Holdings 2000
senior bridge loan facility;
(5) 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 CC VI (Fanch) revolving credit facility, and a portion of the
amounts outstanding under the Charter Operating and CC VII (Falcon)
revolving credit facilities;
(6) the issuance and sale of the May 2001 Charter Holdings notes and the
application of the net proceeds;
(7) the issuance and sale of the notes described in this prospectus
supplement and the application of the net proceeds; and
(8) the issuance and sale of the Class A common stock described in this
prospectus supplement and application of the net proceeds.
The Unaudited Pro Forma Financial Statements reflect the application of the
principles of purchase accounting to the transactions listed in items (1) and
(2) above. The allocation of certain purchase prices is based, in part, on
preliminary information, which is subject to adjustment upon obtaining complete
valuation information of intangible assets and is subject to post-closing
purchase price adjustments. We believe that
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finalization of the purchase prices and the allocation will not have a material
impact on the results of operations or financial position of Charter
Communications, Inc.
The number of shares issuable in the pending AT&T transactions will be
based on the average closing share price of Charter Communications, Inc.'s Class
A common stock for the thirty days prior to the close of the transactions. The
number of shares to be issued will vary based upon fluctuations in Charter
Communications, Inc.'s share price, subject to a specified share price range. We
have assumed that 23.9 million shares will be issued. However, we believe the
effects of any change in this number of shares would not have a material impact
on the Unaudited Pro Forma Financial Statements.
Immediately after the issuance of Class A common stock and the equity
contribution to Charter Communications Holding Company, the economic interest of
Charter Communications, Inc. in Charter Communications Holding Company will
increase to 45.8% from 40.8%. The Unaudited Pro Forma Financial Statements
reflect minority interest of 54.2%. It has been assumed that the underwriters
have not exercised their over-allotment options.
The Unaudited Pro Forma Financial Statements of Charter Communications,
Inc. do not purport to be indicative of what our financial position or results
of operations would actually have been had the transactions described above been
completed on the dates indicated or to project our results of operations for any
future date.
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UNAUDITED PRO FORMA DATA
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2001
------------------------------------------------------------------------------------------
EQUITY NOTES
CHARTER PENDING OFFERING OFFERING
COMMUNICATIONS, INC. ACQUISITIONS ADJUSTMENT ADJUSTMENT
(NOTE A) (NOTE B) SUBTOTAL (NOTE C) (NOTE D) TOTAL
-------------------- ------------ -------- ---------- ---------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
STATEMENT OF OPERATIONS:
Revenues.............................. $ 873,797 $ 71,410 $ 945,207 $ -- $ -- $ 945,207
----------- -------- ----------- -------- -------- ------------
Operating expenses:
Operating, general and
administrative.................... 472,147 48,156 520,303 -- -- 520,303
Depreciation and amortization....... 695,895 34,515 730,410 -- -- 730,410
Option compensation expense......... 6,038 -- 6,038 -- -- 6,038
Corporate expense charges........... 13,721 4,850 18,571 -- -- 18,571
----------- -------- ----------- -------- -------- ------------
Total operating expenses.......... 1,187,801 87,521 1,275,322 -- -- 1,275,322
----------- -------- ----------- -------- -------- ------------
Loss from operations.................. (314,004) (16,111) (330,115) -- -- (330,115)
Interest expense...................... (340,501) (3,648) (344,149) 3,640 (7,606) (348,115)
Interest income....................... 92 -- 92 -- -- 92
Other expense......................... (59,917) (36) (59,953) -- -- (59,953)
----------- -------- ----------- -------- -------- ------------
Loss before minority interest in loss
of subsidiary....................... (714,330) (19,795) (734,125) 3,640 (7,606) (738,091)
Minority interest in loss of
subsidiary (Note E)................. 385,940 10,735 396,675 (1,974) 4,125 398,826
----------- -------- ----------- -------- -------- ------------
Net loss.............................. $ (328,390) $ (9,060) $ (337,450) $ 1,666 $ (3,481) $ (339,265)
=========== ======== =========== ======== ======== ============
Loss per common share, basic and
diluted (Note F).................... $ (1.19)
============
Weighted-average common shares
outstanding, basic and diluted (Note
G).................................. 286,166,675
============
OTHER FINANCIAL DATA:
EBITDA (Note H)....................... $ 321,974 $ 18,368 $ 340,342 $ 340,342
EBITDA margin (Note I)................ 36.8% 25.7% 36.0% 36.0%
Adjusted EBITDA (Note J).............. $ 401,650 $ 23,254 $ 424,904 $ 424,904
Cash flows from operating
activities.......................... (154,087) 137,907 (16,180) (16,180)
Cash flows used in investing
activities.......................... (530,527) 3,383 (527,144) (527,144)
Cash flows from (used in) financing
activities.......................... 573,333 (144,192) 429,141 429,141
Capital expenditures.................. 524,523 2,165 526,688 526,688
Cash interest expense................. 239,297
Deficiency of earnings to cover fixed
charges (Note K).................... 738,091
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGE):
Homes passed (Note L)................. 10,258,300 955,787 11,214,087 11,214,087
Basic customers (Note M).............. 6,349,823 509,368 6,859,191 6,859,191
Basic penetration (Note N)............ 61.9% 53.3% 61.2% 61.2%
Premium units (Note O)................ 5,199,721 686,849 5,886,570 5,886,570
Premium penetration (Note P).......... 81.9% 134.8% 85.8% 85.8%
Average monthly revenue per basic
customer (Note Q)................... $45.93
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NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Communications, Inc. consist of
the following (dollars in thousands):
HISTORICAL
--------------------
3/31/2001
CHARTER PRO FORMA
COMMUNICATIONS, INC. ADJUSTMENTS TOTAL
-------------------- ----------- ----------
Revenues................................................. $ 873,797 $ -- $ 873,797
---------- -------- ----------
Operating expenses:
Operating, general and administrative.................. 472,147 -- 472,147
Depreciation and amortization.......................... 695,895 -- 695,895
Option compensation expense............................ 6,038 -- 6,038
Corporate expense charges.............................. 13,721 -- 13,721
---------- -------- ----------
Total operating expenses............................. 1,187,801 -- 1,187,801
---------- -------- ----------
Loss from operations..................................... (314,004) -- (314,004)
Interest expense......................................... (310,832) (29,669)(a) (340,501)
Interest income.......................................... 92 -- 92
Other expense............................................ (59,917) -- (59,917)
---------- -------- ----------
Loss before minority interest in loss of subsidiary...... (684,661) (29,669) (714,330)
Minority interest in loss of subsidiary.................. 403,962 (18,022)(b) 385,940
---------- -------- ----------
Net loss................................................. $ (280,699) $(47,691) $ (328,390)
========== ======== ==========
---------------
(a) Represents additional interest expense related to the borrowings on the May
2001 Charter Holdings senior and senior discount notes (dollars in
millions):
9.625% senior notes due 2009............................... $ 8.4
10.000% senior notes due 2011............................... 14.4
11.750% senior discount notes due 2011...................... 17.4
Amortization of debt issuance costs......................... 0.9
------
Total pro forma interest expense........................ 41.1
Less--interest expense on debt repaid of $631.0 million
at a weighted average interest rate of 7.2%............ (11.4)
------
$ 29.7
======
Net proceeds after deducting the underwriting commissions, and offering
expenses and debt repayment of $834.2 million were applied to cash and cash
equivalents.
(b) Represents an adjustment to minority interest in loss of subsidiary to
reflect the allocation of 54.2% of the pro forma loss to minority interest.
S-41
42
NOTE B: Pro forma operating results for our pending acquisitions consist
of the following (dollars in thousands):
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
2001
---------------------------------------------------------------
PENDING ACQUISITION
---------------------------------------------------------------
PRO FORMA
---------------------------------------------------------------
AT&T
TRANSACTIONS(a) DISPOSITIONS(b) ADJUSTMENTS TOTAL
--------------- --------------- ----------- --------
Revenues.................................... $81,013 $(9,603) $ -- $ 71,410
------- ------- -------- --------
Operating expenses:
Operating, general and administrative..... 53,303 (5,147) -- 48,156
Depreciation and amortization............. 25,478 (2,484) 11,521(c) 34,515
Corporate expense charges................. 5,005 (155) -- 4,850
------- ------- -------- --------
Total operating expenses........... 83,786 (7,786) 11,521 87,521
------- ------- -------- --------
Income (loss) from operations............... (2,773) (1,817) (11,521) (16,111)
Interest expense............................ (12) 4 (3,640)(d) (3,648)
Other income (expense)...................... (32) (4) -- (36)
------- ------- -------- --------
Loss before income taxes and minority
interest in loss of subsidiary............ (2,817) (1,817) (15,161) (19,795)
Minority interest in loss of subsidiary..... -- -- 10,735(e) 10,735
------- ------- -------- --------
Net loss.................................... $(2,817) $(1,817) $ (4,426) $ (9,060)
======= ======= ======== ========
(a) Represents the results of operations of the systems to be acquired in the
pending AT&T transactions for the three months ended March 31, 2001.
(b) Represents the results of operations of the Charter systems to be
transferred to AT&T in connection with the pending AT&T transactions. No
material gain or loss occurred on the dispositions as these systems were
recently acquired and recorded at fair value at that time.
(c) Represents additional depreciation and amortization as a result of the
pending AT&T transactions. A large portion of the purchase price was
allocated to franchises ($1.3 billion) that are amortized over 15 years.
The adjustment to depreciation and amortization expense consists of the
following (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
Franchises.................................. $1,305.3 15 $ 21.7
Cable distribution systems.................. 388.3 7 13.9
Buildings and equipment..................... 38.5 7 1.4
------
Total depreciation and amortization.................................... 37.0
Less -- historical depreciation and amortization....................... (25.5)
------
Adjustment........................................................ $ 11.5
======
(d) Reflects additional interest expense on borrowings that were used to
finance the AT&T transactions as follows (dollars in millions):
$205.3 of revolving credit facilities at a composite current
rate of 7.1% -- CC VII (Falcon)........................... $ 3.6
An increase in the interest rate of 0.125% on all variable rate debt would
result in an increase in interest expense of $7.2.
(e) Represents the allocation of 54.2% of the losses to the minority interest
in loss of subsidiary.
NOTE C: Reflects a decrease in interest expense related to the repayment
of $205.3 million of revolving credit facilities at a composite current rate of
7.1% -- CC VII (Falcon). The remaining proceeds of $343.4 million, after
deducting the underwriting commission and offering expenses and the payment of a
portion of
S-42
43
the pending AT&T transactions in cash in lieu of issuing Class A common stock,
were applied to cash and cash equivalents. Also represents the allocation of
54.2% of the losses to the minority interest in loss of subsidiary.
NOTE D: The offering adjustment of approximately $7.6 million in
additional interest expense consists of the following (dollars in millions):
Notes offered in this prospectus supplement at an interest
rate of 4.75%............................................. $6.5
Amortization of debt issuance costs......................... 1.1
----
$7.6
====
Also represents the allocation of 54.2% of the losses to the minority
interest in loss of subsidiary.
NOTE E: 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.
NOTE F: 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 March 31, 2001, are exchanged for shares of
Charter Communications, Inc. Class A common stock, none of the October and
November 2000 convertible senior notes or the notes offered hereby are converted
into shares of Charter Communications, Inc. Class A common stock and none of the
outstanding options to purchase membership units of Charter Communications
Holding Company that are automatically exchanged for Charter Communications,
Inc. Class A common stock are exercised. If the membership units were exchanged,
notes converted or options exercised, the effects would be antidilutive.
FOR THE THREE MONTHS
ENDED
MARCH 31, 2001
--------------------
Converted loss per Class A common share..................... $ (1.14)
============
Weighted average Class A common shares
outstanding -- converted.................................. 649,478,898
============
Converted loss per common share assumes all common membership units of
Charter Communications Holding Company and preferred membership units in an
indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of
March 31, 2001, are exchanged for Charter Communications, Inc. Class A common
stock. If all these shares are exchanged, 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.
Weighted average common shares outstanding -- converted assumes all of the
common membership units in Charter Communications Holding Company totaling
339,096,474 and 24,215,749 preferred membership units in a subsidiary of Charter
Holdings held by certain Bresnan sellers are exchanged for Charter
Communications, Inc. Class A common stock. Converted loss per Class A common
share assumes no conversion of the convertible senior notes and no exercise of
any options.
NOTE G: Represents historical weighted average shares outstanding for the
three months ended March 31, 2001, plus the Class A common stock as described in
this prospectus supplement, assuming such shares were outstanding for the entire
year.
NOTE H: EBITDA represents earnings (loss) before interest, 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
S-43
44
limited by working capital, debt service and capital expenditure requirements
and by restrictions related to legal requirements, commitments and
uncertainties.
NOTE I: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE J: Adjusted EBITDA means EBITDA before option compensation expense,
corporate expense charges and other expense. Adjusted EBITDA is presented
because it is a widely accepted indicator of a cable company's ability to
service indebtedness. However, adjusted EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating, investing
or financing activities, as determined in accordance with generally accepted
accounting principles. Adjusted EBITDA should also not be construed as an
indication of a company's operating performance or as a measure of liquidity. In
addition, because adjusted EBITDA is not calculated identically by all
companies, the presentation here may not be comparable to other similarly titled
measures of other companies. Management's discretionary use of funds depicted by
adjusted EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
NOTE K: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated interest component of rent
expense.
NOTE L: 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.
NOTE M: Basic customers are customers who receive basic cable service.
NOTE N: Basic penetration represents basic customers as a percentage of
homes passed.
NOTE O: Premium units represent the total number of subscriptions to
premium channels.
NOTE P: Premium penetration represents premium units as a percentage of
basic customers.
NOTE Q: Average monthly revenue per basic customer represents revenues
divided by three divided by the number of basic customers at March 31, 2001.
S-44
45
UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------
CHARTER 2000 PENDING
COMMUNICATIONS, INC. ACQUISITIONS ACQUISITIONS
(NOTE A) (NOTE B) SUBTOTAL (NOTE B)
-------------------- ------------ -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
STATEMENT OF OPERATIONS:
Revenues............................ $ 3,249,222 $ 49,752 $ 3,298,974 $ 279,705
----------- -------- ----------- -----------
Operating expenses:
Operating, general and
administrative.................. 1,651,353 29,312 1,680,665 188,658
Depreciation and amortization..... 2,473,082 46,845 2,519,927 141,148
Option compensation expense....... 40,978 -- 40,978 --
Corporate expense charges......... 55,243 707 55,950 12,088
----------- -------- ----------- -----------
Total operating expenses........ 4,220,656 76,864 4,297,520 341,894
----------- -------- ----------- -----------
Loss from operations................ (971,434) (27,112) (998,546) (62,189)
Interest expense.................... (1,249,040) (24,381) (1,273,421) (63)
Interest income..................... 7,348 (49) 7,299 (1)
Other expense....................... (31,729) (77) (31,806) (477)
----------- -------- ----------- -----------
Loss before minority interest in
loss of subsidiary................ (2,244,855) (51,619) (2,296,474) (62,730)
Minority interest in loss of
subsidiary (Note E)............... 1,212,583 27,033 1,239,616 34,018
----------- -------- ----------- -----------
Net loss............................ $(1,032,272) $(24,586) $(1,056,858) $ (28,712)
=========== ======== =========== ===========
Loss per common share, basic and
diluted (Note F)..................
Weighted-average common shares
outstanding, basic and diluted
(Note G)..........................
OTHER FINANCIAL DATA:
EBITDA (Note H)..................... $ 1,469,919 $ 19,656 $ 1,489,575 $ 78,482
EBITDA margin (Note I).............. 45.2% 39.5% 45.2% 28.1%
Adjusted EBITDA (Note J)............ $ 1,597,869 $ 20,440 $ 1,618,309 $ 91,047
Cash flows from operating
activities........................ 1,131,210 84,112 1,215,322 48,363
Cash flows used in investing
activities........................ (4,053,968) (38,924) (4,092,892) (154,733)
Cash flows from (used in) financing
activities........................ 2,919,754 (79,321) 2,840,433 107,727
Capital expenditures................ 2,825,126 93,951 2,919,077 156,128
Cash interest expense...............
Deficiency of earnings to cover
fixed charges (Note K)............
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGE):
Homes passed (Note L)............... 10,219,300 955,924
Basic customers (Note M)............ 6,346,200 511,279
Basic penetration (Note N).......... 62.1% 53.5%
Premium units (Note O).............. 4,936,800 718,288
Premium penetration (Note P)........ 77.8% 140.5%
Average monthly revenue per basic
customer (Note Q).................
UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------
EQUITY NOTES
OFFERING OFFERING
ADJUSTMENT ADJUSTMENT
(NOTE C) (NOTE D) TOTAL
---------- ---------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
STATEMENT OF OPERATIONS:
Revenues............................ $ -- $ -- $ 3,578,679
------- --------- ------------
Operating expenses:
Operating, general and
administrative.................. -- -- 1,869,323
Depreciation and amortization..... -- -- 2,661,075
Option compensation expense....... -- -- 40,978
Corporate expense charges......... -- -- 68,038
------- --------- ------------
Total operating expenses........ -- -- 4,639,414
------- --------- ------------
Loss from operations................ -- (1,060,735)
Interest expense.................... -- (30,425) (1,303,909)
Interest income..................... -- -- 7,298
Other expense....................... -- -- (32,283)
------- --------- ------------
Loss before minority interest in
loss of subsidiary................ -- (30,425) (2,389,629)
Minority interest in loss of
subsidiary (Note E)............... -- 16,499 1,290,133
------- --------- ------------
Net loss............................ $ -- $ (13,926) $ (1,099,496)
======= ========= ============
Loss per common share, basic and
diluted (Note F).................. $ (3.85)
============
Weighted-average common shares
outstanding, basic and diluted
(Note G).......................... 285,792,320
============
OTHER FINANCIAL DATA:
EBITDA (Note H)..................... $ 1,568,057
EBITDA margin (Note I).............. 43.8%
Adjusted EBITDA (Note J)............ $ 1,709,356
Cash flows from operating
activities........................ 1,263,685
Cash flows used in investing
activities........................ (4,247,625)
Cash flows from (used in) financing
activities........................ 2,948,160
Capital expenditures................ 3,075,205
Cash interest expense............... 991,718
Deficiency of earnings to cover
fixed charges (Note K)............ 2,389,629
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGE):
Homes passed (Note L)............... 11,175,224
Basic customers (Note M)............ 6,857,479
Basic penetration (Note N).......... 61.4%
Premium units (Note O).............. 5,655,088
Premium penetration (Note P)........ 82.5%
Average monthly revenue per basic
customer (Note Q)................. $43.49
S-45
46
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Communications, Inc. consist of
the following (dollars in thousands):
HISTORICAL
--------------------
12/31/2000
CHARTER PRO FORMA
COMMUNICATIONS, INC. ADJUSTMENTS TOTAL
-------------------- ----------- -----------
Revenues................................................ $ 3,249,222 $ -- $ 3,249,222
----------- --------- -----------
Operating expenses:
Operating, general and administrative................. 1,651,353 -- 1,651,353
Depreciation and amortization......................... 2,473,082 -- 2,473,082
Option compensation expense........................... 40,978 -- 40,978
Corporate expense charges............................. 55,243 -- 55,243
----------- --------- -----------
Total operating expenses............................ 4,220,656 -- 4,220,656
----------- --------- -----------
Loss from operations.................................... (971,434) -- (971,434)
Interest expense........................................ (1,059,130) (189,910)(a) (1,249,040)
Interest income......................................... 7,348 -- 7,348
Other expense........................................... (31,729) -- (31,729)
----------- --------- -----------
Loss before minority interest in loss of subsidiary..... (2,054,945) (189,910) (2,244,855)
Minority interest in loss of subsidiary................. 1,226,295 (13,712)(b) 1,212,583
----------- --------- -----------
Net loss................................................ $ (828,650) $(203,622) $(1,032,272)
=========== ========= ===========
---------------
(a) Represents an increase in interest expense of $48.8 million related to the
January 2001 Charter Holdings notes and a decrease in interest expense of
$8.2 million related to the Charter Communications, Inc. convertible senior
notes. In addition, represents an increase in interest expense of $149.3
million related to the borrowings on the May 2001 Charter Holdings notes and
the application to pay the remaining portion of the amounts outstanding
under the revolving credit facilities of our subsidiaries. (dollars in
millions):
INTEREST
DESCRIPTION EXPENSE
----------- ---------
$900.0 million of 10.750% senior notes due 2009............. $ 96.7
$500.0 million of 11.125% senior notes due 2011............. 55.6
$675.0 million of 13.500% senior discount notes due 2011.... 49.6
Amortization of debt issuance costs......................... 3.6
-------
Total pro forma interest expense........................ 205.5
Less -- interest expense on debt repaid of $1,704.5
million at a weighted average interest rate of 9.2%.... (156.7)
-------
Adjustment............................................ 48.8
$750.0 million of 5.75% convertible senior notes due 2005... 35.9
Amortization of debt issuance costs......................... 4.9
-------
Total pro forma interest expense........................ 40.8
Less -- interest expense on debt repaid of $675.9
million at a weighted average rate of 7.2%............. (49.0)
-------
Adjustment............................................ (8.2)
$350 million of 9.625% senior notes due 2009................ 33.7
$575 million of 10.000% senior notes due 2011............... 57.5
$1,018 million of 11.750% senior discount notes due 2011.... 69.6
Amortization of debt issuance costs......................... 3.6
-------
Total pro forma interest expense........................ 164.4
Less: interest expense on debt repaid of $181.0 million
at a weighted average rate of 8.3%..................... (15.1)
-------
Adjustment............................................ 149.3
------
Total interest expense adjustment.................. $189.9
======
(b) Represents an adjustment to minority interest in loss of subsidiary to
reflect the allocation of 54.2% of the pro forma loss to minority interest.
S-46
47
NOTE B: Pro forma operating results for our 2000 and pending acquisitions
consist of the following (dollars in thousands):
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------
2000 ACQUISITIONS -- HISTORICAL
-------------------------------------------------
BRESNAN(a) KALAMAZOO(b) OTHER(c) Total
---------- ------------ -------- --------
Revenues............................................... $37,102 $14,151 $ 3,187 $ 54,440
------- ------- ------- --------
Operating expenses:
Operating, general and administrative................ 24,925 8,437 2,759 36,121
Depreciation and amortization........................ 8,095 1,640 777 10,512
Corporate expense charges............................ 1,389 318 112 1,819
------- ------- ------- --------
Total operating expenses........................... 34,409 10,395 3,648 48,452
------- ------- ------- --------
Income (loss) from operations.......................... 2,693 3,756 (461) 5,988
Interest expense....................................... (9,566) -- (1,565) (11,131)
Interest income........................................ 44 3,365 2 3,411
Other expense.......................................... (106) (131) (1) (238)
------- ------- ------- --------
Income (loss) before income taxes...................... $(6,935) $ 6,990 $(2,025) $ (1,970)
======= ======= ======= ========
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------
2000 ACQUISITIONS
--------------------------------------------------------------------------
PRO FORMA
-------------------------------------------------------------
HISTORICAL ACQUISITIONS(d) DISPOSITIONS(e) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- --------
Revenues................................ $ 54,440 $556 $(5,244) $ -- $ 49,752
-------- ---- ------- -------- --------
Operating expenses:
Operating, general and
administrative...................... 36,121 415 (2,608) (4,616)(f) 29,312
Depreciation and amortization......... 10,512 107 (495) 36,721(g) 46,845
Corporate expense charges............. 1,819 47 (127) (1,032)(f) 707
-------- ---- ------- -------- --------
Total operating expenses....... 48,452 569 (3,230) 31,073 76,864
-------- ---- ------- -------- --------
Income (loss) from operations........... 5,988 (13) (2,014) (31,073) (27,112)
Interest expense........................ (11,131) (8) -- (13,242)(h) (24,381)
Interest income......................... 3,411 -- -- (3,460)(i) (49)
Other income (expense).................. (238) 10 55 96(j) (77)
-------- ---- ------- -------- --------
Loss before income taxes and, minority
interest in loss of subsidiary........ (1,970) (11) (1,959) (47,679) (51,619)
Income tax benefit...................... -- 5 -- (5)(k) --
Minority interest in loss of
subsidiary............................ -- -- -- 27,033(l) 27,033
-------- ---- ------- -------- --------
Net loss................................ $ (1,970) $ (6) $(1,959) $(20,651) $(24,586)
======== ==== ======= ======== ========
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48
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------
PENDING ACQUISITION
---------------------------------------------------------------
PRO FORMA
---------------------------------------------------------------
AT&T
TRANSACTIONS(m) DISPOSITIONS(n) ADJUSTMENTS TOTAL
--------------- --------------- ----------- --------
Revenues.................................... $316,133 $(36,428) $ -- $279,705
-------- -------- -------- --------
Operating expenses:
Operating, general and administrative..... 208,048 (19,390) -- 188,658
Depreciation and amortization............. 130,291 (6,848) 17,705(o) 141,148
Corporate expense charges................. 12,088 -- -- 12,088
-------- -------- -------- --------
Total operating expenses........... 350,427 (26,238) 17,705 341,894
-------- -------- -------- --------
Income (loss) from operations............... (34,294) (10,190) (17,705) (62,189)
Interest expense............................ (63) -- -- (63)
Interest income............................. -- (1) -- (1)
Other income (expense)...................... (491) 14 -- (477)
-------- -------- -------- --------
Loss before income taxes and minority
interest in loss of subsidiary............ (34,848) (10,177) (17,705) (62,730)
Income tax benefit.......................... 78 -- (78)(k) --
Minority interest in loss of subsidiary..... -- -- 34,018(p) 34,018
-------- -------- -------- --------
Net loss.................................... $(34,770) $(10,177) $ 16,235 $(28,712)
======== ======== ======== ========
---------------
(a) Represents the results of operations of Bresnan for the period from January
1, 2000 to February 14, 2000, the date of acquisition.
(b) Represents the results of operations of Kalamazoo for the period from
January 1, 2000 to September 7, 2000, the date of acquisition.
(c) Represents the historical results of operations of Capital Cable and
Farmington for the period from January 1, 2000 through April 1, 2000, the
date of these acquisitions, and of Interlake for the period from January 1,
2000 through January 31, 2000, the date of that acquisition.
(d) Represents the historical results of operations for the period from January
1, 2000 through the date of purchase for an acquisition completed by
Bresnan. This acquisition was accounted for using the purchase method of
accounting. The purchase price was $36.2 million and the transaction closed
in January 2000.
(e) Represents the results of operations of a North Dakota cable system sold in
December 2000, and the results of operations of an Indiana cable system
that we did not transfer at the time of the InterMedia closing because some
of the necessary regulatory approvals were still pending. This Indiana
system was transferred in March 2000. No material gain or loss occurred on
the dispositions as these systems were recently acquired and recorded at
fair value at that time.
(f) Reflects a reclassification of expenses representing corporate expenses
that would have occurred at Charter Investment, Inc. totaling $0.2 million.
The remaining adjustment primarily relates to the elimination of severance
and divestiture costs of $3.8 million and an adjustment for loss contracts
of $0.6 million that were included in operating, general and administrative
expense. Also represents the elimination of termination benefits of $1.2
million paid in connection with the Bresnan acquisition included in
corporate expense charges.
(g) Represents additional depreciation and amortization as a result of our
acquisitions completed in 2000. A large portion of the purchase price was
allocated to franchises ($3.0 billion) that are amortized over
S-48
49
15 years. The adjustment to depreciation and amortization expense consists
of the following (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
Franchises.................................. $2,982.0 15 $35.4
Cable distribution systems.................. 325.7 8 10.3
Land, buildings and improvements............ 10.2 10 0.4
Vehicles and equipment...................... 16.8 3 1.2
-----
Total depreciation and amortization.................................... 47.3
Less -- historical depreciation and amortization....................... (10.6)
-----
Adjustment........................................................ $36.7
=====
(h) Reflects additional interest expense on borrowings, which were used to
finance the 2000 acquisitions as follows (dollars in millions):
DESCRIPTION INTEREST EXPENSE
----------- ----------------
$631.2 million of credit facilities at a composite current
rate of 8.4% -- Bresnan................................... $ 6.6
$361.0 million of January 2000 Charter Holdings notes used
to refinance Bresnan 8.0% senior notes and 9.25% senior
discount notes at composite rate of 10.55%................ 4.7
Interest expense on additional borrowings used to finance
other acquisitions at a composite current rate of 8.8%.... 13.0
------
Total pro forma interest expense....................... 24.3
Less -- historical interest expense from acquired
companies............................................. (11.1)
------
Adjustment........................................... $ 13.2
======
An increase in the interest rate of 0.125% on all variable rate debt would
result in an increase in interest expense of $7.1 million.
(i) Represents interest income on a historical related party receivable that
was retained by the seller.
(j) Represents the elimination of gain (loss) on sale of cable systems whose
results of operations have been eliminated in (e) above.
(k) Reflects the elimination of income tax benefit as a result of expected
recurring future losses. The losses will not be tax benefited and no net
deferred tax assets will be recorded.
(l) 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.
(m) Represents the results of operations of the systems to be acquired in the
pending AT&T transactions for the year ended December 31, 2000.
(n) Represents the results of operations of the Charter systems to be
transferred to AT&T in connection with the pending AT&T transactions. No
material gain or loss occurred on the dispositions as these systems were
recently acquired and recorded at fair value at that time.
(o) Represents additional depreciation and amortization as a result of the
pending AT&T transactions. A large portion of the purchase price was
allocated to franchises ($1.3 billion) that are amortized over 15 years.
The adjustment to depreciation and amortization expense consists of the
following (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
Franchises.................................. $1,305.3 15 $ 87.0
Cable distribution systems.................. 388.3 7 55.5
Buildings and equipment..................... 38.5 7 5.5
-------
Total depreciation and amortization.................................... 148.0
Less -- historical depreciation and amortization....................... (130.3)
-------
Adjustment........................................................ $ 17.7
=======
S-49
50
(p) Represents the allocation of 54.2% of the losses to the minority interest
in loss of subsidiary.
NOTE C: All net proceeds related to the Class A common stock issuance
described in this prospectus supplement were applied to cash and cash
equivalents.
NOTE D: The offering adjustment of approximately $30.4 million in
additional interest expense consists of the following (dollars in millions):
Notes offered in this prospectus supplement at an interest
rate of 4.75%............................................. $26.1
Amortization of debt issuance costs......................... 4.3
-----
Total proforma interest expense........................ $30.4
=====
NOTE E: 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.
NOTE F: 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. Class A common stock, none of the October and
November 2000 convertible senior notes or the notes offered hereby are converted
into shares of Charter Communications, Inc. Class A common stock and none of the
outstanding options to purchase membership units of Charter Communications
Holding Company that are automatically exchanged for Charter Communications,
Inc. Class A common stock are exercised. If the membership units were exchanged,
notes converted or options exercised, the effects would be antidilutive.
FOR THE YEAR
ENDED
DECEMBER 31,
2000
------------
Converted loss per Class A common share..................... $ (3.68)
============
Weighted average Class A common shares
outstanding -- converted.................................. 649,104,543
============
Converted loss per common share assumes all common membership units of
Charter Communications Holding Company and preferred membership units in an
indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of
December 31, 2000, are exchanged for Charter Communications, Inc. Class A common
stock. If all these shares are exchanged, 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.
Weighted average common shares outstanding -- converted assumes all of the
common membership units in Charter Communications Holding Company totaling
339,096,474 and 24,215,749 preferred membership units in a subsidiary of Charter
Holdings held by certain Bresnan sellers are exchanged for Charter
Communications, Inc. Class A common stock. Converted loss per Class A common
share assumes no conversion of the convertible senior notes and no exercise of
any options.
NOTE G: Represents historical weighted average shares outstanding for the
year ended December 31, 2000, plus the Class A common stock as described in this
prospectus supplement, assuming such shares were outstanding for the entire
year.
NOTE H: 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
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51
limited by working capital, debt service and capital expenditure requirements
and by restrictions related to legal requirements, commitments and
uncertainties.
NOTE I: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE J: Adjusted EBITDA means EBITDA before option compensation expense,
corporate expense charges and other expense. Adjusted EBITDA is presented
because it is a widely accepted indicator of a cable company's ability to
service indebtedness. However, adjusted EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating, investing
or financing activities, as determined in accordance with generally accepted
accounting principles. Adjusted EBITDA should also not be construed as an
indication of a company's operating performance or as a measure of liquidity. In
addition, because adjusted EBITDA is not calculated identically by all
companies, the presentation here may not be comparable to other similarly titled
measures of other companies. Management's discretionary use of funds depicted by
adjusted EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
NOTE K: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated interest component of rent
expense.
NOTE L: 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.
NOTE M: Basic customers are customers who receive basic cable service.
NOTE N: Basic penetration represents basic customers as a percentage of
homes passed.
NOTE O: Premium units represent the total number of subscriptions to
premium channels.
NOTE P: Premium penetration represents premium units as a percentage of
basic customers.
NOTE Q: Average monthly revenue per basic customer represents revenues
divided by twelve divided by the number of basic customers at December 31, 2000.
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UNAUDITED PRO FORMA BALANCE SHEET AS OF MARCH 31, 2001
-----------------------------------------------------------------------------------------
EQUITY NOTES
CHARTER PENDING OFFERING OFFERING
COMMUNICATIONS, INC. ACQUISITIONS ADJUSTMENT ADJUSTMENT
(NOTE A) (NOTE B) SUBTOTAL (NOTE C) (NOTE D) TOTAL
-------------------- ------------ ----------- ---------- ---------- -----------
ASSETS
Cash and cash equivalents........ $ 853,611 $(830,041) $ 23,570 $ 343,359 $528,500 $ 895,429
Accounts receivable, net......... 193,811 10,351 204,162 -- -- 204,162
Receivable from related party.... 4,592 10,559 15,151 -- -- 15,151
Prepaid expenses and other....... 92,656 (303) 92,353 -- -- 92,353
----------- --------- ----------- --------- -------- -----------
Total current assets......... 1,144,670 (809,434) 335,236 343,359 528,500 1,207,095
Property, plant and equipment.... 5,500,886 372,064 5,872,950 -- -- 5,872,950
Franchises....................... 16,753,694 1,101,122 17,854,816 -- -- 17,854,816
Other assets..................... 328,664 51,766 380,430 -- 21,500 401,930
----------- --------- ----------- --------- -------- -----------
Total assets................. $23,727,914 $ 715,518 $24,443,432 $ 343,359 $550,000 $25,336,791
=========== ========= =========== ========= ======== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and accrued
expenses....................... $ 1,169,766 $ 8,512 $ 1,178,278 $ -- $ -- $ 1,178,278
----------- --------- ----------- --------- -------- -----------
Total current liabilities.... 1,169,766 8,512 1,178,278 -- -- 1,178,278
Long-term debt................... 14,576,537 205,716 14,782,253 (205,310) 550,000 15,126,943
Deferred management
fees -- related party.......... 13,751 -- 13,751 -- -- 13,751
Other long-term liabilities...... 331,857 (210) 331,647 -- -- 331,647
Minority interest................ 4,783,692 119,307 4,902,999 103,533 -- 5,006,532
Shareholders' equity............. 2,852,311 382,193 3,234,504 445,136 -- 3,679,640
----------- --------- ----------- --------- -------- -----------
Total liabilities and
shareholders' equity....... $23,727,914 $ 715,518 $24,443,432 $ 343,359 $550,000 $25,336,791
=========== ========= =========== ========= ======== ===========
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
NOTE A:The pro forma balance sheet for Charter Communications, Inc. consists of
the following (dollars in thousands):
AS OF MARCH 31, 2001
---------------------------------------------------
CHARTER COMMUNICATIONS, INC.
---------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
-------------------- ----------- -----------
ASSETS
Cash and cash equivalents................................... $ 19,421 $834,190(a) $ 853,611
Accounts receivable, net.................................... 193,811 -- 193,811
Receivable from related party............................... 4,592 -- 4,592
Prepaid expenses and other.................................. 92,656 -- 92,656
----------- -------- -----------
Total current assets.................................... 310,480 834,190 1,144,670
Property, plant and equipment............................... 5,500,886 -- 5,500,886
Franchises.................................................. 16,753,694 -- 16,753,694
Other assets................................................ 293,664 35,000(a) 328,664
----------- -------- -----------
Total assets............................................ $22,858,724 $869,190 $23,727,914
=========== ======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 1,169,766 $ -- $ 1,169,766
----------- -------- -----------
Total current liabilities............................... 1,169,766 -- 1,169,766
Long-term debt.............................................. 13,707,347 869,190(a) 14,576,537
Deferred management fees -- related party................... 13,751 -- 13,751
Other long-term liabilities................................. 331,857 -- 331,857
Minority interest........................................... 4,783,692 -- 4,783,692
Shareholders' equity........................................ 2,852,311 -- 2,852,311
----------- -------- -----------
Total liabilities and shareholders' equity.............. $22,858,724 $869,190 $23,727,914
=========== ======== ===========
---------------
(a) Represents the addition to other assets of $35.0 million of underwriting
discounts and commissions and estimated expenses incurred in connection with
the issuance and sale of the May 2001 Charter Holdings notes and the
application of the remaining net proceeds of $834.2 million to cash and cash
equivalents for general corporate purposes.
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NOTE B: The pro forma balance sheet for our pending acquisitions consists of the
following (dollars in thousands):
AS OF MARCH 31, 2001
----------------------------------------------------------------------
AT&T
TRANSACTIONS(a) DISPOSITIONS(b) ADJUSTMENTS TOTAL
-------------------- --------------- ----------- -----------
ASSETS
Cash and cash equivalents............ $ 7,951 $ (3,802) $ (834,190)(c) $ (830,041)
Accounts receivable, net............. 10,767 (416) -- 10,351
Receivable from related party........ -- 10,559 -- 10,559
Prepaid expenses and other........... -- (303) -- (303)
---------- --------- ----------- -----------
Total current assets............. 18,718 6,038 (834,190) (809,434)
Property, plant and equipment........ 429,630 (57,566) -- 372,064
Franchises........................... 1,294,742 (204,162) 10,542(d) 1,101,122
Other assets......................... 52,212 (446) -- 51,766
---------- --------- ----------- -----------
Total assets..................... $1,795,302 $(256,136) $ (823,648) $ 715,518
========== ========= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued
expenses........................... $ 15,438 $ (6,926) $ -- $ 8,512
Payables to manager of cable
systems -- related party........... 121,296 -- (121,296)(e) --
---------- --------- ----------- -----------
Total current liabilities........ 136,734 (6,926) (121,296) 8,512
Long-term debt....................... 406 -- 205,310(f) 205,716
Other long-term liabilities.......... -- (210) -- (210)
Minority interest.................... -- -- 119,307(g) 119,307
Shareholders' equity................. 1,658,162 (249,000) (1,026,969)(h) 382,193
---------- --------- ----------- -----------
Total liabilities and
shareholders' equity........... $1,795,302 $(256,136) $ (823,648) $ 715,518
========== ========= =========== ===========
---------------
(a) Represents the assets and liabilities of the systems to be acquired in the
pending AT&T transactions.
(b) Represents the assets and liabilities of the Charter systems to be
transferred to AT&T in connection with the pending AT&T transactions.
(c) Represents cash used to purchase the pending AT&T transactions.
(d) Substantial amounts of the purchase price have been allocated to franchises
based on estimated fair values. This results in an allocation of purchase
price as follows (dollars in thousands):
AT&T
----------
Working capital............................................. $ 3,280
Property, plant, and equipment.............................. 429,630
Franchises.................................................. 1,305,284
Other....................................................... 51,806
----------
$1,790,000
==========
(e) Represents liabilities retained by the seller.
(f) Represents $205.3 million additional borrowings from the CC VII (Falcon)
revolving credit facility to pay the remaining cash portion of the pending
AT&T transactions.
(g) Adjusts minority interest to reflect the loss on issuance of equity by
Charter Communications Holding Company of $119.3 million (see (h) below).
(h) Represents the following adjustment related to the pending AT&T
transactions:
Issuance of Class A common stock............................ $ 501,500
Fair value of assets transferred............................ 249,000
Less: Historical equity................................... (1,658,162)
Less: Loss on issuance of equity of Charter Communications
Holding Company......................................... (119,307)
-----------
Adjustment......................................... $(1,026,969)
===========
We have estimated that 23.9 million shares will be issued. The number of
shares to be issued will vary based upon fluctuations in Charter
Communications, Inc.'s stock price. A one dollar increase in the stock price
of Charter Communications, Inc. would increase minority interest and
decrease shareholders' equity by $7.5 million. A one dollar decrease in the
stock price would decrease minority interest and increase shareholders'
equity by $8.2 million.
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NOTE C: Offering adjustments include the issuance and sale by Charter
Communications, Inc. of Class A common stock for net proceeds of $1.1
billion, after deducting underwriting discounts and commissions of
$50.0 million, the payment of $501.5 million of the purchase price of
the pending AT&T transactions in lieu of issuing Class A common stock,
the repayment of $205.3 million outstanding under the CC VII (Falcon)
revolving credit facilities and to provide $343.4 million of additional
cash for general corporate purposes. The increase in minority interest
represents a $103.5 million loss arising from the issuance of
membership units by Charter Communications Holding Company.
NOTE D: Offering adjustments represent additional long-term debt of $550.0
million resulting from the issuance and sale of the notes offered
hereby, the addition to other assets of $21.5 million of underwriting
discounts and commissions and estimated expenses, and the application of
the remaining net proceeds of $528.5 million to cash and cash
equivalents for general corporate purposes.
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SELECTED HISTORICAL FINANCIAL DATA
On July 22, 1999, Charter Investment, Inc., a company controlled by Mr.
Allen, formed Charter Communications, Inc. with a nominal initial investment. On
November 12, 1999, Charter Communications, Inc. 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 these sales were
used to purchase membership units of Charter Communications Holding Company.
Charter Communications, Inc.'s purchase of 50,000 membership units of
Charter Communications Holding Company 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
Communications Holding Company, the assets and liabilities of Charter
Communications Holding Company are reflected in the consolidated financial
statements of Charter Communications, Inc. at Mr. Allen's basis. Minority
interest is recorded representing that portion of the economic interests in
Charter Communications Holding Company not owned by Charter Communications, Inc.
Consolidated financial statements of Charter Communications, Inc. do not
exist for periods prior to December 23, 1998. Instead, for the periods from
January 1, 1996 through December 23, 1998, the consolidated financial statements
of Charter Communications Properties Holdings, LLC (CCPH), a wholly owned
subsidiary of Charter Investment, Inc. and predecessor to Charter
Communications, Inc., are presented.
The selected historical financial data below for the years ended December
31, 1996 and 1997, and for the period from January 1, 1998 through December 23,
1998, are derived from the consolidated financial statements of CCPH, which have
been audited by Arthur Andersen LLP, independent public accountants, and are
incorporated by reference herein. The selected historical financial data for the
period from December 24, 1998 through December 31, 1998 and the years ended
December 31, 1999 and 2000 are derived from the consolidated financial
statements of Charter Communications, Inc., which have been audited by Arthur
Andersen LLP and are incorporated by reference herein. The selected historical
financial data for the period from January 1, 2001 through March 31, 2001 are
derived from the unaudited consolidated financial statements of Charter
Communications, Inc. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements and related
notes included elsewhere in this prospectus supplement.
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SELECTED HISTORICAL FINANCIAL DATA
CHARTER COMMUNICATIONS
PROPERTIES HOLDINGS CHARTER COMMUNICATIONS, INC.
---------------------------- -------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1/1/98 12/24/98 DECEMBER 31, THREE MONTHS ENDED
----------------- THROUGH THROUGH --------------------------- MARCH 31,
1996 1997 12/23/98 12/31/98 1999 2000 2001
------- ------- -------- ---------- ------------ ------------ ------------------
(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 $ 873,797
------- ------- -------- ---------- ----------- ----------- ------------
Operating expenses:
Operating, general and
administrative................. 8,123 11,767 25,952 7,134 737,957 1,651,353 472,147
Depreciation and amortization.... 4,593 6,103 16,864 8,318 745,315 2,473,082 695,895
Option compensation expense...... -- -- -- 845 79,979 40,978 6,038
Management fees/corporate expense
charges........................ 446 566 6,176 473 51,428 55,243 13,721
------- ------- -------- ---------- ----------- ----------- ------------
Total operating expenses....... 13,162 18,436 48,992 16,770 1,614,679 4,220,656 1,187,801
------- ------- -------- ---------- ----------- ----------- ------------
Income (loss) from operations...... 1,719 431 739 (3,057) (186,435) (971,434) (314,004)
Interest expense................... (4,415) (5,120) (17,277) (2,353) (477,799) (1,059,130) (310,832)
Interest income.................... 20 41 44 133 34,467 7,348 92
Other income (expense)............. (47) 25 (728) -- (8,039) (31,729) (59,917)
------- ------- -------- ---------- ----------- ----------- ------------
Loss before income taxes and
minority interest................ (2,723) (4,623) (17,222) (5,277) (637,806) (2,054,945) (684,661)
Income tax expense................. -- -- -- -- (1,030) -- --
------- ------- -------- ---------- ----------- ----------- ------------
Loss before minority interest...... (2,723) (4,623) (17,222) (5,277) (638,836) (2,054,945) (684,661)
------- ------- -------- ---------- ----------- ----------- ------------
Minority interest in loss of
subsidiary....................... -- -- -- 5,275 572,607 1,226,295 403,962
------- ------- -------- ---------- ----------- ----------- ------------
Net loss........................... $(2,723) $(4,623) $(17,222) $ (2) $ (66,229) $ (828,650) $ (280,699)
------- ------- -------- ---------- ----------- ----------- ------------
Loss per common share, basic and
diluted.......................... N/A N/A N/A $ (0.04) $ (2.22) $ (3.67) $ (1.20)
------- ------- -------- ---------- ----------- ----------- ------------
Weighted-average common shares
outstanding...................... N/A N/A N/A 50,000 29,811,202 225,697,775 233,777,675
------- ------- -------- ---------- ----------- ----------- ------------
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets....................... $67,994 $55,811 $281,969 $4,335,527 $18,966,507 $23,043,566 $ 22,858,724
Total debt......................... 59,222 41,500 274,698 2,002,206 8,936,455 13,060,455 13,707,347
Minority interest.................. -- -- -- 2,146,549 5,381,331 4,089,329 4,783,692
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 2,852,311
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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 period from January 1, 1998
to 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
Our organizational structure is very complex and is described in more
detail in the "Business" section of this prospectus supplement. 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.
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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.
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.
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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 interests
issued. These acquisitions were funded through the issuance of long-term debt,
bank borrowings, and internally generated funds. 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 company
interest in Charter-Helicon, LLC, an indirect 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 & 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 our
Class A common stock.
(g) Includes revenues of approximately $0.6 million related to the cable systems
acquired by Bresnan since December 31, 1999.
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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 509,400 customers for the Charter cable systems.
In the pending AT&T transactions, we expect to acquire cable systems from AT&T
Broadband serving approximately 571,900 customers in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. We anticipate that a portion of the
purchase price will consist of Charter cable systems valued at $249.0 million
serving approximately 62,500 customers in Florida. Of the balance of the
purchase price, up to $501.5 million is expected to be paid in shares of Charter
Communications, Inc. Class A common stock and the remainder will be paid in
cash. Upon completion of the Class A common stock offering described in this
prospectus supplement, the portion of the purchase price payable in Class A
common stock will instead be paid in cash using a portion of the net proceeds of
such offering. The pending AT&T 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 revenue 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
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods (dollars in
millions, except per share data):
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2001 MARCH 31, 2000
---------------- ---------------
AMOUNT % AMOUNT %
-------- ----- ------- -----
STATEMENTS OF OPERATIONS:
Revenues.................................................. $ 873.8 100.0% $ 721.6 100.0%
-------- ----- ------- -----
Operating expenses:
Operating, general and administrative costs............. 472.2 54.0% 371.8 51.5%
Depreciation and amortization........................... 695.9 79.6% 546.1 75.7%
Option compensation expense............................. 6.0 0.7% 15.5 2.2%
Corporate expenses...................................... 13.7 1.6% 12.5 1.7%
-------- ----- ------- -----
Total operating expenses.................................. 1,187.8 135.9% 945.9 131.1%
-------- ----- ------- -----
Loss from operations...................................... (314.0) (35.9)% (224.3) (31.1)%
Interest expense.......................................... (310.8) (35.6)% (230.9) (32.0)%
Interest income........................................... -- -- 5.4 0.7%
Other income (expense).................................... (59.9) (6.9)% 0.2 --
-------- ----- ------- -----
Loss before minority interest............................. (684.7) (78.4)% (449.6) (62.4)%
-------- ----- ------- -----
Minority interest in loss of subsidiary................... 404.0 46.2% 268.9 37.3%
-------- ----- ------- -----
Net loss.................................................. $ (280.7) (32.2)% $(180.7) (25.1)%
======== ===== ======= =====
Loss per common share, basic and diluted.................. $ (1.20) $ (0.81)
======== =======
REVENUES. Revenues increased by $152.2 million, or 21%, from $721.6
million for the three months ended March 31, 2000 to $873.8 million for the
three months ended March 31, 2001. System operations acquired after January 1,
2000 accounted for $39.1 million, or 26%, of the increase, while systems
acquired before January 1, 2000 accounted for $113.1 million, or 74% of the
increase. Revenues by service offering are as follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2001 2000
----------------- -----------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
------ -------- ------ -------- ------ ------
Analog video............................. $649.4 75% $587.5 82% $ 61.9 11%
Digital video............................ 55.0 6% 9.2 1% 45.8 498%
Cable modem.............................. 25.2 3% 9.7 1% 15.5 160%
Advertising sales........................ 55.6 6% 33.3 5% 22.3 67%
Other.................................... 88.6 10% 81.9 11% 6.7 8%
------ --- ------ --- ------ -----
$873.8 100% $721.6 100% $152.2 21%
====== ====== ======
Analog video customers increased by 197,800 to 6,349,800 at March 31, 2001
as compared to 6,152,000 at March 31, 2000. Of this increase, approximately
72,700 customer additions were the result of acquisitions. The remaining
increase of 125,100 customers relates to internal growth.
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Digital video customers increased by 1,119,000 to 1,343,700 at March 31,
2001 from 224,700 at March 31, 2000. The increase was primarily due to internal
growth which continues to increase as we upgrade our systems to provide advanced
services to a larger customer base. Increased marketing efforts and strong
demand for this service have also contributed to the increase.
Cable modem customers increased by 220,400, to 343,300 at March 31, 2001
from 122,900 at March 31, 2000. The increase was primarily due to internal
growth. Our system upgrades continue to increase our ability to offer high-speed
interactive service to a larger customer base. Growth in cable modem services
was also the result of strong marketing efforts coupled with increased demand
for such services.
Advertising sales increased $22.3 million, from $33.3 million for the three
months ended March 31, 2000 to $55.6 million for the three months ended March
31, 2001. The increase was primarily due to internal growth. As a result of our
rebuild efforts, we experienced increased capacity due to expanded channel
line-ups.
OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and
administrative costs increased by $100.3 million, from $371.8 million for the
three months ended March 31, 2000 to $472.1 million for the three months ended
March 31, 2001. System operations acquired after January 1, 2000 accounted for
$22.6 million, or 23%, of the increase in 2001 while systems acquired before
January 1, 2000 accounted for $77.7 million, or 77%. Key components of expense
as a percentage of revenues are as follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2001 2000
----------------- -----------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
------ -------- ------ -------- ------ ------
General, administrative and service...... $189.5 22% $168.0 23% $ 21.5 13%
Analog video programming................. 210.4 24% 164.8 23% 45.6 28%
Digital video............................ 20.6 2% 4.2 1% 16.4 390%
Cable modem.............................. 17.6 2% 8.8 1% 8.8 100%
Advertising sales........................ 15.3 2% 12.3 2% 3.0 24%
Marketing................................ 16.6 2% 11.7 2% 4.9 42%
Other.................................... 2.1 -- 2.0 -- 0.1 5%
------ ------ ------ ---
$472.1 $371.8 $100.3
====== ====== ======
The increase in general, administrative and service costs of $21.5 million
reflects an increase of $7.2 million, or 33%, related to operations acquired
after January 1, 2000. The remaining increase of $14.3 million was due to
increased spending on customer care coupled with overall continued growth. Of
the $45.6 million increase in analog video programming, approximately $9.4
million, or 21%, related to operations acquired after January 1, 2000. The
remaining increase of $36.2 million was due to continued inflationary or
negotiated increases, particularly in sports programming, coupled with increased
channel capacity. The increase in digital video costs of $16.4 million reflects
an increase of $1.8 million related to operations acquired after January 1,
2000. The remaining increase of $14.6 million was due to internal growth of
these advanced services. The increase in cable modem costs of $8.8 million
reflects an increase of $0.5 million related to operations acquired after
January 1, 2000. The remaining increase was due to internal growth. Advertising
sales costs increased $3.0 million, of which the majority related to operations
acquired after January 1, 2000. Marketing expenses increased $4.9 million to
$16.6 million in 2001 related to promotions of advanced product offerings,
including digital cable and high-speed Internet service.
GROSS MARGIN. Gross margin decreased by 2%, from 48% for the three months
ended March 31, 2000 to 46% for the three months ended March 31, 2001. Gross
margin on analog video decreased by 4.3% from 71.9% for the three months ended
March 31, 2000 to 67.6% in 2001 due to continued inflation and negotiated
increases in programming. Digital video gross margin increased 8.2% from 54.3%
for the three months ended March 31, 2000 to 62.5% in 2001 primarily due to an
increased customer base. Cable modem gross margin also increased 20.9% from 9.3%
for the three months ended March 31, 2000 to 30.2% in 2001 due to the
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significant growth in customer base compared to the prior year. Advertising
sales gross margin increased 9.5% due to our significant system upgrades, which
resulted in expanded channel capacity.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $149.8 million, from $546.1 million for the three months ended
March 31, 2000 to $695.9 million for the three months ended March 31, 2001. This
increase was due to a full quarter of expense on the fixed assets and franchises
related to our 2000 acquisitions and an increase in capital expenditures of
$264.6 million to rebuild and upgrade our cable systems compared to first
quarter 2000.
OPTION COMPENSATION EXPENSE. Option compensation expense decreased by $9.5
million, from $15.5 million for the three months ended March 31, 2000 to $6.0
million for the three months ended March 31, 2001. The expense related to option
grants at the time of our initial public offering at exercise prices less than
the estimated fair value of our stock at the time of grant, resulting in
compensation expense being accrued over the vesting period of the options.
Expense will continue to be recorded at a decreasing rate until the last vesting
period lapses in April 2004.
CORPORATE EXPENSES. Corporate expenses increased by $1.2 million, from
$12.5 million for the three months ended March 31, 2000 to $13.7 million for the
three months ended March 31, 2001. The increase was the result of growth from
acquisitions and internal growth.
INTEREST EXPENSE. Interest expense increased by $79.9 million, from $230.9
million for the three months ended March 31, 2000 to $310.8 million for the
three months ended March 31, 2001. The increase in interest expense was a result
of increased average debt outstanding during the first quarter in 2001 of $13.6
billion compared to $9.9 billion in the first quarter of 2000, coupled with an
increase in our average borrowing rate of 0.1% from 8.63% in the first quarter
of 2000 to 8.73% in the first quarter of 2001. Our average borrowing rate
increased primarily as a result of our issuance of high-yield notes in January
2001 (referred to as the January 2001 Charter Holdings notes). The increased
debt primarily relates to capital expenditures.
INTEREST INCOME. Interest income decreased by $5.3 million, from $5.4
million for the three months ended March 31, 2000 to $0.1 million for the three
months ended March 31, 2001. The decrease in interest income was due to lower
cash on hand at March 31, 2001 over March 31, 2000 as a result of our continued
capital expenditures to upgrade, rebuild, and expand our cable systems, to
develop new products and services and to deploy digital converters.
OTHER INCOME (EXPENSE). Other expense fluctuated by $60.1 million, from
$0.2 million of income for the three months ended March 31, 2000 to $59.9
million of expense for the three months ended March 31, 2001. This decrease was
due to a cumulative effect of a change in accounting principle of $23.9 million
related to our adoption of SFAS No. 133 on January 1, 2001, a current period
loss of $21.8 million on interest rate agreements also as a result of adoption
of SFAS No. 133 and losses of $12.8 million primarily on investments carried on
the equity method.
MINORITY INTEREST. Minority interest increased by $135.1 million, from
$268.9 million for the three months ended March 31, 2000 to $404.0 million for
the three months ended March 31, 2001. The minority interest represents the
ownership in Charter Holdco by entities other than Charter.
NET LOSS. Net loss increased by $100.0 million, from $180.7 million for
the three months ended March 31, 2000 to $280.7 million for the three months
ended March 31, 2001 as a result of the factors described above.
LOSS PER COMMON SHARE. The loss per common share increased by $0.39, from
$0.81 per common share for the three months ended March 31, 2000 to $1.20 per
common share for the three months ended March 31, 2001 as a result of the
factors described above, partially offset by an increase in weighted average
shares outstanding.
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FISCAL YEAR COMPARATIVE DATA
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, INC.
-------------------- ------------------------------------------------------------
PERIOD PERIOD
JANUARY 1, 1998 DECEMBER 24, 1998 YEAR ENDED YEAR ENDED
TO DECEMBER 23, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 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%
Depreciation 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 expense (expense)...... (728) (1.5)% -- -- (8,039) (0.5)% (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 2000 OVER 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 in
2000. 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.
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
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before January 1, 1999 accounted for $99.6 million, or 11% of the increase. Key
expense components as a percentage of revenues are as follows (dollars in
thousands):
2000 1999 2000 OVER 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.
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 draw downs
in 1999 which were not required in 2000.
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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 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 $0.04
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, the initial public offering
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 interest on the notes and
credit facilities used to finance the acquisitions of CCA Group and CharterComm
Holdings, Marcus Holdings and 1999 acquisitions.
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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
March 31, 2001, we had availability of $2.2 billion under our bank credit
facilities. In recent years, we have incurred significant 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 may incur 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.
We made capital expenditures, excluding acquisitions of cable systems, of $524.5
million and $259.9 million for the three months ended March 31, 2001 and 2000,
respectively.
Excluding the pending AT&T transactions, for 2001, 2002 and 2003, we expect
to spend a total of approximately $2.9 billion, $1.8 billion and $1.0 billion,
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 $350.0
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. If we borrow the full amount available under the
amended Charter Holdings 2001 senior bridge loan facility or if we receive
approximately $1 billion of net proceeds from the offerings described in this
prospectus supplement (exclusive of $501.5 million of net proceeds from the
Class A common stock offering that we expect to use for payment to AT&T), we
will have sufficient capital to satisfy our previously projected funding
shortfall of $300.0 million to $500.0 million. See "Description of
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Certain Indebtedness -- Committed Bridge Facility." If there is accelerated
growth in digital cable customers or in the delivery of other advanced services
however, we may need additional capital.
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.
FINANCING ACTIVITIES
As of March 31, 2001, our total debt was approximately $13.7 billion.
Actual debt outstanding at March 31, 2001 and pro forma for the issuance of the
May 2001 Charter Holdings notes and the application of the net proceeds
therefrom and the closing of the pending AT&T transactions is summarized below
(dollars in thousands):
ACTUAL PRO FORMA
BALANCE AT BALANCE AT
MARCH 31, MARCH 31,
2001 2001
----------- -----------
LONG-TERM DEBT
Charter Communications, Inc:
5.75% convertible senior notes.......................... $ 750,000 $ 750,000
Charter Holdings:
9.625% senior notes due 2009............................ -- 350,000
10.000% senior notes due 2011........................... -- 575,000
11.750% senior discount notes due 2011.................. -- 1,018,000
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
10.00% senior notes due 2009............................ 675,000 675,000
10.25% senior notes due 2010............................ 325,000 325,000
11.75% senior discount notes due 2010................... 532,000 532,000
10.750% senior notes due 2009........................... 900,000 900,000
11.125% senior notes due 2011........................... 500,000 500,000
13.500% senior discount notes due 2011.................. 675,000 675,000
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...................................... 1,416 1,416
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ACTUAL PRO FORMA
BALANCE AT BALANCE AT
MARCH 31, MARCH 31,
2001 2001
----------- -----------
CREDIT FACILITIES
Charter Operating......................................... 3,815,000 3,450,000
CC VI -- Fanch............................................ 901,000 850,000
CC VII -- Falcon.......................................... 698,750 694,060
CC VIII -- Bresnan........................................ 1,005,000 1,000,000
----------- -----------
14,647,329 16,164,639
Unamortized discount...................................... (939,982) (1,382,386)
----------- -----------
$13,707,347 $14,782,253
=========== ===========
CHARTER 2000 CONVERTIBLE NOTES. In October and November 2000, we issued
$750.0 million 5.75% convertible senior notes maturing on October 15, 2005 for
net proceeds of $727.5 million.
The 2000 convertible senior 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
our option at amounts decreasing from 102.3% to 100% of the principal amount
plus accrued and unpaid interest beginning after 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 2000 convertible notes rank equally with all future unsubordinated and
unsecured indebtedness of Charter Communications, Inc., 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, we 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.
MARCH 1999 CHARTER HOLDINGS NOTES. In March 1999, Charter Holdings and
Charter Capital 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 March 31, 2001, 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 $1.1 billion.
JANUARY 2000 CHARTER HOLDINGS NOTES. In January 2000, Charter Holdings and
Charter Capital issued $1.5 billion principal amount of senior notes. The
January 2000 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 March 31, 2001, $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 $345.3 million.
JANUARY 2001 CHARTER HOLDINGS NOTES. In January 2001, Charter Holdings and
Charter Capital issued $1.75 billion principal amount of senior notes. The
January 2001 Charter Holdings notes consisted of $900.0 million in aggregate
principal amount of 10.750% senior notes due 2009, $500.0 million in aggregate
principal amount of 11.125% senior notes due 2011, and $675.0 million in
aggregate principal amount at maturity of
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13.500% senior discount notes due 2011. The net proceeds of approximately $1.72
billion were used to repay all remaining amounts then outstanding under the
Charter Holdings senior bridge loan facility and the Fanch CC VI
(Fanch)revolving credit facility and a portion of the amounts then outstanding
under the Charter Operating and CC VII (Falcon) revolving credit facilities and
for general corporate purposes.
As of March 31, 2001, $1.4 billion of the January 2001 Charter Holdings
10.750% and 11.125% senior notes were outstanding, and the accreted value of the
13.500% senior discount notes was approximately $361.3 million.
MAY 2001 CHARTER HOLDINGS NOTES. On May 15, 2001, Charter Holdings and
Charter Capital issued 9.625% senior notes due 2009 in the aggregate principal
amount of $350.0 million, 10.000% senior notes due 2011 in the aggregate
principal amount of $575.0 million and 11.750% senior discount notes due 2011 in
the aggregate principal amount at maturity of $1.018 billion in Rule 144A and
Regulation S private placements. A portion of the net proceeds were used to
repay amounts outstanding under the revolving credit facilities of our
subsidiaries. The remainder of the net proceeds are intended to be used to pay
the cash portion of the pending AT&T transactions and for general corporate
purposes, including capital expenditures. Pending such use of the net proceeds,
Charter Holdings expects to invest such amount temporarily in short-term
marketable securities. See "Description of Certain Indebtedness -- Existing
Public Debt."
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 March 31, 2001, outstanding borrowings were approximately $3.8
billion, and the unused availability was $885.0 million. As of March 31, 2001,
pro forma for the sale of the May 2001 Charter Holdings notes and the
application of the net proceeds therefrom and the closing of the pending AT&T
transactions, outstanding borrowings would have been approximately $3.5 billion
and the unused availability would have been approximately $1.2 billion.
RENAISSANCE NOTES. In connection with the acquisition of Renaissance in
April 1999, we 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 March 31, 2001, the accreted value of the Renaissance notes that remained
outstanding was approximately $96.7 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 as of the acquisition date.
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.
CC VII (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
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December 2007 (Term C). The CC VII (Falcon) credit facilities also provide for a
$646.0 million revolving credit facility with a maturity date in 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
CC VII (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 March 31, 2001, outstanding borrowings were approximately $699.0
million and unused availability was approximately $547.0 million. As of March
31, 2001, pro forma for the sale of the May 2001 Charter Holdings notes and the
application of the net proceeds therefrom and the closing of the pending AT&T
transactions, outstanding borrowings would have been approximately $694.0
billion and the unused availability would have been approximately $552.0
billion.
CC V (AVALON) CREDIT FACILITIES. In December 2000, 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
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 March 31, 2001, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity remained outstanding with an
accreted value of $135.2 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 the proceeds from the sale of the January 2000 Charter
Holdings notes.
CC VI (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 CC VI (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 CC VI
(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 March 31, 2001, outstanding borrowings were approximately $901.0
million and unused availability was approximately $299.0 million. As of March
31, 2001, pro forma for the sale of the May 2001 Charter Holdings notes and the
application of the net proceeds therefrom and the closing of the pending AT&T
transactions, outstanding borrowings would have been approximately $850.0
million and the unused availability would have been approximately $350.0
million. However, debt covenants limit the amount that can be borrowed to $122.3
million at March 31, 2001.
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.
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CC VIII (BRESNAN) CREDIT FACILITIES. Upon the completion of the
Bresnan/Avalon combination in January 2001, the Bresnan credit facilities were
amended and restated to, among other things, increase borrowing availability by
$555.0 million. As amended, the CC VIII (Bresnan) credit facilities provide for
borrowings of up to $1.45 billion. The CC VIII (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
CC VIII (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 CC
VIII (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 March 31, 2001, outstanding borrowings were approximately $1.0
billion and unused availability was approximately $445.0 million. As of March
31, 2001, pro forma for the sale of the May 2001 Charter Holdings notes and the
application of the net proceeds therefrom and the closing of the pending AT&T
transactions, outstanding borrowings would have been approximately $1.0 billion
and the unused availability would have been approximately $450.0 million.
CHARTER HOLDINGS 2000 SENIOR BRIDGE LOAN FACILITY. On August 4, 2000,
Charter Holdings and Charter 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 CC VII
(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 our 2001 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 January 5, 2001, the
remaining balance of $272.5 million on the senior bridge loan facility was paid
down with the proceeds from the sale of the Charter Holdings January 2001 notes.
CHARTER HOLDINGS 2001 SENIOR BRIDGE LOAN COMMITMENT. Charter Holdings and
Charter Capital entered into a commitment letter with affiliates of the
underwriters 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 are not completed, the commitment will be reduced by the amount of
the commitment allocated to such portion of the transaction, up to $1.0 billion.
On May 10, 2001, Charter Holdings, Charter Capital and the prospective lenders
under the committed facility amended the commitment letter. Giving effect to
this amendment, the current availability under the committed facility is
approximately $1 billion. Pursuant to commitment reduction provisions of the
committed facility, the aggregate commitments of the prospective lenders will be
reduced by the net proceeds received by Charter Communications, Inc. from the
offering of the Class A common stock described in this prospectus supplement
(except for $501.5 million of the net proceeds that we expect to use to pay a
portion of the purchase price of the pending AT&T transactions) and the net
proceeds received by Charter Communications, Inc. from the offering of the notes
described in this prospectus supplement.
The bridge loans would bear interest initially at a rate equal to either
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 commitments expire on December 31, 2001. The bridge loans would mature
one year from the date of first funding, but if not repaid in full by such date
will automatically convert into senior term loans that would be due nine years
after such conversion. Interest on the senior term loans would initially be the
rate then
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in effect for the bridge loans, plus 50 basis points, and would increase by 50
basis points after every 90-day 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 redeemable at the option of
Charter Holdings until the fifth anniversary of the first funding of the bridge
loan. After the fifth anniversary, the notes would be redeemable at a premium
initially 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 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. See "Description of Certain
Indebtedness."
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 to fund our anticipated capital expenditures and
meet our other obligations. See "Risk Factors--Our Business--The prospective
lenders' commitments to lend to us under the Charter Holdings 2001 senior bridge
loan facility are subject to a number of conditions."
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 pending 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% to
16% and operating cash flow growth after corporate overhead expense of 12% to
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 to 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% to 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% to 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.
Achieving the anticipated growth and increases specified in this Outlook
section is subject to many factors, some of which are outside our control. Among
those factors are those specified in "-- Certain Trends and Uncertainties" and
in "Risk Factors." We refer you to these sections, as well as to
"Forward-Looking Statements."
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties,
in addition to those discussed elsewhere in this prospectus supplement, that
could materially impact our business, results of operations and financial
condition.
SUBSTANTIAL LEVERAGE. As of March 31, 2001, pro forma for the sale of the
May 2001 Charter Holdings notes and the application of the net proceeds
therefrom and the closing of the pending AT&T transactions, our total debt was
approximately $14.8 billion. We may incur significant additional debt in the
future, including borrowings under the Charter Holdings 2001 senior bridge loan
facility, 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 March 31, 2001, approximately 47% 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 March 31,
2001, our weighted-average rate on outstanding bank commitments is approximately
7.43% and approximately 9.55% on high-yield debt, resulting in a blended
weighted-average rate of 8.58%. 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
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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 our
publicly held debt.
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 in Virginia 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 new 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 the provision of Internet access, may endanger that
regulatory protection. The 11th Circuit Court of Appeals recently ruled such
services left cable attachments ineligible for regulatory protection, and
certain utilities already have proposed vastly higher pole
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attachment rates. The 11th Circuit decision is now scheduled to be reviewed by
the United States Supreme Court.
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 March 31, 2001, 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 three months ended March 31, 2001 and 2000, 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 $6.4 billion at
March 31, 2001, since this debt bears interest at current market rates.
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BUSINESS
OVERVIEW
We 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.
For the year ended December 31, 2000, pro forma for the acquisitions
completed since the beginning of 2000 and the pending AT&T transactions, our
revenues would have been approximately $3.6 billion.
Mr. Allen, the principal owner of Charter Communications, Inc. and one of
the computer industry's visionaries, has long believed in a Wired World in which
cable technology will facilitate the convergence of television, computers and
telecommunications. We believe cable's ability to deliver voice, video and data
at high speeds will enable it to serve as the primary platform for the delivery
of new services to the home and workplace.
BUSINESS STRATEGY
Our ultimate objective is to increase our customer base and the amount of
cash flow per customer. To achieve this objective, we are pursuing the following
strategies:
BUILD AND OPERATE A TECHNOLOGICALLY ADVANCED BROADBAND NETWORK. We are
upgrading the technical quality and capacity of our existing systems. We will
build out new systems to a minimum bandwidth of 550 megahertz or greater, which
will allow us to:
- offer advanced products and services, such as digital television,
high-speed Internet access and other interactive services;
- increase channel capacity up to 82 analog channels, and add even more
channels and services when our bandwidth is used for digital signal
transmission; and
- permit two-way communication, so that Internet access does not require a
separate telephone line and our systems can provide telephony services.
By year-end 2002, when we anticipate that the upgrade of our existing
systems will be substantially complete, we expect that approximately 93% of our
customers will be served by cable systems with at least 550 megahertz bandwidth
capacity, 88% of our customers will be served by cable systems with at least 750
megahertz bandwidth capacity and 89% of our customers will have two-way
communication capability.
It is anticipated that upon completion of our upgrade, approximately 87% of
our customers will be served by headends serving at least 10,000 customers.
Headends are the control centers of a cable television system, where incoming
signals are amplified, converted, processed and combined for transmission to the
customer. Reducing the number of headends will reduce headend equipment and
maintenance expenditures and, together with our other upgrades, will provide
enhanced picture quality and system reliability.
In 2001, we plan to complete a national network operations center to
monitor and control all aspects of our network to enhance the reliability of our
upgraded systems and support our high-speed Internet access and other advanced
products.
As we complete our planned upgrade and build out new systems, we will be
well positioned to migrate our customers to the digital platform and deploy new
technologically advanced products and services as they are developed.
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OFFER AN ARRAY OF ADVANCED PRODUCTS AND SERVICES. We offer an array of
advanced products and services to our customers, consistent with our Wired World
vision. Using digital technology, we offer additional channels on our standard
service packages, create new service packages, introduce multiple packages of
premium services, increase the number of pay-per-view channels, and offer
programming of local interest. We also offer digital music services and
interactive program guides that are comprehensive guides to television program
listings that can be accessed by channel, time, date or programming type. In
addition, we offer interactive video programming, high-speed Internet access,
including Internet access over the television, and video-on-demand. We also are
currently exploring opportunities for telephony. We have entered into the Digeo
Broadband joint venture to deliver high-speed Internet television portal
services to our customers.
FOCUS ON THE CUSTOMER. To maximize customer satisfaction and loyalty, we
operate our business to provide reliable, high-quality products and services and
superior customer care. We tailor our product and service packages to suit the
diverse communities we serve and satisfy local preferences for programming and
value. We maintain a strong management presence at the local system level to
improve our customer service and respond to local customer needs. We have
launched one state-of-the-art regional customer contact center that provides
customers with 24 x 7 access to specialized customer care representatives. Our
objective is to have a customer contact center serving each of our 12 operating
regions. We believe that our customer service efforts have contributed to our
superior customer growth and will strengthen the Charter brand name and increase
acceptance of our new advanced products and services.
EMPLOY INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers, win back former customers, and increase revenue per customer. Our
marketing efforts focus on offering Charter-branded entertainment and
information services that provide value, choice, convenience and quality to our
customers. We offer our expanded product and service offerings on a stand-alone
basis and in varied packages that result in an attractive price/value
relationship. We utilize database marketing to target audiences through direct
mail and telemarketing. In addition, we promote our services in media
advertising, by door-to-door selling and through e-marketing. We are
implementing a retail sales strategy in coordination with consumer electronics
retailers and other retailers. In addition, we have a retention and loyalty
program for retaining customers that includes televised advertising to reinforce
the link between quality service and the Charter brand name.
ORGANIZATIONAL STRUCTURE
The following is a description of the entities in our organizational
structure and how they relate to us.
OWNERSHIP OF CHARTER COMMUNICATIONS, INC. Mr. Allen owns approximately
3.8% of the outstanding capital stock of Charter Communications, Inc. and
controls approximately 93.5% of the voting power of Charter Communications,
Inc.'s capital stock. The remaining equity interests and voting power are held
by the public. Mr. Allen's voting control arises from his ownership of Charter
Communications, Inc.'s high vote Class B common stock, his Class A common stock
and his ownership interests in Vulcan Cable III and Charter Investment, both of
which own membership units in Charter Communications Holding Company that are
exchangeable for shares of high-vote Class B common stock of Charter
Communications, Inc.
Charter Communications, Inc. is the issuer of the shares of Class A common
stock and the notes offered hereby and is the issuer of the $750.0 million
aggregate principal amount of convertible senior notes issued in October and
November 2000.
The following table sets forth information as of May 10, 2001 with respect
to the outstanding shares of common stock of Charter Communications, Inc. and
pro forma for the exchange of membership units in two of our subsidiaries
(Charter Communications Holding Company, LLC and CC VIII, LLC), which are
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exchangeable for shares of Charter Communications, Inc. Class A common stock on
a one-for-one basis at any time.
PRO FORMA FOR EXCHANGE OF
AS OF MAY 10, 2001 EQUITY IN SUBSIDIARIES
--------------------------- --------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
SHARES TOTAL SHARES SHARES SHARES
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
----------- ------------ ----------- -----------
Class A Common Stock.................... 233,773,798 99.98% 233,773,798 39.15%
Class B Common Stock.................... 50,000 0.02 50,000 0.01
----------- ------ ----------- ------
Total Common Stock Outstanding..... 233,823,798 100.00% 233,823,798 39.16%
=========== ====== =========== ======
Exchangeable Equity in Subsidiaries:
Charter Investment, Inc.(a)........... 217,585,246 36.44%
Vulcan Cable III Inc.(a).............. 106,715,233 17.87
Sellers of Bresnan cable systems(b)... 39,011,744 6.53
----------- ------
Total Pro Forma Common Stock
Outstanding...................... 597,136,021 100.00%
=========== ======
---------------
(a) Assumes exchange of units in Charter Communications Holding Company held by
such entities. Both Charter Investment, Inc. and Vulcan Cable III Inc. are
controlled by Paul G. Allen.
(b) Assumes exchange of membership units in Charter Communications Holding
Company and CC VIII, LLC held by such persons.
VULCAN CABLE III INC. Vulcan Cable III has an 18.6% equity interest and no
voting rights in Charter Communications Holding Company. Vulcan Cable III's
membership units in Charter Communications Holding Company are exchangeable for
shares of Charter Communications, Inc. Class B common stock on a one-for-one
basis at any time. Mr. Allen owns 100% of the outstanding capital stock of
Vulcan Cable III.
CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 38.0% equity
interest and no voting rights in Charter Communications Holding Company. Charter
Investment's membership units in Charter Communications Holding Company are
exchangeable for shares of Charter Communications, Inc. Class B common stock at
any time on a one-for-one basis. Mr. Allen owns approximately 96.8% of the
outstanding capital stock of Charter Investment, Inc. The remaining 3.2% equity
is beneficially owned by our founders, Jerald L. Kent, Howard L. Wood and Barry
L. Babcock.
SELLERS OF BRESNAN CABLE SYSTEMS. Upon the closing of the Bresnan
acquisition, some of the sellers received a portion of their purchase price in
the form of equity interests in subsidiaries of Charter Communications, Inc.
rather than in cash. The common membership units in Charter Communications
Holding Company and the preferred membership units in CC VIII, LLC which were
issued to these sellers are exchangeable for shares of Charter Communications,
Inc. Class A common stock on a one-for-one basis at any time. If all of the
Bresnan sellers exchanged their membership units in Charter Communications
Holding Company or such indirect subsidiary, as applicable, these equity holders
as a group would have a total 14.3% equity interest in Charter Communications,
Inc.
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications
Holding Company is the direct 100% parent of Charter Communications Holdings,
LLC. Charter Communications Holding Company is owned 40.8% by Charter
Communications, Inc., 18.6% by Vulcan Cable III Inc., 38.0% by Charter
Investment, Inc. and 2.6% by certain sellers in our Bresnan acquisition. Charter
Communications, Inc. controls 100% of the voting power of Charter Communications
Holding Company. All of the outstanding membership units in Charter
Communications Holding Company held by Vulcan Cable III and Charter Investment
are exchangeable for shares of Class B common stock of Charter Communications,
Inc. on a one-for-one basis at any time which are in turn exchangeable for Class
A common stock of Charter Communications, Inc. All of the outstanding membership
units held by Bresnan sellers are exchangeable for shares of Class A common
stock of Charter Communications, Inc. on a one-for-one basis at any time.
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CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of
the Charter Holdings notes. Charter Holdings owns 100% of Charter Communications
Holdings Capital Corporation, the co-issuer of the Charter Holdings notes.
Charter Holdings also owns the various subsidiaries that conduct all of our
cable operations, including the Charter, CC V, CC VI, CC VII and CC VIII
Companies described below.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Capital is a
wholly owned subsidiary of Charter Holdings and a co-issuer of the Charter
Holdings notes.
OPERATING SUBSIDIARIES. These companies are subsidiaries of Charter
Holdings and own or operate all of our cable systems. There are separate credit
facilities for each of four groups of these operating subsidiaries. As indicated
below, these groups include systems acquired in the acquisitions listed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These groups consist of:
- the Charter Companies, including Charter Operating and its subsidiaries,
which own or operate all of the cable systems formerly operated by
Charter Investment, Inc. under the "Charter Communications" name, and the
cable systems acquired in the following 1999 and 2000 transactions:
Marcus, American Cable, Greater Media, Helicon, Vista, Rifkin, South
Miami, Farmington and Capital Cable. The Charter Companies also include
the issuers of outstanding publicly held notes of a subsidiary acquired
in the Renaissance acquisition;
- the CC V and CC VIII Companies, which own or operate all of the cable
systems acquired in the Avalon, Interlake and Bresnan acquisitions, and
include co-issuers of outstanding publicly held notes;
- the CC VI Companies, which own or operate all of the cable systems
acquired in the Fanch and Kalamazoo acquisitions; and
- the CC VII Companies, which own or operate all of the cable systems
acquired in the Falcon acquisition.
ACQUISITIONS COMPLETED IN 2000
BRESNAN. In February 2000, Charter Communications Holding Company and
Charter Holdings 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 membership units in Charter
Communications Holding Company and CC VIII, our indirect subsidiary, and $963.3
million in assumed debt. Charter Communications Holding Company transferred its
ownership interest to us. The cable systems acquired in the Bresnan acquisition
are located in Michigan, Minnesota, Wisconsin and Nebraska and served
approximately 697,400 customers as of December 31, 2000. For the year ended
December 31, 2000, these systems had revenues of $334.7 million.
KALAMAZOO. In September 2000, Charter Communications, Inc. completed a
stock-for-stock merger with Cablevision of Michigan, Inc., the owner of a cable
system in Kalamazoo, Michigan, in which Charter Communications, Inc. issued
shares of its Class A common stock valued at $170.6 million. After the merger,
Charter Communications, Inc. contributed 100% of the equity interests it
acquired to Charter Communications Holding Company in exchange for membership
units. Charter Communications Holding Company in turn contributed these equity
interests to us and we in turn contributed the equity interests to a subsidiary.
The Kalamazoo system served approximately 52,100 customers as of December 31,
2000 and had revenues of approximately $21.5 million for the year ended December
31, 2000.
OTHER ACQUISITIONS. In 2000, we completed several other acquisitions for
an aggregate purchase price of $88 million in cash. These systems served
approximately 34,200 customers as of December 31, 2000 and had revenues of
approximately $14.0 million for the year ended December 31, 2000.
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 509,400 customers for the Charter cable systems.
In the pending AT&T transactions, we expect to acquire cable systems from AT&T
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Broadband serving approximately 571,900 customers in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. We anticipate that a portion of the
purchase price will consist of Charter cable systems valued at $249.0 million
serving approximately 62,500 customers in Florida. Of the balance of the
purchase price, up to $501.5 million is expected to be paid in shares of Charter
Communications, Inc. Class A common stock and the remainder will be paid in
cash. Upon completion of the Class A common stock offering described in this
prospectus supplement, the portion of the purchase price payable in Class A
common stock will instead be paid in cash, using a portion of the net proceeds
of such offering. The pending AT&T transactions are expected to close in the
second and/or third quarters of 2001, subject to certain closing conditions and
regulatory review.
PRODUCTS AND SERVICES
We offer our customers traditional cable television services and
programming as well as new and advanced high bandwidth services such as digital
television and high-speed Internet access. We plan to continue to enhance and
upgrade these services by adding new programming and other advanced products and
services as they are developed. In 2001, we are continuing to focus on our
digital television and high-speed Internet services, both of which are
increasingly desired by customers. In addition, we plan to increase the number
of markets where we offer video-on-demand services.
TRADITIONAL CABLE TELEVISION SERVICES. Customers subscribing to both
"basic" and "expanded basic" service generally receive a line-up of between 33
and 82 channels of television programming, depending on the bandwidth capacity
of the system. Customers who pay additional amounts can also subscribe to
additional channels, either individually or in packages, as add-ons to the basic
channels. We tailor both our basic channel line-up and our additional channel
offerings to each system according to demographics, programming preferences,
competition, price sensitivity and local regulation.
Our traditional cable television service offerings include the following:
-- BASIC CABLE. All of our customers receive a package of basic
programming, which generally consists of local broadcast television,
local community programming, including governmental and public
access, and limited satellite delivered or non-broadcast channels.
-- EXPANDED BASIC CABLE. This expanded programming level includes a
package of satellite-delivered or non-broadcast channels (such as
ESPN, CNN and Lifetime Television) in addition to the basic channel
line-up.
-- PREMIUM CHANNELS. These channels provide commercial-free movies,
sports and other special event entertainment programming. Home Box
Office, Cinemax, Showtime, the Movie Channel, Starz and Encore are
examples of premium channels. Although we offer subscriptions to
premium channels on an individual basis, we are offering an
increasing number of premium channel packages and are bundling
premium channels with our advanced services.
-- PAY-PER-VIEW. These channels allow customers to pay on a per event
basis to view a single showing of a recently released movie, a
one-time special sporting event or music concert on a commercial-free
basis.
ADVANCED PRODUCTS AND SERVICES. Cable's high bandwidth is a key factor in
the successful delivery of advanced products and services. A variety of emerging
technologies and increasing Internet usage by our customer base have presented
us with substantial opportunities to expand our sources of revenue. In an
increasing number of our systems, we now offer a variety of advanced products
and services, including:
-- digital television and its related enhancements, such as an
interactive programming guide;
-- high-speed Internet access via cable modems;
-- television-based Internet access, which allows customers to access
the Internet through the use of our two-way cable plant without the
need for a personal computer;
-- video-on-demand;
-- interactive services, such as Wink, which adds interactivity and
electronic commerce opportunities to traditional programming and
advertising; and
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-- private network services, such as voice and data transmission
services to a network of interconnected locations of a single
customer.
The following table summarizes our customer statistics for our analog and
digital cable and advanced products and services. The pro forma statistics as of
December 31, 1999 reflect all acquisitions closed since that date as if such
acquisitions occurred on January 1, 1999.
AS OF AND FOR THE YEAR ENDED
----------------------------
ACTUAL PRO FORMA
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
VIDEO SERVICES
Basic cable (analog signal)
Homes passed(a).................................. 10,225,000 9,970,000
Basic customers(b)............................... 6,350,900 6,193,700
Penetration(c)................................... 62.1% 62.1%
Digital cable
Homes passed(a).................................. 8,793,000 4,675,000
Digital customers................................ 1,069,500 155,400
Penetration(c)................................... 12.2% 3.3%
Number of digital terminals deployed............. 1,336,900 176,600
INTERNET AND OTHER DATA SERVICES
Cable modem high-speed Internet access
Homes passed(a).................................. 5,550,800 4,422,000
Cable modem customers............................ 252,400 84,400
Penetration...................................... 4.5% 1.9%
Television-based Internet access
Homes passed(a).................................. 472,100 429,000
TV Internet customers............................ 9,700 7,100
Penetration...................................... 2.1% 1.7%
INTERACTIVE TELEVISION (WINK)
Homes passed(a).................................. 3,271,430 983,239
Interactive TV customers......................... 304,362 39,477
PRO FORMA FOR THE YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Average monthly pro forma revenue per basic
customer(b)(d)................................... $43.31 $39.70
Average monthly pro forma operating cash flow per
basic customer(b)(e)............................. $20.52 $17.67
---------------
(a) Homes passed are the number of living units, such as single residence homes,
apartments and condominium units, passed by the cable television
distribution network in a given cable system service area to which we offer
the named service.
(b) Basic customers are customers who receive basic cable service. All of our
customers, including those receiving digital or advanced services, receive
basic cable service.
(c) Penetration represents customers as a percentage of homes passed.
(d) Average pro forma monthly revenue per basic customer represents pro forma
revenues from all sources, adjusted to illustrate the effect of all 1999 and
2000 acquisitions as if they had closed on January 1, 1999, divided by
twelve, divided by the number of basic customers at the end of the year
(actual for December 31, 2000 and pro forma for December 31, 1999).
(e) Average pro forma monthly operating cash flow per basic customer represents
operating cash flow (defined as revenues less the sum of operating, general
and administrative expenses and corporate expense charges-related party),
adjusted to illustrate the effect of all 1999 and 2000 acquisitions as if
they had closed on January 1, 1999, divided by twelve, divided by the number
of basic customers at the end of the year (actual for December 31, 2000 and
pro forma for December 31, 1999).
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DIGITAL TELEVISION. As part of our systems upgrade, we are installing
headend equipment capable of delivering digitally encoded cable transmissions to
a two-way digital-capable set-top terminal in the customer's home. This digital
connection offers significant advantages. For example, we can compress the
digital signal to allow the transmission of up to twelve digital channels in the
bandwidth normally used by one analog channel. The increased channel capacity
will allow us to increase both programming and service offerings, including
offering video-on-demand to pay-per-view customers.
We offer digital service to our customers in several different service
combination packages. All digital packages include a digital set-top terminal,
an interactive electronic programming guide, 45 channels of CD quality digital
music, an expanded menu of pay-per-view channels and at least thirty additional
digital channels. Certain digital packages also offer customers one or more
premium channels of their choice with "multiplexes." Multiplexes give customers
access to several different versions of the same premium channel which are
varied as to time of broadcast (such as east and west coast time slots) or
programming content theme (such as westerns or romance). Other digital packages
bundle digital television with other advanced services, such as Internet access.
We expect to increase our digital customers to approximately two million
and our digital penetration to over 30% of digital homes passed by December 31,
2001.
CABLE MODEM-BASED HIGH-SPEED INTERNET ACCESS. We offer high-speed data and
Internet access to our residential customers primarily via cable modems attached
to personal computers, at speeds of up to approximately 50 times the speed of a
conventional telephone modem. By December 31, 2001, we expect to have
approximately 500,000 cable-modem high-speed Internet customers.
We generally offer high-speed Internet access services under the Charter
Pipeline(TM) brand. In some of our markets, however, our cable modem and
Internet access service is a co-branded service with an Internet service
provider.
TRADITIONAL DIAL-UP MODEM INTERNET ACCESS. Traditional dial-up Internet
access is available upon customer request in a limited number of our markets
where two-way cable modem Internet access is not yet available.
TV-BASED INTERNET ACCESS. We also have agreements with WorldGate, ICTV and
Digeo to offer our residential customers high-speed Internet access over the
television.
Our WorldGate television-based Internet access service offers easy,
low-cost Internet access to customers at connection speeds ranging up to 128
kilobits per second. This service, with its user-friendly interface, appeals to
first-time Internet users and does not require the use of a PC, an existing or
additional telephone line, or any additional equipment. The Internet domain name
of the customers who use this service is "Charter.net." This allows customers to
switch or expand to our other Internet services without a change of e-mail
address.
During 2001, we expect to offer Digeo, Inc.'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, a portal guides and directs users through the World Wide Web. In
addition, the portal generates revenues from advertising on its own web pages
and by sharing revenues generated by linked or featured web sites.
We plan to use Digeo as our television-based portal for an initial six-year
period. A Charter subsidiary and an affiliate of Mr. Allen own equity interests
in Digeo. See "Certain Relationships and Related Transactions -- Business
Relationships."
VIDEO-ON-DEMAND. In 2000, we began the roll-out of video-on-demand (VOD)
service to digital customers in some of our markets. With VOD service, customers
can access hundreds of movies and other
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programming at any time, with digital picture quality. VOD allows full VCR
functionality, including the ability to pause, rewind and fast-forward programs.
Customers can also stop a program and resume watching it several hours later
during the rental period. In addition, the VOD programming available in a
particular market can be customized for market-based or customer preferences and
local interest. For example, foreign language or other local programming could
be offered in markets where such programming is likely to appeal to customers.
Generally, customers pay for VOD (such as movies) on a per-selection basis. Some
VOD programming is also available on a category basis (such as children's
programming) for a single monthly fee.
At December 31, 2000, VOD was available to approximately 170,000 homes in
our Los Angeles and Atlanta markets with approximately 450 titles available to
customers. We expect VOD to be available to approximately 2.2 million homes
passed by the end of 2001. In systems where VOD is available, it is included as
a standard feature of our digital service packages. We utilize DIVA Systems
Corporation, a company providing interactive VOD products and services to the
cable industry, to provide us with hardware, software, programming and
operational support.
INTERACTIVE VIDEO PROGRAMMING. We provide interactive programming using
technology developed by Wink Communications, Inc. The Wink technology embeds
interactive features, such as additional information and statistics about a
television program or the option to order an advertised product, into
programming and advertisements. A customer with a Wink-enabled set-top terminal
and a Wink-enabled cable provider sees an icon flash on the screen when
additional Wink features are available to enhance a program or advertisement. By
pressing the select button on a standard remote control, a viewer of a
Wink-enhanced program is able to access additional information regarding such
program, including, for example, information on prior episodes or the program's
characters. A viewer watching an advertisement would be able to access
additional information regarding the advertised product and may also be able to
utilize the two-way transmission features to order a product. We have bundled
Wink's services with our traditional cable services in both our advanced analog
and digital platforms. Wink's services are provided free of charge to the
customer. A company controlled by Mr. Allen has a 3.2% equity interest in Wink.
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel and Nickelodeon, together currently produce
over 2,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. We receive fees from Wink
each time one of our customers uses Wink to request certain additional
information or order advertised products. Our customers average approximately
246,000 clicks per week on Wink icons.
PRIVATE BUSINESS NETWORKS. During 2000, we established Charter Business
Networks as a separate division to offer integrated network solutions for data,
video, Internet and private voice communications to commercial and institutional
customers in certain of our markets. These solutions include virtual local area
and wide area networks with bandwidth and Internet access capacity based on
customer needs, supported by remote monitoring.
TELEPHONY/VOICE SERVICES. We expect to be able to offer cable telephony
services by the end of 2003 in selected markets using our systems' direct,
two-way connections to homes and other buildings. We are exploring technologies
using Internet protocol telephony to transmit digital voice signals over our
systems. We have already begun an Internet protocol (IP) telephony trial in
Wisconsin, and expect to launch a second trial in St. Louis in 2001. We have
marketed telephony services as a competitive access provider in the State of
Wisconsin through one of our subsidiaries, and are currently looking to expand
our services as a competitive access provider into other states.
OTHER NEW BUSINESS INITIATIVES. We are seeking to provide our customers in
2001 with advanced digital set-top terminals that include digital video
recording capabilities (commonly referred to as "DVR"). Built-in DVR capability
in the set-top terminal will enable customers to store video, audio and Internet
content. We are also exploring deployment of wireless networking technology for
our cable modem customers.
SALE OF LOCAL ADVERTISING. We receive revenue from the sale of local
advertising on satellite-delivered networks such as MTV, CNN and ESPN. In any
particular system, we generally insert local advertising on a
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minimum of twelve networks, and have covered up to 40 channels. Our system
rebuild and additional digital services launches have increased the number of
channels, and made it possible to insert local advertising.
HOME SHOPPING. In 2000, we also received revenues from channels devoted
exclusively to home shopping (such as HSN) and other channels that allow us to
insert infomercials during off-peak hours.
PRICING FOR OUR PRODUCTS AND SERVICES
Our revenues are derived principally from the monthly fees our customers
pay for cable services. The rates we charge vary based on the market served and
level of service selected and are usually adjusted on an annual basis. As of
December 31, 2000, the average monthly fee was $13.16 for basic service and
$17.93 for expanded basic service. A one-time installation fee, which may be
waived in part during certain promotional periods, is charged to new customers.
We believe our rate practices are in accordance with Federal Communications
Commission Guidelines and are consistent with those prevailing in the industry
generally. See "Regulation and Legislation."
In accordance with the Federal Communications Commission's rules, the rates
we charge for cable-related equipment, such as set-top terminals and remote
control devices, and installation services are based on actual costs plus a
permitted rate of return.
Although our service offerings vary by market because of differences in the
bandwidth capacity of the cable systems in each of our markets and competitive
and regulatory factors, our services, when offered on a stand-alone basis, are
typically offered at monthly price ranges as follows.
SERVICE PRICE RANGE
------- ---------------
Basic cable................................................. $ 9.95 - $14.00
Expanded basic cable........................................ $15.00 - $29.00
Premium channel............................................. $10.95 - $13.50
Pay-Per-View (per movie or event)........................... $ 2.95 - $50.95
Digital cable video packages................................ $45.95 - $59.95
High-speed Internet access by cable modem................... $24.95 - $34.95
Video-on-Demand (per selection)............................. $ 0.99 - $ 9.95
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The following table indicates the states covered by, and customer data for,
each of our operating regions as of December 31, 2000.
NUMBER OF
REGION STATES COVERED CUSTOMERS
------ -------------- ---------
WESTERN DIVISION
Central................................ Missouri, Illinois, Indiana, Arkansas 486,800
North Central.......................... Wisconsin, Minnesota 806,400
Southern California.................... Central and Southern California 642,200
Northwest.............................. Northern California, Idaho, Oregon,
Washington 486,200
Michigan............................... Michigan 621,300
National............................... Colorado, Kansas, Nebraska, New Mexico,
Oklahoma, Texas, Utah, Arizona,
Nevada 461,200
EASTERN DIVISION
Southeast.............................. North Carolina, South Carolina 568,400
South-Atlantic......................... Georgia, Florida 391,400
Mid-South.............................. Georgia, Kentucky, Tennessee 557,800
Northeast.............................. Connecticut, Massachusetts, New York,
Vermont, New Hampshire 364,100
Gulf Coast............................. Alabama, Louisiana, Mississippi 427,400
Mid-Atlantic........................... Maryland, New York, Ohio, Pennsylvania
Virginia, W. Virginia, Delaware 537,700
OUR NETWORK TECHNOLOGY
As of December 31, 2000, our cable systems consisted of approximately
220,347 sheath miles, including approximately 29,829 sheath miles of fiber optic
cable, passing approximately 10.2 million households and serving approximately
6.4 million customers. Fiber optic cable is a communication medium that uses
glass fibers to transmit signals over long distances with minimum signal loss or
distortion.
The following table describes the current technological state of our
systems as of December 31, 2000 and the anticipated progress of planned upgrades
through 2002, based on the percentage of our customers who will have access to
the bandwidths listed below and two-way capability.
550 MEGAHERTZ
LESS THAN TO TWO-WAY
550 MEGAHERTZ 660 MEGAHERTZ 750 MEGAHERTZ 870 MEGAHERTZ CAPABILITY
------------- ------------- ------------- ------------- ----------
December 31, 2000.... 33.4% 12.6% 37.5% 16.5% 57.1%
December 31, 2001.... 19.6% 12.8% 39.3% 28.3% 70.8%
December 31, 2002.... 6.9% 5.5% 43.8% 43.8% 89.0%
We have adopted the hybrid fiber coaxial cable (HFC) architecture as the
standard for our ongoing systems upgrades. HFC architecture combines the use of
fiber optic cable with coaxial cable. Fiber optic cable has excellent broadband
frequency characteristics, noise immunity and physical durability and can carry
hundreds of video, data and voice channels over extended distances. Coaxial
cable is less expensive and requires a more extensive signal amplification in
order to obtain the desired transmission levels for delivering channels. In most
systems, we deliver our signals via fiber optic cable from the headend to a
group of nodes, and use coaxial cable to deliver the signal from individual
nodes to the homes passed served by that node. Our system design enables a
maximum of 500 homes passed to be served by a single node. Currently, our
average node serves approximately 380 homes passed. Our system design provides
for six strands of fiber to each node, with two strands activated and four
strands reserved for future services (sometimes referred to as "dark fiber"). We
believe that this hybrid network design provides high capacity and superior
signal quality, and will
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enable us to provide the newest forms of telecommunications services to our
customers. It also provides reserve capacity for the addition of future
services.
The primary advantages of HFC architecture over traditional coaxial-only
cable networks include:
- increased bandwidth capacity, for more channels and other services;
- dedicated bandwidth for two-way services, which avoids reverse signal
interference problems that can otherwise occur with two-way communication
capability;
- improved picture quality and service reliability; and
- operating efficiencies resulting from a reduced number of headends.
In 2001, we will have a fully operational national network operations
center to monitor our networks and ensure maximum quality of service. Monitoring
becomes increasingly important as we increase the number of customers utilizing
two-way high-speed data service. We plan to open regional operations centers in
the future to augment our national center on an as-needed basis.
MANAGEMENT OF OUR SYSTEMS
Our operating philosophy emphasizes decentralized management, with
decisions being made as close to the customer as possible. We are organized in
two divisions that contain a total of twelve operating regions. Each of the two
divisions is managed by a Senior Vice President, who is responsible for the
overall supervision of the operating regions within the division. Each operating
region is managed by a Senior Vice President or a Vice President, supported by
operational, marketing and engineering personnel at the regional and local
system level. Our consolidation of certain functions at the regional level has
resulted in numerous operating efficiencies and superior customer care. At the
same time, our centralized financial management by our corporate office enables
us to set financial and operating benchmarks and monitor system performance on
an ongoing basis. Our corporate office also performs certain financial control
functions such as accounting, finance and acquisitions, payroll and benefit
administration, internal audit, purchasing and programming contract
administration on a centralized basis.
SALES AND MARKETING
We have a centralized team responsible for overseeing the sales and the
marketing strategies of our individual systems. For most of our systems with
over 30,000 customers we have a dedicated marketing manager, while smaller
systems are handled regionally. We believe our success in marketing comes in
large part from new and innovative ideas and from good interaction, quick
information flow and sharing of best practices between our corporate office,
which handles programs and administration, and our field offices, which
implement the various programs. In addition, we constantly monitor the
regulatory arena, customer perception, competition, pricing and product
preferences to increase our responsiveness to our customers.
Our long-term marketing objective is to increase our cash flow through
deeper market penetration and growth in revenue per household. We hope that
customers will come to view their cable connection as the best "pipeline" to the
home for a multitude of services. To achieve this objective, we are pursuing the
following strategies:
-- increase the number of residential consumers who subscribe to digital
service, which enables them to receive a greater number of television
channels and interactive services;
-- introduce new advanced products and services;
-- design product offerings to enable greater opportunity for customer
entertainment and information choices;
-- package product offerings to promote the sale of premium services and
niche programming providing an attractive price/value relationship
with our customers;
-- target marketing opportunities based on geodemographic data and past
purchasing behavior;
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-- develop specialized programs to attract former customers, households
that have never subscribed and customers of competitive services; and
-- employ Charter branding of products to promote customer awareness and
loyalty.
We invest significant amounts of time, effort and financial resources in
marketing new and existing services. To increase customer penetration and
increase the level of services used by our customers, we use coordinated
marketing techniques, including door-to-door solicitation, telemarketing, media
advertising, e-marketing and direct mail solicitation. We believe we have one of
the cable industry's highest success rates in attracting and retaining customers
who have never before subscribed to cable services.
In 2001, we began to sell our services through consumer electronics
retailers and other retailers that sell televisions or cable modems.
PROGRAMMING
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. We devote considerable resources to
obtaining access to a wide range of programming that we believe will appeal to
both existing and potential customers. We rely on extensive market research,
customer demographics and local programming preferences to determine channel
offerings in each of our markets. We obtain basic and premium programming from a
number of suppliers, usually pursuant to a written contract. Our programming
contracts generally continue for a fixed period of time, usually from three to
ten years, and are subject to negotiated renewal. Some program suppliers offer
financial support for the launch of a new channel and ongoing marketing support.
We also try to negotiate volume discount pricing structures.
COSTS. Programming tends to be made available to us for a flat fee per
customer. However, some channels are available without cost to us. In connection
with the launch of a new channel, we may receive a distribution fee to support
the channel launch. For home shopping channels, we receive a percentage of the
amount spent in home shopping purchases by our customers on channels we carry.
Our cable programming costs have increased in recent years and are expected
to continue to increase due to factors including:
-- system acquisitions that increase the number of customers;
-- additional programming being provided to customers as a result of
system rebuilds that increase channel capacity;
-- increased cost to produce or purchase cable programming; and
-- inflationary or negotiated annual increases.
In every year we have operated, our costs to acquire programming have
exceeded customary inflationary and cost-of-living type increases. In
particular, sports programming costs have increased significantly over the past
several years. In addition, contracts to purchase sports programming sometimes
contain built-in cost increases for programming added during the term of the
contract.
Under rate regulations of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "Regulation and Legislation."
FRANCHISES
As of December 31, 2000, our systems operated pursuant to a total of
approximately 4,520 franchises, permits and similar authorizations issued by
local and state governmental authorities. Each franchise is awarded by a
governmental authority and is usually not transferable unless the granting
governmental authority consents. Most franchises are subject to termination
proceedings in the event of a material breach. In addition, most franchises
require us to pay the granting authority a franchise fee of up to 5.0% of gross
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revenues as defined by the franchise agreements, which is the maximum amount
that may be charged under the applicable law.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. This process usually takes three
years but can take a longer period of time and often involves substantial
expense. The Communications Act provides for an orderly franchise renewal
process in which granting authorities may not unreasonably withhold renewals. If
a renewal is withheld and the granting authority takes over operation of the
affected cable system or awards the cable franchise to another party, the
granting authority must pay the existing cable operator the "fair market value"
of the system. The Communications Act also established comprehensive renewal
procedures requiring that an incumbent franchisee's renewal application be
evaluated on its own merit and not as part of a comparative process with
competing applications. In connection with the franchise renewal process, many
governmental authorities require the cable operator to make certain commitments,
such as technological upgrades to the system, which may require substantial
capital expenditures. We cannot assure you that any particular franchise will be
renewed or that it can be renewed on commercially favorable terms. Our failure
to obtain renewals of our franchises, especially those in major metropolitan
areas where we have the most customers, would have a material adverse effect on
our business, results of operations and financial condition. Approximately 44%
of our franchises covering approximately 42% of our basic cable customers expire
within five years after December 31, 2000.
Under the 1996 Telecom Act, state and local authorities are prohibited from
limiting, restricting or conditioning the provision of telecommunications
services. They may, however, impose "competitively neutral" requirements and
manage the public rights-of-way. Granting authorities may not require a cable
operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems which are eligible for renewal have been
renewed or extended at or prior to their stated expiration dates.
CUSTOMER CARE
Maximizing customer satisfaction is a key element of our business strategy.
In support of our commitment to customer satisfaction, we operate a 24-hour
customer service hotline for nearly all of our systems and offer on-time
installation and service guarantees.
To better serve our customers, we are consolidating some of our local
customer care functions at the regional level. At December 31, 2000, we
maintained 22 call centers handling approximately 56% of our customers,
including our first state-of-the-art regional customer contact center that was
established in 2000. We expect to complete six additional state-of-the-art
regional customer contact centers in 2001. By establishing regional customer
contact centers, we are able to service our customers 24 hours a day, seven days
a week, with highly trained personnel. These regional centers utilize
state-of-the-art equipment that enhances all interactions with our customers and
provides a high-performance employee environment. Our customer care specialists
receive extensive training to develop customer contact skills and product
knowledge critical to high rates of customer retention as well as to selling
additional services and higher levels of service to our customers. We expect
that our customer care functions will benefit from the additional technologies
available when our national and regional network operations centers are opened.
We utilize surveys, focus groups and other research tools as part of our efforts
to determine and respond to customer needs.
Consistent with our focus on customer satisfaction, we have implemented
stringent customer care standards that we believe meet or exceed those
established by the National Cable Television Association, the Washington,
D.C.-based trade association for the cable industry. It is our policy that if an
installer is late for a scheduled appointment the customer receives free
installation, and if a service technician is late for a service call the
customer receives a $20 credit.
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COMPETITION
We face competition in the areas of price, service offerings and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as interactive services and telephony, we will face competition
from other providers of each type of service. See "Risk Factors." We operate in
a very competitive business environment which can adversely affect our business
and operations.
To date, we believe that we have not lost a significant number of customers
or a significant amount of revenue to our competitors. However, competition from
other providers of the technologies we expect to offer in the future may have a
negative impact on our business in the future.
Through business developments such as the merger of Tele-Communications,
Inc. and AT&T and the merger of America Online, Inc. (AOL) and Time Warner Inc.,
customers have come to expect a variety of services from a single provider.
While these mergers are not expected to have a direct or immediate impact on our
business, they encourage providers of cable and telecommunications services to
expand their service offerings. They also encourage consolidation in the cable
industry as cable operators recognize the competitive benefits of a large
customer base and expanded financial resources.
Our key competitors include:
BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. The recent licensing of digital spectrum by the Federal
Communications Commission will provide incumbent television licenses with the
ability to deliver high definition television pictures and multiple
digital-quality program streams, as well as advanced digital services such as
subscription video and data transmission.
DBS. Direct broadcast satellite, known as DBS, is a significant competitor
to cable systems. The DBS industry has grown rapidly over the last several
years, far exceeding the growth rate of the cable television industry, and now
serves more than 15 million subscribers nationwide. DBS service allows the
subscriber to receive video services directly via satellite using a relatively
small dish antenna. Moreover, video compression technology allows DBS providers
to offer more than 100 digital channels, thereby surpassing the typical analog
cable system. DBS companies historically were prohibited from retransmitting
popular local broadcast programming. However, a change to the copyright laws in
November 1999 eliminated this legal impediment. As a result, DBS companies now
need to secure retransmission consent from the popular broadcast stations they
wish to carry, and they will face mandatory carriage obligations of less popular
broadcast stations as of January 2002. In response to the legislation, DirecTV,
Inc. and EchoStar Communications Corporation have begun carrying the major
network stations in the nation's top television markets. DBS, however, is
limited in the local programming it can provide because of the current capacity
limitations of satellite technology. It is, therefore, expected that DBS
companies will offer local broadcast programming only in the larger U.S. markets
in the foreseeable future. The DBS industry recently initiated a judicial
challenge to the 2002 requirement mandating carriage of less popular broadcast
stations. This lawsuit alleges that the requirement (similar to the one
applicable to cable systems) is unconstitutional. EchoStar began providing
high-speed Internet access in late 2000, and DirecTV, which partnered with AOL,
reports that it will begin providing its own version of high-speed Internet
access shortly.
DSL. The deployment of digital subscriber line technology, known as DSL,
allows Internet access to subscribers at data transmission speeds greater than
available over conventional telephone lines. DSL service therefore is
competitive with high-speed Internet access over cable systems. Several
telephone companies and other companies offer DSL service. The Federal
Communications Commission has a policy of encouraging the deployment of DSL and
similar technologies, both by incumbent telephone companies and newer, competing
telephone companies. The Federal Communication Commission's decisions and
policies in this area are subject to change. We cannot predict the likelihood of
success of the Internet access services offered by our competitors, or the
impact on our business and operations of these competitive ventures.
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TRADITIONAL OVERBUILDS. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a franchising
authority might grant a second franchise to another cable operator and that such
a franchise might contain terms and conditions more favorable than those
afforded us. In addition, entities willing to establish an open video system,
under which they offer unaffiliated programmers non-discriminatory access to a
portion of the system's cable system may be able to avoid local franchising
requirements. Well financed businesses from outside the cable industry, such as
public utilities that already possess fiber optic and other transmission lines
in the areas they serve may over time become competitors. There has been a
recent increase in the number of cities that have constructed their own cable
systems, in a manner similar to city-provided utility services. There also has
been an increased interest in traditional overbuilds by private companies.
Constructing a competing cable system is a capital intensive process which
involves a high degree of risk. We believe that in order to be successful, a
competitor's overbuild would need to be able to serve the homes and businesses
in the overbuilt area on a more cost-effective basis than us. Any such overbuild
operation would require either significant access to capital or access to
facilities already in place that are capable of delivering cable television
programming.
As of December 31, 2000, we are aware of overbuild situations in some of
our cable systems. Approximately 139,000 basic customers, or 2% of our total
basic customers, are passed by these overbuilds. Additionally, we have been
notified that franchises have been awarded, and present potential overbuild
situations, in other systems. Approximately 253,000, or 4% of our total
customers are located in areas with potential overbuilds. In response to such
overbuilds, these systems have been designated priorities for the upgrade of
cable plant and the launch of new and enhanced services. We have upgraded many
of these systems to at least 750 megahertz two-way HFC architecture, and
anticipate upgrading the other systems to at least 750 megahertz by December 31,
2001.
TELEPHONE COMPANIES AND UTILITIES. The competitive environment has been
significantly affected by technological developments and regulatory changes
enacted under the 1996 Telecom Act, which was designed to enhance competition in
the cable television and local telephone markets. Federal cross-ownership
restrictions historically limited entry by local telephone companies into the
cable business. The 1996 Telecom Act modified this cross-ownership restriction,
making it possible for local exchange carriers, who have considerable resources,
to provide a wide variety of video services competitive with services offered by
cable systems.
Several telephone companies have obtained or are seeking cable franchises
from local governmental authorities and are constructing cable systems.
Cross-subsidization by local exchange carriers of video and telephony services
poses a strategic advantage over cable operators seeking to compete with local
exchange carriers that provide video services. Some local exchange carriers may
choose to make broadband services available under the open video regulatory
framework of the Federal Communications Commission or through wireless
technology. In addition, local exchange carriers provide facilities for the
transmission and distribution of voice and data services, including Internet
services, in competition with our existing or potential interactive services
ventures and businesses, including Internet service, as well as data and other
non-video services. We cannot predict the likelihood of success of the broadband
services offered by our competitors or the impact on us of such competitive
ventures. Although enthusiasm on the part of local exchange carriers appears to
have waned in recent months, the entry of telephone companies as direct
competitors in the video marketplace may become more widespread and could
adversely affect the profitability and valuation of established cable systems.
As we expand our offerings to include Internet access and other
telecommunications services, we will be subject to competition from other
telecommunications providers. The telecommunications industry is highly
competitive and includes competitors with greater financial and personnel
resources, who have brand name recognition and long-standing relationships with
regulatory authorities. Moreover, mergers, joint ventures and alliances among
franchise, wireless or private cable operators, local exchange carriers and
others may result in providers capable of offering cable television, Internet,
and telecommunications services in direct competition with us.
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Additionally, we are subject to competition from utilities which possess
fiber optic transmission lines capable of transmitting signals with minimal
signal distortion.
PRIVATE CABLE. Additional competition is posed by satellite master antenna
television systems known as "SMATV systems" serving multiple dwelling units,
referred to in the cable industry as "MDUs", such as condominiums, apartment
complexes, and private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may preclude operators of
franchise systems from serving residents of such private complexes. Private
cable systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services which are offered by cable
systems. SMATV systems currently benefit from operating advantages not available
to franchised cable systems, including fewer regulatory burdens and no
requirement to service low density or economically depressed communities.
Exemption from regulation may provide a competitive advantage to certain of our
current and potential competitors. The Federal Communications Commission ruled
in 1998 that private cable operators can lease video distribution capacity from
local telephone companies and distribute cable programming services over public
rights-of-way without obtaining a cable franchise. In 1999, both the Fifth and
Seventh Circuit Courts of Appeals upheld this Federal Communications Commission
policy.
WIRELESS DISTRIBUTION. Cable television systems also compete with wireless
program distribution services such as multi-channel multipoint distribution
systems or "wireless cable," known as MMDS. MMDS uses low-power microwave
frequencies to transmit television programming over-the-air to paying customers.
Wireless distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology is likely
to increase significantly the channel capacity of their systems. Both analog and
digital MMDS services require unobstructed "line of sight" transmission paths.
Analog MMDS has impacted our customer growth in Riverside and Sacramento,
California and Missoula, Montana. Digital MMDS is a more significant competitor,
presenting potential challenges to us in Los Angeles, California and Atlanta,
Georgia.
PROPERTIES
Our principal physical assets consist of a cable television distribution
plant and equipment, including signal receiving, encoding and decoding devices,
headend reception facilities, distribution systems and customer drop equipment
for each of our cable television systems.
Our cable television plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities and
telephone companies, and in certain locations are buried in underground ducts or
trenches. We own or lease real property for signal reception sites and business
offices in many of the communities served by our systems and for our principal
executive offices. We own most of our service vehicles.
Our subsidiaries own the real property and buildings for our regional data
center and call centers and our regional and divisional administrative offices.
Our subsidiaries generally have leased space for business offices throughout our
operating regions, although an increasing number of our systems are now
purchasing property for system offices. Our headend locations are generally
located on owned or leased parcels of land, and we generally own the towers on
which our equipment is located.
We believe that our properties are in good operating condition and are
suitable for our business operations.
EMPLOYEES
During 2000, pursuant to a mutual services agreement between Charter
Communications, Inc. and Charter Investment, Inc., Charter Investment leased the
necessary personnel and provided services to Charter Communications, Inc. to
manage Charter Communications Holding Company and its subsidiaries. Effective
January 1, 2001, Charter Investment personnel became employees of Charter
Communications Holding Company and the mutual services agreement was amended to
add Charter Communications Holding
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Company as a party and provide that both Charter Investment and Charter
Communications Holding Company will provide services to Charter Communications,
Inc. on a cost reimbursement basis.
Charter Communications, Inc. currently has only 15 employees, all of whom
are senior management. The corporate office also includes employees of Charter
Communications Holding Company. The corporate office is responsible for
coordinating and overseeing our operations, including certain critical
functions, such as marketing and engineering, that are conducted by personnel at
the regional and local system level. The corporate office also performs certain
financial control functions such as accounting, finance and acquisitions,
payroll and benefit administration, internal audit, purchasing and programming
contract administration on a centralized basis.
As of December 31, 2000, we had approximately 13,490 full-time equivalent
employees of which approximately 300 were represented by collective bargaining
agreements. We believe we have a good relationship with our employees and have
never experienced a work stoppage.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters and other claims
incidental to our business. We believe that the resolution of such matters,
taking into account established reserves and insurance, will not have a material
adverse impact on our consolidated financial position or results of operations.
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REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and
legislation affecting the cable industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The Federal Communications Commission has the authority to enforce its
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations. The 1996 Telecom Act has altered the regulatory structure governing
the nation's communications providers. It removed barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduced the scope of cable rate regulation and encouraged
additional competition in the video programming industry by allowing local
telephone companies to provide video programming in their own telephone service
areas.
The 1996 Telecom Act required the Federal Communications Commission to
undertake a host of implementing rulemakings. Moreover, Congress and the Federal
Communications Commission have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations, and there have been calls in Congress and at the Federal
Communications Commission to maintain or even tighten cable regulation in the
absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems were subjected to rate regulation, unless they faced "effective
competition" in their local franchise area. Federal law defines "effective
competition" on a community-specific basis as requiring satisfaction of
conditions not typically satisfied in the current marketplace.
Although the Federal Communications Commission established the underlying
regulatory scheme, local government units, commonly referred to as local
franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable service--the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 2000, approximately 17% of our local franchising
authorities were certified to regulate basic tier rates. The 1992 Cable Act
permits communities to certify and regulate rates at any time, so that it is
possible that additional localities served by the systems may choose to certify
and regulate basic rates in the future.
The Federal Communications Commission historically administered rate
regulation of cable programming service tiers, which are the expanded basic
programming packages that offer services other than basic programming and which
typically contain satellite-delivered programming. As of December 31, 2000, we
had cable programming service tier rate complaints relating to approximately
414,000 customers pending at the Federal Communications Commission. Under the
1996 Telecom Act, however, the Federal Communications Commission's authority to
regulate cable programming service tier rates expired on March 31, 1999. The
Federal Communications Commission has taken the position that it will still
adjudicate pending cable programming service tier complaints but will strictly
limit its review, and possible refund orders, to the time period until March 31,
1999. We do not believe any adjudications regarding these complaints will have a
material adverse effect on our business. The elimination of cable programming
service tier regulation affords us substantially greater pricing flexibility.
Under the rate regulations of the Federal Communication Commission, most
cable systems were required to reduce their basic service tier and cable
programming service tier rates in 1993 and 1994, and have since
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had their rate increases governed by a complicated price cap scheme that allows
for the recovery of inflation and certain increased costs, as well as providing
some incentive for expanding channel carriage. The Federal Communications
Commission has modified its rate adjustment regulations to allow for annual rate
increases and to minimize previous problems associated with regulatory lag.
Operators also have the opportunity to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit. The Federal
Communications Commission and Congress have provided various forms of rate
relief for smaller cable systems owned by smaller operators. Premium cable
services offered on a per-channel or per-program basis remain unregulated.
However, federal law requires that the basic service tier be offered to all
cable subscribers and limits the ability of operators to require purchase of any
cable programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which expires in 2002.
As noted above, Federal Communications Commission regulation of cable
programming service tier rates for all systems, regardless of size, expired
pursuant to the 1996 Telecom Act on March 31, 1999. As a result, the regulatory
requirements just discussed are now essentially applicable only to the basic
service tier and cable equipment. The 1996 Telecom Act also relaxes existing
"uniform rate" requirements by specifying that uniform rate requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the Federal Communications Commission.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunications services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunications
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles, beginning in 2001, if the operator provides telecommunications
service, as well as cable service, over its plant. The Federal Communications
Commission clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access, but a recent decision by the
Eleventh Circuit Court of Appeals disagreed and suggested that Internet traffic
is neither cable service nor telecommunications service and might leave cable
attachments that carry Internet traffic ineligible for Pole Attachment Act
protections. This decision could lead to substantial increases in pole
attachment rates, and certain utilities have already proposed vastly higher pole
attachment rates based in part on the existing court decision. The United States
Supreme Court is now reviewing this decision and the Eleventh Circuit mandate
has been stayed pending Supreme Court action.
Cable entry into telecommunications will be affected by the rulings and
regulations implementing the 1996 Telecom Act, including the rules governing
interconnection. A cable operator offering telecommunications services generally
needs efficient interconnection with other telephone companies to provide a
viable service. A number of details designed to facilitate interconnection are
subject to ongoing regulatory and judicial review, but the basic obligation of
incumbent telephone companies to interconnect with competitors, such as cable
companies offering telephone service, is well established. Even so, the economic
viability of different interconnection arrangements can be greatly affected by
regulatory changes. Consequently, we cannot predict whether reasonable
interconnection terms will be available in any particular market we may choose
to enter.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the Federal
Communications Commission has issued several reports finding no immediate need
to impose such regulation, this situation may change as cable systems expand
their broadband
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delivery of Internet services. In particular, proposals have been advanced at
the Federal Communications Commission and Congress that would require cable
operators to provide access to unaffiliated Internet service providers and
online service providers. The Federal Communications Commission recently
rejected a petition by certain Internet service providers attempting to use
existing access rules designed for video programming service providers to gain
access to cable system delivery. The Federal Trade Commission and the Federal
Communications Commission recently imposed certain "open-access" requirements on
Time Warner and AOL in connection with their merger, but those requirements are
not applicable to other cable operators.
Some states and local franchising authorities are considering the
imposition of mandatory Internet access requirements as part of cable franchise
renewals or transfers and a few local jurisdictions have adopted these
requirements. In June 2000, the Ninth Circuit Court of Appeals for the rejected
an attempt by the City of Portland, Oregon to impose mandatory Internet access
requirements on the local cable operator. In reversing a contrary ruling by the
lower court, the Ninth Circuit court held that Internet service was not a cable
service, and therefore could not be subject to local cable franchising. At the
same time, the court suggested that at least the transport component of
broadband Internet service could be subject to regulation as a
"telecommunications" service. Although regulation of this form of
telecommunications service would presumably be reserved for the Federal
Communications Commission (which has so far resisted requests for active
regulation), some states may argue that they are entitled to impose
"open-access" requirements pursuant to their authority over intrastate
telecommunications. In addition, some local governments may argue that a cable
operator must secure a local telecommunications franchise before providing
Internet service.
In response to the Ninth Circuit decision, the Federal Communications
Commission has initiated a new proceeding to categorize cable-delivered Internet
service and perhaps establish an appropriate regulatory scheme. The Ninth
Circuit decision is the leading case on cable-delivered Internet service at this
point, but the Federal District Court for the Eastern District of Virginia
reached a similar deregulatory result in a May 2000 ruling, albeit using a
different legal analysis. It concluded that broadband Internet service was a
cable service, but that multiple provisions of the Telecommunications Act
preempted local regulation. A federal district court in Florida recently
addressed a similar "open-access" requirement in a local franchise and struck
down the requirement as unconstitutional. There are other instances where
"open-access" requirements have been imposed and judicial challenges are
pending. If regulators are allowed to impose Internet access requirements on
cable operators, it could burden the capacity of cable systems and complicate
our own plans for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators
both inside and outside their telephone service areas with certain regulatory
safeguards. Because of their resources, local exchange carriers could be
formidable competitors to traditional cable operators. Various local exchange
carriers already are providing video programming services within their telephone
service areas through a variety of distribution methods, including both the
deployment of broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system (OVS). To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of
the Federal Communications Commission's open video system rules, including its
preemption of local franchising. The Federal Communications Commission
subsequently revised its OVS rules to eliminate this general preemption, thereby
leaving franchising discretion to state and local authorities. It is unclear
what effect this ruling will have on the entities pursuing open video system
operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable
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systems. Co-located cable systems are cable systems serving an overlapping
territory. Cable operator buyouts of co-located local exchange carrier systems,
and joint ventures between cable operators and local exchange carriers in the
same market are also prohibited. The 1996 Telecom Act provides a few limited
exceptions to this buyout prohibition, including a carefully circumscribed
"rural exemption." The 1996 Telecom Act also provides the Federal Communications
Commission with the limited authority to grant waivers of the buyout
prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the Federal Communications Commission for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several such utilities have been granted broad authority by the Federal
Communications Commission to engage in activities which could include the
provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing Federal Communications
Commission regulations prohibiting local cross-ownership between co-located
television stations and cable systems.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. Also pursuant to the 1992 Cable Act, the Federal Communications
Commission adopted rules that preclude any cable operator from serving more than
30% of all U.S. domestic multichannel video subscribers, including cable and
direct broadcast satellite subscribers. The D.C. District Court of Appeals
recently struck down these vertical and horizontal ownership limits as
unconstitutional, concluding that the Federal Communications Commission had not
adequately justified the specific rules (i.e., the 40% and 30% figures) adopted.
As a result, an existing divestiture requirement on AT&T was suspended.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to require a cable system to carry the
station. More popular stations, such as those affiliated with a national
network, typically elect retransmission consent, which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to negotiate for payments for granting permission to the cable operator to carry
the stations. Must carry requests can dilute the appeal of a cable system's
programming offerings because a cable system with limited channel capacity may
be required to forego carriage of popular channels in favor of less popular
broadcast stations electing must carry. Retransmission consent demands may
require substantial payments or other concessions. Either option has a
potentially adverse effect on our business. The burden associated with must
carry may increase substantially if broadcasters proceed with planned conversion
to digital transmission and the Federal Communications Commission determines
that cable systems must carry all analog and digital broadcasts in their
entirety. This burden would reduce capacity available for more popular video
programming and new Internet and telecommunication offerings. The Federal
Communications Commission tentatively decided against imposition of dual digital
and analog must carry in a January 2001 ruling. At the same time, however, it
initiated further fact-gathering which ultimately could lead to a
reconsideration of the tentative conclusion.
ACCESS CHANNELS. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted
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rules regulating the terms, conditions and maximum rates a cable operator may
charge for commercial leased access use. We believe that requests for commercial
leased access carriages have been relatively limited. The Federal Communications
Commission recently rejected a request that unaffiliated Internet service
providers be found eligible for commercial leased access.
ACCESS TO PROGRAMMING. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. This prohibition is
scheduled to expire in October 2002, unless the Federal Communications
Commission determines that an extension is necessary to protect competition and
diversity. There also has been interest expressed in further restricting the
marketing practices of cable programmers, including subjecting programmers who
are not affiliated with cable operators to all of the existing program access
requirements, and subjecting terrestrially-delivered programming to the program
access requirements. Terrestrially-delivered programming is programming
delivered other than by satellite and is currently exempt from the ban on
exclusivity. These changes should not have a dramatic impact on us, but would
limit potential competitive advantages we now enjoy. Pursuant to the Satellite
Home Viewer Improvement Act, the Federal Communications Commission has adopted
regulations governing retransmission consent negotiations between broadcasters
and all multichannel video programming distributors, including cable and DBS.
INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers who are willing to pay the building owner a
higher fee, where such a fee is permissible. The Federal Communications
Commission has also proposed terminating all exclusive multiple dwelling unit
service agreements held by incumbent operators, but allowing such contracts when
held by new entrants. In another proceeding, the Federal Communications
Commission has preempted restrictions on the deployment of private antenna on
rental property within the exclusive use of a tenant, such as balconies and
patios. This Federal Communications Commission ruling may limit the extent to
which we along with multiple dwelling unit owners may enforce certain aspects of
multiple dwelling unit agreements which otherwise prohibit, for example,
placement of digital broadcast satellite receiver antennae in multiple dwelling
unit areas under the exclusive occupancy of a renter. These developments may
make it even more difficult for us to provide service in multiple dwelling unit
complexes.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to
the Federal Communications Commission regulations noted above, there are other
regulations of the Federal Communications Commission covering such areas as:
-- equal employment opportunity,
-- subscriber privacy,
-- programming practices, including, among other things,
(1) syndicated program exclusivity, which is a Federal Communications
Commission rule which requires a cable system to delete particular
programming offered by a distant broadcast signal carried on the
system which duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
(2) network program nonduplication,
(3) local sports blackouts,
(4) indecent programming,
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(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) closed captioning,
-- registration of cable systems and facilities licensing,
-- maintenance of various records and public inspection files,
-- aeronautical frequency usage,
-- lockbox availability,
-- antenna structure notification,
-- tower marking and lighting,
-- consumer protection and customer service standards,
-- technical standards,
-- consumer electronics equipment compatibility, and
-- emergency alert systems.
The Federal Communications Commission recently ruled that cable customers
must be allowed to purchase set-top terminals from third parties and established
a multi-year phase-in during which security functions, which would remain in the
operator's exclusive control, would be unbundled from basic converter functions,
which could then be satisfied by third party vendors. The first phase
implementation date was July 1, 2000. Compliance was technically and
operationally difficult in some locations, so we and several other cable
operators filed a request at the Federal Communications Commission that the
requirement be waived in those systems. The request resulted in a temporary
deferral of the compliance deadline for those systems.
The Federal Communications Commission recently initiated an inquiry to
determine whether the cable industry's future provision of interactive services
should be subject to regulations ensuring equal access and competition among
service vendors. The inquiry, which grew out of the Commission's review of the
AOL-Time Warner merger, is in its earliest stages, but is yet another expression
of regulatory concern regarding control over cable capacity.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The U.S.
copyright office recently adopted an industry agreement providing for a modest
increase in the copyright royalty rates. The possible modification or
elimination of this compulsory copyright license is the subject of continuing
legislative review and could adversely affect our ability to obtain desired
broadcast programming. We cannot predict the outcome of this legislative
activity. Copyright clearances for nonbroadcast programming services are
arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. A prior voluntarily negotiated
agreement with Broadcast Music has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for American Society of Composers music based on the
previously negotiated Broadcast Music rate. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of
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any license fees we may be required to pay for past and future use of
association-controlled music, we do not believe such license fees will be
significant to our business and operations.
STATE AND LOCAL REGULATION. Cable systems generally are operated pursuant
to nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee fails to
comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states,
including Connecticut, 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. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming. Certain
states are considering the imposition of new broadly applied telecommunications
taxes.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents
granted to cable operators that have provided satisfactory services and have
complied with the terms of their franchise.
Under the 1996 Telecom Act, states and local franchising authorities are
prohibited from limiting, restricting, or conditioning the provision of
competitive telecommunications services, except for certain "competitively
neutral" requirements and as necessary to manage the public rights-of-way. This
law should facilitate entry into competitive telecommunications services,
although certain jurisdictions still may attempt to impose rigorous entry
requirements. In addition, local franchising authorities may not require a cable
operator to provide any telecommunications service or facilities, other than
institutional networks under certain circumstances, as a condition of an initial
franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom
Act also provides that franchising fees are limited to an operator's
cable-related revenues and do not apply to revenues that a cable operator
derives from providing new telecommunications services.
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MANAGEMENT
DIRECTORS
The persons listed below are directors of Charter Communications, Inc. All
of our directors are elected annually.
DIRECTORS POSITION(S)
--------- -----------
Paul G. Allen........................ Chairman of the Board of Directors
Jerald L. Kent....................... Director
Marc B. Nathanson.................... Director
Ronald L. Nelson..................... Director
Nancy B. Peretsman................... Director
William D. Savoy..................... Director
Howard L. Wood....................... Director
The following sets forth certain biographical information with respect to
the directors listed above.
PAUL G. ALLEN, 48, has been Chairman of the Board of Directors of Charter
Communications, Inc. since July 1999, and chairman of the board of directors of
Charter Investment, Inc. (a predecessor to, and currently an affiliate of,
Charter Communications, Inc.) since December 1998. Mr. Allen, a co-founder of
Microsoft Corporation, has been a private investor for more than five years,
with interests in over 140 companies, many of which contribute to the Wired
World vision that we share. 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, a multi-media entertainment
company, High Speed Access Corp., Wink Communications, Inc. and Oxygen Media,
LLC. 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 Charter Communications, Inc. 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 Board of Directors of
Charter Communications, Inc. See "Certain Relationships and Related
Transactions -- Employment and Consulting Arrangements."
MARC B. NATHANSON, 55, has been a director of Charter Communications, Inc.
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 Charter Communications, Inc. See "Certain Relationships and Related
Transactions -- Employment and Consulting Arrangements."
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RONALD L. NELSON, 48, has been a director of Charter Communications, Inc.
since November 1999. Mr. Nelson is a founding member of DreamWorks LLC, where he
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.
NANCY B. PERETSMAN, 47, has been a director of Charter Communications, Inc.
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 Charter Communications, Inc.
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, 62, has been a director of Charter Communications, Inc.
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 Charter Communications, Inc. 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.
COMMITTEES OF THE BOARD OF CHARTER COMMUNICATIONS, INC.
The Audit Committee oversees Charter Communications, Inc.'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.
The Compensation Committee was formed in February 2000 for the purpose of
reviewing and approving compensation and benefits programs, and approving
compensation for senior management of Charter Communications, Inc. and its
affiliates and subsidiaries. The members of the Compensation Committee are Paul
G. Allen, Marc B. Nathanson, William D. Savoy and Howard L. Wood.
The Option Plan Committee was formed in June 2000 for the purpose of
administering the 1999 Option Plan. The Option Plan Committee was also appointed
by the Board of Directors of Charter Communications, Inc. to administer the 2001
Stock Incentive Plan and Jerald L. Kent acts as a special committee for the 2001
Stock Incentive Plan to approve grants to eligible individuals below the Senior
Vice President level. The Option Plan Committee consists of directors Nancy B.
Peretsman and Ronald L. Nelson.
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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 consists of directors Paul
G. Allen, Jerald L. Kent and William D. Savoy.
DIRECTOR COMPENSATION
Mr. Kent, the only director who is also an employee of Charter
Communications, Inc., 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 of Charter Communications,
Inc. All non-employee directors of Charter Communications, Inc. received an
annual grant of 10,000 vested options in February 2001, subject to approval of
Charter Communications, Inc.'s 2001 Stock Incentive Plan by its shareholders at
its annual meeting in June 2001. All directors of Charter Communications, Inc.
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 Charter Communications,
Inc. Mr. Wood is a party to a consulting agreement with Charter Communications,
Inc. and Mr. Nathanson is a party to a letter agreement with Charter
Communications, Inc. These agreements are summarized in "Certain Relationships
and Related Transactions -- Employment and Consulting Arrangements."
EXECUTIVE OFFICERS
The following persons are executive officers of Charter Communications,
Inc.:
EXECUTIVE OFFICERS POSITION
------------------ --------
Jerald L. Kent.................... President and Chief Executive Officer
David C. Andersen................. Senior Vice President -- Communications
David G. Barford.................. Executive Vice President and Chief Operating Officer
Mary Pat Blake.................... Senior Vice President -- Marketing and Charter Media
Eric A. Freesmeier................ Senior Vice President -- Administration
Thomas R. Jokerst................. Senior Vice President -- Advanced Technology Development
Kent D. Kalkwarf.................. Executive Vice President and Chief Financial Officer
Ralph G. Kelly.................... Senior Vice President -- Treasurer
David L. McCall................... Senior Vice President of Operations -- Eastern Division
Majid R. Mir...................... Senior Vice President -- Telephony and Advanced Services
John C. Pietri.................... Senior Vice President -- Engineering
Michael E. Riddle................. Senior Vice President and Chief Information Officer
Steven A. Schumm.................. Executive Vice President, Assistant to the President
Curtis S. Shaw.................... Senior Vice President, General Counsel and Secretary
Stephen E. Silva.................. Senior Vice President -- Corporate Development and
Technology
James (Trey) H. Smith, III........ Senior Vice President of Operations -- Western Division
Information regarding our executive officers is set forth below.
DAVID C. ANDERSEN, 52, Senior Vice President -- Communications. Prior to
joining Charter Communications, Inc. 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, Inc., most recently as vice
president of Public Affairs. Mr. Andersen serves on the board of
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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 between 1984 and 1992. 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. Mr.
Kelly is a certified public accountant.
JERALD L. KENT, 44, President, Chief Executive Officer and Director. Mr.
Kent has held these positions with Charter Communications, Inc. 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.
MAJID R. MIR, 50, Senior Vice President -- Telephony and Advanced
Services. From 1999 until joining Charter Communications, Inc. in April 2001,
Mr. Mir was employed by Genuity, Inc. where he was vice
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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 Charter Communications, Inc. 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 of
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In February 2000, the Board of Directors of Charter Communications, Inc.
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 Board of
Directors of Charter Communications, Inc. appointed Nancy B. Peretsman and
Ronald L. Nelson to serve as a separate committee to administer the Charter
Communications 1999 Option Plan.
During 2000 and through the date hereof, no member of the Compensation
Committee or the Option Plan Committee was an officer or employee of Charter
Communications, Inc. or any of its subsidiaries. Mr. Wood served as an officer
of Charter Communications, Inc. for several months in 1999, and served as a
consultant to Charter Communications, Inc. in 2000. Mr. Nathanson served as an
officer of certain of Charter Communications, Inc.'s subsidiaries prior to their
acquisition by Charter Communications, Inc. Transactions between Charter
Communications, Inc. and certain members of the Compensation Committee are more
fully described in "Certain Relationships and Related Transactions."
None of the executive officers of Charter Communications, Inc. or its
affiliates serve on the compensation committee of any other company that has an
executive officer currently serving on the Board of Directors of
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Charter Communications, Inc. or any of its affiliates, the Compensation
Committee or the Option Plan Committee.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation paid
for services rendered in 2000 to executive officers of Charter Communications,
Inc. 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
Charter Communications, Inc. Pursuant to a mutual services agreement between
Charter Communications, Inc. and Charter Investment, each of those entities
leases the necessary personnel and provides services to each other, including
the knowledge and expertise of their respective officers. See "Certain
Relationships and Related Transactions."
Summary Compensation Table
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
YEAR ----------------------------------------- SECURITIES
ENDED OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND 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 1999 235,000 80,000 -- 200,000 7,000
and Chief Operating 1998 220,000 225,000(7) -- -- 8,395,235(8)
Officer
Kent D. Kalkwarf.......... 2000 225,000 250,500 -- 40,000 5,250
Executive Vice President 1999 180,000 80,000 -- 200,000 2,586
and Chief Financial 1998 135,000 55,000 -- -- 7,768,091(8)
Officer
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 aggregate 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 Charter Communications, Inc.'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 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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THE CHARTER COMMUNICATIONS 1999 OPTION PLAN
Charter Holdings adopted an option plan on February 9, 1999, which was
assumed by Charter Communications Holding Company in May 1999. This plan
provides for the grant of options to purchase up to 25,009,798 membership units
in Charter Communications Holding Company to current and prospective employees
and consultants of Charter Communications Holding Company and its affiliates and
current and prospective non-employee directors of Charter Communications, Inc.
Membership units received upon exercise of any options are immediately exchanged
for shares of Charter Communications, Inc. Class A common stock on a one-for-one
basis.
As of May 10, 2001, a total of 20,599,026 options to purchase membership
units in Charter Communications Holding Company were outstanding under the plan.
One-fourth of the options vest on the 15-month anniversary of the date of grant
and the remaining vest 1/45 on each month anniversary following the 15-month
anniversary of the date of grant. The options expire after ten years from the
date of grant. The plan administrator has the discretion to accelerate the
vesting of any options.
Any shares not subject to outstanding options and any shares covered by
options that are terminated under the 1999 Option Plan will be transferred to
the Charter Communications, Inc. 2001 Stock Incentive Plan. As a result, there
are no options available for future grant under the 1999 Option Plan.
2000 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE
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 Charter Communications, Inc.'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
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 $10,460,527 $10,460,530
Steven A. Schumm............ -- -- 300,027 482,654 891,080 1,433,482
David G. Barford............ -- -- 76,666 163,334 229,869 506,302
Kent D. Kalkwarf............ -- -- 76,666 163,334 229,869 506,302
David L. McCall............. -- -- 76,666 148,334 227,698 453,802
---------------
(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 Charter Communications 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 Charter
Communications, Inc.'s Class A common stock.
(2) Based on a per share market value of $22.97 for Charter Communications,
Inc.'s Class A common stock.
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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 Charter Communications 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 Charter Communications 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 Charter
Communications, Inc.'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.
THE CHARTER COMMUNICATIONS, INC. 2001 STOCK INCENTIVE PLAN
On February 12, 2001, the Board of Directors unanimously adopted the
Charter Communications, Inc. 2001 Stock Incentive Plan, subject to approval by
our shareholders which is expected to occur at the annual meeting of
shareholders in June 2001. Under this plan, up to 59,964,013 shares of our Class
A common stock 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 purpose of the 2001 Incentive Plan is to strengthen Charter
Communications, Inc. by providing an incentive to the employees (including
future employees who have received a formal offer of employment), officers,
consultants and directors of Charter Communications, Inc., as well as its
subsidiaries and affiliates, and thereby encouraging them to devote their
abilities and industry to the success of Charter Communications, Inc.'s business
enterprise. It is intended that this purpose be achieved by extending to such
persons an added long-term incentive of 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).
Upon approval by our shareholders, the 2001 Incentive Plan will be
administered by at least one committee of the Board of Directors, which will
consist of one or more directors and could consist of the entire Board. In
February 2001, the Board of Directors appointed an Option Plan Committee to
authorize grants and awards under the 2001 Incentive Plan to any eligible
individuals and Jerald L. Kent to authorize grants to eligible individuals below
the Senior Vice President level. For purposes of this section, "committee" shall
mean either the Option Plan Committee or Jerald L. Kent acting in his capacity
as a special committee.
The 2001 Incentive Plan will terminate as of the tenth anniversary of
February 12, 2001, and no option or award can 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 cannot impair or
adversely alter any options or awards theretofore granted under the plan, except
with the consent of the optionee or grantee.
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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 3,889,501. 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.
STOCK OPTIONS
If an optionee's employment with or service to Charter Communications, Inc.
or its affiliates is terminated other than for cause, death, disability or
retirement, 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, disability or retirement, the options can be exercised 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.
If a grantee's employment or service to Charter Communications, Inc. or its
affiliates is terminated other than for cause, death, disability or retirement,
the grantee has the right to exercise any vested SARs within 60 days of the
termination of employment. After this 60-day period, all vested and unvested
SARs held by the grantee are automatically canceled. If a grantee's employment
is terminated for cause, any unexercised SARs are automatically canceled. If a
grantee's employment is terminated because of death, disability or retirement,
the SARs may be exercised until the second anniversary of the event, with any
SARs not so exercised being automatically canceled.
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 of Charter Communications,
Inc.'s Class A common stock. 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 awards. DERs may be
settled in cash or shares or a combination thereof, in a single or multiple
installments, as the committee determines.
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
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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.
Payment of deferred dividends in respect of shares of restricted stock, together
with any interest accrued thereon, shall be made upon the lapsing of
restrictions imposed on such shares. Any dividends deferred (together with any
interest accrued thereon) in respect of any shares of restricted stock shall be
forfeited upon the forfeiture of such shares.
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 Charter Communications, Inc., (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
Charter Communications, Inc. 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.
OTHER STOCK-BASED AWARDS; PHANTOM STOCK
The committee may 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.
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 of the
outstanding performance units will vest and the restrictions on all of the
outstanding performance shares will lapse as if all performance objectives had
been satisfied at the maximum level. Upon a change of control, the committee can
shorten the exercise period, have the survivor or successor entity assume the
options with appropriate adjustments, 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 Charter Communications, Inc.; (b) if at least
one-half of our Board of Directors ceases to be made up of those individuals who
are directors as of February 12, 2001;
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or (c) upon the consummation of a merger, consolidation or reorganization with
or into Charter Communications, Inc. in which securities of Charter
Communications, Inc. are issued, except for certain transactions, including,
among other things, a merger where our shareholders own more than 50% of the
surviving corporation or constitute a majority of the board of the surviving
corporation.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS. Charter
Communications, Inc.'s restated certificate of incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. The
Delaware General Corporation Law provides that a corporation may eliminate or
limit the personal liability of a director for monetary damages for breach of
fiduciary duty as a director, except for liability for:
(1) any breach of the director's duty of loyalty to the corporation
and its shareholders;
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) unlawful payments of dividends or unlawful stock purchases or
redemptions; or
(4) any transaction from which the director derived an improper
personal benefit.
Charter Communications, Inc.'s bylaws provide that we will indemnify all
persons whom we may indemnify pursuant thereto to the fullest extent permitted
by law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Charter
Communications, Inc. pursuant to the foregoing provisions, we have been informed
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Class A common stock as of May 10, 2001 by:
-- each of our directors;
-- each of our executive officers named in the Summary Compensation
Table;
-- all directors and executive officers of Charter Communications, Inc.
as a group; and
-- each person known by us to own beneficially 5% or more of the
outstanding Charter Communications, Inc. Class A common stock.
With respect to the percentage of voting power set forth in the following
table:
-- each holder of our Class A common stock is entitled to one vote per
share; and
-- each holder of our 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 ten votes for each share of Class B common
stock held by him or his affiliates and ten 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 % OF
CLASS A SHARES VESTED UPON EXCHANGE % OF VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OPTIONS(2) OR CONVERSION(3) EQUITY(4) POWER(5)
------------------------------------ -------------- ------------- ---------------- --------- --------
Paul G. Allen(6)................. 9,334,083 10,000 324,300,479(7) 59.8% 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 4,549,332 1.92% *
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................. -- 50,000 756,747(11) * *
Steven A. Schumm(12)............. 3,700 391,340 * *
David G. Barford................. 2,500 110,666 * *
Kent D. Kalkwarf................. 9,000 110,666 * *
David L. McCall.................. 4,700 106,666 * *
All current directors and executive
officers as a group (22
persons)....................... 19,474,093 6,351,832 324,300,479 62.03% 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 Charter Communications, Inc. Class A common stock
issuable upon exercise of options vested on or before July 9, 2001 under
the 1999 Option Plan. Furthermore, because the controlling shareholder of
Charter Communications, Inc. has advised Charter Communications, Inc. 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 Charter Communications, Inc. shareholders' approval of the plan at the
upcoming annual meeting.
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(3) Beneficial ownership is determined in accordance with Rule 13d-3. The
beneficial owners of our 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 our 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:
-- 233,773,798 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 July 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 vested 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 Charter Communications, Inc.'s 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 South, 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 he 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 756,747 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 July 9, 2001.
(12) Includes 3,700 shares for which Mr. Schumm has shared investment and voting
power.
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SHARES ELIGIBLE FOR FUTURE SALE
As of May 10, 2001, we had 233,773,798 shares of Class A common stock
issued and outstanding. As of May 10, 2001, the following shares of Class A
common stock are or will be issuable:
- 324,300,479 shares will be issuable upon conversion of Class B common
stock issuable upon exchange of Charter Communications Holding Company
membership units held by Vulcan Cable III Inc. and Charter Investment.
These membership units are exchangeable for shares of Class B common
stock on a one-for-one basis. Shares of Class B common stock are
convertible into shares of Class A common stock on a one-for-one basis;
- 50,000 shares will be issuable upon conversion of outstanding Class B
common stock on a one-for-one basis;
- 39,011,744 shares will be issuable upon the exchange of Charter
Communications Holding Company membership units and CC VIII, LLC
membership units issued to specified sellers in the Bresnan acquisition,
including 93,751 to be issued in a post-closing adjustment. These units
are exchangeable for shares of Class A common stock;
- 20,599,026 shares will be issuable upon the exchange of membership units
in Charter Communications Holding Company that are received upon the
exercise of options granted under the Charter Communications 1999 Option
Plan and under agreements with Mr. Kent, our Chief Executive Officer.
Upon issuance, these membership units will be immediately exchanged for
shares of Class A common stock, without any further action by the
optionholder. As of May 10, 2001, 5,254,083 of these options have vested;
and
- 8,060,630 shares will be issuable upon the exercise of options granted
under the Charter Communications, Inc. 2001 Stock Incentive Plan, subject
to shareholder approval of the plan, which we expect to occur on June 6,
2001 at the annual stockholders' meeting.
- All or a portion of 52,524 shares of Class A common stock, constituting
10% of the shares issuable as payment of a portion of the merger
consideration in the Chat TV transaction, will be issued on September 13,
2001 in the event that no indemnity claims have been made under the Chat
TV acquisition agreement. Additional Class A common stock having an
aggregate value of $1,221,493.20 may be issued eighteen months after
September 13, 2000 and again thirty-six months after September 13, 2000
if certain performance targets are satisfied. The number of shares will
be based on the market price at that time.
- 34,786,650 shares will be issuable upon the conversion of $750 million
aggregate principal amount of 5.75% convertible senior notes at a
conversion rate of 46.3822 shares of Class A common stock per $1,000
principal amount of notes.
In addition, of the total number of shares of Class A common stock issuable
as described above, 30,610,612 shares may be sold in compliance with Rule 144
under the Securities Act of 1933, unless registered under the Securities Act of
1933 pursuant to demand or piggyback registration rights. Substantially all of
the shares of Class A common stock issuable upon exchange of Charter
Communications Holding Company and CC VIII, LLC membership units and upon
conversion of shares of our Class B common stock have demand and piggyback
registration rights attached to them.
The sale of a substantial number of shares of Class A common stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Class A common stock. In addition, any such sale or perception
could make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that we deem appropriate.
A registration statement on Form S-8 covering the Class A common stock
issuable pursuant to the exercise of options under the Charter Communications
1999 Option Plan was filed with the Securities and Exchange Commission in May
2000. A registration statement on Form S-8 covering the Class A common stock
issuable pursuant to the 2001 Incentive Plan was filed in May 2001. The shares
of Class A common stock covered by the Form S-8 registration statements
generally may be resold in the public market without restriction or limitation,
except in the case of our affiliates who generally may only resell such shares
in accordance with the provisions of Rule 144 of the Securities Act of 1933.
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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. Charter Communications, Inc. has entered into
management arrangements with Charter Communications Holding Company and certain
of its subsidiaries. Under these agreements, Charter Communications, Inc.
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 Charter Communications, Inc. 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 Charter Communications, Inc. 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 Charter
Communications, Inc. is obligated to pay under the mutual services agreement
described below. Payment of management fees by Charter Communications, Inc.'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, Charter Communications, Inc. 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. During 2000, pursuant to a mutual services
agreement between Charter Communications, Inc. and Charter Investment, Inc.,
Charter Investment leased the necessary personnel and provided services to
Charter Communications, Inc. to manage Charter Communications Holding Company
and its subsidiaries, including us. Effective January 1, 2001, Charter
Investment personnel became employees of Charter Communications Holding Company
and the mutual services agreement was amended to add Charter Communications
Holding Company as a party and provide that both Charter Investment and Charter
Communications Holding Company will provide services to Charter Communications,
Inc. on a cost reimbursement basis. Charter Communications, Inc. 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
Charter Communications, Inc. 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, Charter Communications, Inc. paid $50,285,700
to Charter Investment for services rendered pursuant to the mutual services
agreement. All such amounts are reimbursable to Charter Communications, Inc.
pursuant to a management arrangements with subsidiaries. See "--Management
Arrangements."
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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.
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, Charter Communications, Inc.'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, Inc. and
Charter Communications Holding 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); an investment in @Security Broadband Corp., a
company developing broadband security applications; and incidental businesses
engaged in as of the closing of Charter Communications, Inc.'s initial public
offering in November 1999. This restriction will remain in effect until all of
the shares of Charter Communications, Inc.'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 Charter Communications, Inc. 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 Charter
Communications, Inc. 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 Charter Communications, Inc. 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 Charter Communications, Inc., 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 Charter Communications,
Inc., including Mr. Allen, is generally required to present to Charter
Communications, Inc., any opportunity he or she may have to acquire any cable
transmission business or any company whose principal business is the ownership,
operation or
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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 Charter Communications, Inc. 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 Charter Communications, Inc. 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.
EMPLOYMENT AND CONSULTING ARRANGEMENTS
Jerald L. Kent is employed by Charter Communications, Inc. 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 Charter Communications, Inc., with responsibility for the
nationwide general management, administration and operation of all present and
future business of Charter Communications, Inc. 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 Charter Communications, Inc.'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. Charter Communications, Inc. also
agreed to cause Mr. Kent to be elected to Charter Communications, Inc.'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 Charter Communications, Inc. Mr. Kent will be reimbursed by
Charter Communications, Inc. 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 Charter
Communications, Inc.'s Class A common stock on a one-for-one basis.
The agreement further provides that Charter Communications, Inc. 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 Charter Communications, Inc. 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 Charter Communications, Inc.
without cause:
-- Charter Communications, Inc. 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
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-- any unvested options held by Mr. Kent shall immediately vest.
Pursuant to an automatically renewing consulting agreement between Charter
Communications, Inc. and Howard L. Wood, Mr. Wood provides consulting services
to Charter Communications, Inc. 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. Charter Communications, Inc. 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 Charter Communications, Inc. for a three-year term. Under this
agreement, Mr. Nathanson serves as Vice-Chairman and as a director of Charter
Communications, Inc. During the term of this agreement, Mr. Nathanson receives a
benefit equal to $193,197 per year, which amount is being paid by Charter
Communications, Inc. to a company controlled by Mr. Nathanson. In addition, Mr.
Nathanson is entitled to the rights and benefits provided to other directors of
Charter Communications, Inc. Charter Communications, Inc. 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.
Charter Investment issued 1999 "stay bonuses" and Charter Communications,
Inc. 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 300,000
James H. (Trey) Smith, III............................. 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 Charter
Communications, Inc. and its subsidiaries and affiliates for business travel. An
hourly time share rate is paid for such usage. Mr. Wood's affiliated company
reimburses Charter Communications, Inc. for the full annual cost of two
individuals qualified to operate the plane and who are otherwise available to
Charter Communications, Inc. in connection
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with its own flight operations, which amount was $123,843 in 2000. Charter
Communications, Inc. paid Mr. Wood's affiliate $2,200 in 2000 for time share
usage of the airplane. In addition, Mr. Wood has also used Charter
Communications, Inc.'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 leased 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. In April 2001,
Charter Communications, Inc. terminated the Pasadena office lease in exchange
for a payment of $638,622.
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. 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.
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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. The revenues we earned from High
Speed Access in 2000 were approximately $7.8 million.
Additionally, Charter Communications Holding Company, as the assignee of
Vulcan Ventures, now holds warrants that were amended and restated on May 12,
2000, giving Charter Communications, Inc. 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 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, Charter
Communications, Inc. has earned 1,932,931 warrants under the agreements
described above.
On May 12, 2000, Charter Communications, Inc. entered into a separate
agreement with High Speed Access, which was assigned by Charter Communications,
Inc. to Charter Communications Holding Company on August 1, 2000. Under the
agreement, homes passed by our cable television systems will be committed 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.
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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. Each share of Series D preferred stock may be converted
into that number of shares of common stock calculated by dividing the
liquidation price by the conversion price per share, which is $5.01875, subject
to adjustments for certain events. Each share of Series D preferred stock is
therefore convertible into 199.25 shares of High Speed Access common stock, so
long as no adjustments have occurred. 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 Charter Communications, Inc.; Stephen
E. Silva, Senior Vice President - Corporate Development and Technology of
Charter Communications Holding Company and Charter Communications, Inc.; and Mr.
Savoy, a member of the boards of directors of Charter Communications Holding
Company and Charter Communications, Inc., 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. Charter Communications, Inc. has an affiliation agreement
with WorldGate for an initial term which expires in November 2002. 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, Charter Communications, Inc. agreed to use its 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
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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. Charter Communications, Inc. 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.
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.
Pursuant to the expired agreement, Wink granted us the non-exclusive license to
use their software to deliver the enhanced broadcasting to all of our cable
systems. We continue to 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 97.3%. The remaining 2.7% of TechTV is owned by its management and
employees. Mr. Allen is a director of TechTV and Mr. Savoy is vice president of
TechTV.
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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 $100 million in 1999 in Oxygen Media. Vulcan Ventures
has made equity investments in Oxygen Media of $100 million in 2000 and $50
million 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 Charter Communications, Inc. and Charter
Communications Holding Company, serves on the board of directors of Oxygen
Media. Mr. Allen owns an approximate 26.6% 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 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, Charter Communications, Inc. finalized a carriage
agreement with Digeo, which will function as its television-based Internet
portal for an initial six-year period. In connection with the execution of the
carriage agreement on March 5, 2001, Charter Communications Ventures, LLC
(through Digeo Broadband Holdings, LLC ("Digeo Holdings")) also received an
equity interest in Digeo funded by Vulcan Ventures Incorporated'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 Charter Communications,
Inc.'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
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systems. Charter Communications, Inc.'s certificate of incorporation and Charter
Communications Holding Company's limited liability company agreement provide
that the businesses of RCN are deemed not to be "cable transmission businesses."
Mr. Savoy, a director of Charter Communications, Inc., 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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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description of the indebtedness is qualified in its entirety
by reference to the relevant credit facilities, indentures and related documents
governing the debt.
EXISTING CREDIT FACILITIES
CHARTER OPERATING CREDIT FACILITIES. On March 18, 1999, Charter Operating
entered into senior secured credit facilities arranged by Chase Securities Inc.,
NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. Obligations
under the Charter Operating credit facilities are guaranteed by Charter
Operating's parent, Charter Holdings, and by Charter Operating's subsidiaries.
The obligations under the Charter Operating credit facilities are secured by
pledges by Charter Operating of intercompany obligations and the ownership
interests of Charter Operating and its subsidiaries, but are not secured by the
other assets of Charter Operating or its subsidiaries. The obligations under the
Charter Operating credit facilities are also secured by pledges of intercompany
obligations and the ownership interests of Charter Holdings in Charter
Operating, but are not secured by the other assets of Charter Holdings or
Charter Operating.
The Charter Operating credit facilities provide for borrowings of up to
$4.7 billion consisting of:
-- an eight and one-half year reducing revolving loan in the amount of
$1.25 billion;
-- an eight and one-half year Tranche A term loan in the amount of $1.0
billion; and
-- a nine-year Tranche B term loan in the amount of $2.45 billion.
The Charter Operating credit facilities provide for the amortization of the
principal amount of the Tranche A term loan facility and the reduction of the
revolving loan facility beginning on June 30, 2002 with respect to the Tranche A
term loan and on March 31, 2004 with respect to the revolving credit facility,
with a final maturity date, in each case, of September 18, 2007. The
amortization of the principal amount of the Tranche B term loan facility is
substantially "back-ended," with more than 90% of the principal balance due in
the year of maturity. The final maturity date of the Tranche B term loan
facility is March 18, 2008. The Charter Operating credit facilities also provide
for an incremental term facility of up to $1.0 billion conditioned upon receipt
of additional new commitments from lenders. Up to 50% of the borrowings under it
may be repaid on terms substantially similar to that of the Tranche A term loan
and the remaining portion on terms substantially similar to that of the Tranche
B term loan. In March 2000, $600.0 million of the incremental term facility was
drawn down, thereby increasing the Tranche B term loan. The maturity date for
this term loan is September 18, 2008.
The Charter Operating credit facilities also contain provisions requiring
mandatory loan prepayments under some circumstances, such as when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of Charter Operating. In the event that any
existing March 1999 8.250% Charter Holdings notes remain outstanding on the date
which is six months prior to the scheduled final maturity, the term loans under
the Charter Operating credit facility will mature and the revolving credit
facility will terminate on such date.
The Charter Operating credit facilities provide Charter Operating with two
interest rate options, to which a margin is added: a base rate option, generally
the "prime rate" of interest; and an interest rate option based on the interbank
eurodollar rate. Interest rate margins for the Charter Operating credit
facilities depend upon performance measured by a leverage ratio, which is the
ratio of indebtedness to annualized operating cash flow. This leverage ratio is
based on the debt of Charter Operating and its subsidiaries, exclusive of
outstanding notes and other debt for money borrowed, including guarantees by
Charter Operating and by Charter Holdings. The interest rate margins for the
Charter Operating credit facilities are as follows:
-- with respect to the revolving loan and the Tranche A term loan, the
margin ranges from 1.5% to 2.25% for eurodollar loans and from 0.5%
to 1.25% for base rate loans; and
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-- with respect to the Tranche B term loan, the margin ranges from 2.25%
to 2.75% for eurodollar loans and from 1.25% to 1.75% for base rate
loans.
The Charter Operating credit facilities contain representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default include a
cross-default provision that is triggered by the failure of Charter Operating,
Charter Holdings or Charter Operating's subsidiaries to make payment on debt
with an outstanding total principal amount exceeding $50.0 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on a quarterly basis, measure performance against standards set for
leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
The Charter Operating credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
debt, in the event that either:
-- Mr. Allen, including his estate, heirs and other related entities,
fails to maintain a 25% direct or indirect voting and economic
interest in Charter Operating; or
-- a change of control occurs under the indentures governing the March
1999 Charter Holdings notes or the January 2000 Charter Holdings
notes.
The various negative covenants place limitations on the ability of Charter
Holdings, Charter Operating and their subsidiaries to, among other things:
-- incur debt;
-- pay dividends or make other distributions;
-- incur liens;
-- make acquisitions;
-- make investments or asset sales; or
-- enter into transactions with affiliates.
Distributions under the Charter Operating credit facilities to Charter
Holdings to pay interest on the March 1999 Charter Holdings notes are generally
permitted. Distributions under the Charter Operating credit facilities to
Charter Holdings to pay interest on the January 2000 Charter Holdings notes, the
January 2001 Charter Holdings notes and the May 2001 Charter Holdings notes are
generally permitted, provided Charter Operating's cash flow for the four
complete quarters preceding the distribution exceeds 1.75 times its cash
interest expense, including the amount of such distribution. In each case, such
distributions to Charter Holdings are not permitted during the existence of a
default under the Charter Operating credit facilities.
As of March 31, 2001, approximately $3.8 billion was outstanding and
approximately $885.0 million was available for borrowing under the Charter
Operating credit facilities. As of March 31, 2001, pro forma for the sale of the
May 2001 Charter Holdings notes and the application of the net proceeds
therefrom and the closing of the pending AT&T transactions, outstanding
borrowings would have been approximately $3.5 billion and the unused
availability would have been approximately $1.2 billion. See "Use of Proceeds."
CC VII (FALCON) CREDIT FACILITIES. In connection with the Falcon
acquisition, the required percentage of lenders under the senior secured credit
facilities of Falcon Cable Communications agreed to amend and restate the Falcon
credit agreement, which amendment and restatement was effective as of November
12, 1999, the date that Charter Communications Holding Company closed the Falcon
acquisition. The obligations under the CC VII (Falcon) credit facilities are
guaranteed by the direct parent of Falcon Cable Communications, Charter
Communications VII, LLC, and by the subsidiaries of Falcon Cable Communications.
The obligations under the CC VII (Falcon) credit facilities are secured by
pledges of the ownership interests and
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intercompany obligations of Falcon Cable Communications and its subsidiaries,
but are not secured by other assets of Falcon Cable Communications or its
subsidiaries.
The CC VII (Falcon) credit facilities have maximum borrowing availability
of $1.25 billion consisting of the following:
-- a revolving facility in the amount of approximately $646.0 million;
-- a term loan B in the amount of approximately $196.5 million;
-- a term loan C in the amount of approximately $294.8 million; and
-- a supplemental revolving facility of $110.0 million.
In addition to the above, the CC VII (Falcon) credit facilities provide
for, at the option of the lenders, supplemental credit facilities for a total of
$700.0 million, less the $110.0 million outstanding under the supplemental
revolving facility above. These supplemental credit facilities are available,
subject to the borrower's ability to obtain additional commitments from the
lenders. The terms of such additional borrowings are subject to certain
restrictions that may be no more materially restrictive than the provisions of
the CC VII (Falcon) credit facilities and will be determined at the time of
borrowing.
The revolving facility and the supplemental revolving facility amortize
beginning in 2001 and 2003, respectively, and ending on December 29, 2006 and
December 31, 2007, respectively. The term loan B and term loan C facilities
amortize beginning in 1999 and ending on June 29, 2007 and December 31, 2007,
respectively.
The CC VII (Falcon) credit facilities also contain provisions requiring
mandatory loan prepayments under certain circumstances, such as when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of Falcon Cable Communications.
The CC VII (Falcon) credit facilities provide Falcon Cable Communications
with two interest rate options, to which a margin is added: a base rate option,
generally the "prime rate" of interest; and an interest rate option based on the
interbank eurodollar rate. Interest rates for these credit facilities, as well
as a fee payable on unborrowed amounts available thereunder, depend upon
performance measured by a "leverage ratio" which is the ratio of indebtedness to
annualized operating cash flow. This leverage ratio is based on the debt of
Falcon Cable Communications and its subsidiaries, exclusive of the Falcon
debentures described below. The interest rate margins for the CC VII (Falcon)
credit facilities are as follows:
-- with respect to the revolving loan facility, the margin ranges from
1.0% to 2.0% for eurodollar loans and from 0.0% to 1.0% for base rate
loans;
-- with respect to Term Loan B, the margin ranges from 1.75% to 2.25%
for eurodollar loans and from 0.75% to 1.25% for base rate loans; and
-- with respect to Term Loan C, the margin ranges from 2.0% to 2.5% for
eurodollar loans and from 1.0% to 1.5% for base rate loans.
The CC VII (Falcon) credit facilities contain representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default for the CC VII
(Falcon) credit facilities include a cross-default provision that is triggered
by, among other things, the failure to make payment relating to specified
outstanding debt of Falcon Cable Communications, its direct and indirect parent
companies, CC VII Holdings, LLC and Charter Communications VII, or specified
subsidiary guarantors in a total amount of principal and accrued interest
exceeding $10.0 million, the acceleration of debt of this amount prior to its
maturity or the failure to comply with specified covenants. The financial
covenants, which are generally tested on a quarterly basis, measure performance
against standards set for leverage, debt service coverage, and operating cash
flow coverage of cash interest expense.
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The CC VII (Falcon) credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
debt, in the event that either:
-- Mr. Allen, including his estate, heirs and other related entities,
fails to maintain a 25% direct or indirect voting and economic
interest in Falcon Cable Communications; or
-- a change of control occurs under the terms of other specified debt of
Falcon.
The various negative covenants place limitations on the ability of Falcon
Cable Communications and its subsidiaries to, among other things:
-- incur debt;
-- pay dividends or make other distributions;
-- incur liens;
-- make acquisitions;
-- make investments or asset sales; or
-- enter into transactions with affiliates.
Distributions under the CC VII (Falcon) credit facilities to Charter
Holdings to pay interest on the March 1999 Charter Holdings notes, the January
2000 Charter Holdings notes, the January 2001 Charter Holdings notes and the May
2001 Charter Holdings notes are generally permitted, provided Falcon Cable
Communications' cash flow for the most recent fiscal quarter preceding the
distribution exceeds 1.75 times its cash interest expense, including the amount
of such distribution. Distributions to Charter Holdings are also permitted if
Falcon Cable Communications meets specified financial ratios. In each case, such
distributions to Charter Holdings are not permitted during the existence of a
default under the CC VII (Falcon) credit facilities.
As of March 31, 2001, there was approximately $699.0 million outstanding
and approximately $547.0 million was available for borrowing under the CC VII
(Falcon) credit facilities. As of March 31, 2001, pro forma for the sale of the
May 2001 Charter Holdings notes and the application of the net proceeds
therefrom and the closing of the pending AT&T transactions, outstanding
borrowings would have been approximately $694.0 million and the unused
availability would have been approximately $552.0 million. See "Use of
Proceeds."
CC VI (FANCH) CREDIT FACILITIES. On November 12, 1999, the Fanch
acquisition was closed and CC VI Operating Company, LLC, the parent company of
the Fanch cable systems, entered into senior secured credit facilities arranged
by Chase Securities Inc. and Banc of America Securities LLC. The obligations
under the CC VI (Fanch) credit facilities are guaranteed by CC VI Operating's
parent, CC VI Holdings, LLC, and by the subsidiaries of CC VI Operating. The
obligations under the CC VI (Fanch) credit facilities are secured by pledges of
the ownership interests and intercompany obligations of CC VI Operating and its
subsidiaries, but are not secured by other assets of CC VI Operating or its
subsidiaries.
The CC VI (Fanch) credit facilities have maximum borrowings of $1.2
billion, consisting of:
-- a revolving facility in the amount of approximately $350.0 million;
-- a term loan A in the amount of approximately $450.0 million; and
-- a term loan B in the amount of approximately $400.0 million.
The revolving facility amortizes beginning in 2004 and ending in May 2008.
The term loan A and term loan B facilities amortize beginning in 2003 and ending
in May 2008 and November 2008, respectively.
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In addition to the foregoing, the CC VI (Fanch) credit facilities provide
for supplemental credit facilities in the maximum amount of $300.0 million.
These supplemental credit facilities may be in the form of an additional term
loan or an aggregate increase in the amount of the term loan A or the revolving
facility. These supplemental credit facilities are available, subject to the
borrower's ability to obtain additional commitments from lenders. The
amortization of the additional term loans under the supplemental credit
facilities prior to May 2009 is limited to 1% per annum of the aggregate
principal amount of such additional term loans.
The CC VI (Fanch) credit facilities also contain provisions requiring
mandatory loan prepayments under specific circumstances, including when
significant amounts of assets are sold and the proceeds are not promptly
reinvested in assets useful in the business of CC VI Operating.
The CC VI (Fanch) credit facilities provide CC VI Operating with the
following two interest rate options, to which a margin is added: a base rate
option, generally the prime rate of interest; and an interest rate option rate
based on the interbank Eurodollar rate. Interest rates for the CC VI (Fanch)
credit facilities, as well as a fee payable on unborrowed amounts available
thereunder, depend upon performance measured by a leverage ratio, which is the
ratio of indebtedness to annualized operating cash flow. This leverage ratio is
based on the debt of CC VI Operating and its subsidiaries. The interest rate
margins for the CC VI (Fanch) credit facilities are as follows:
-- with respect to the revolving loan facility and term loan A, the
margin ranges from 1.0% to 2.25% for eurodollar loans and from 0.0%
to 1.25% for base rate loans; and
-- with respect to term loan B, the margin ranges from 2.50% to 3.00%
for eurodollar loans and from 1.50% to 2.00% for base rate loans.
The CC VI (Fanch) credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the CC VI (Fanch) credit
facilities include a cross-default provision that is triggered by the failure to
make payment on debt of CC VI Operating, CC VI Holdings and the subsidiaries of
CC VI Operating in a total amount of $25.0 million, the acceleration of debt of
this amount prior to its maturity or the failure to comply with specified
covenants. The financial covenants, which are generally tested on a quarterly
basis, measure performance against standards set for leverage, debt service
coverage, and operating cash flow coverage of cash interest expense.
The CC VI (Fanch) credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
debt, in the event of any of the following:
-- Mr. Allen, including his estate, heirs and other related entities,
fails to maintain a 25% direct or indirect voting and economic
interest in CC VI Operating;
-- CC VI Operating is no longer a direct or indirect subsidiary of
Charter Communications Holding Company; or
-- A change of control occurs under specified indebtedness of CC VI
Holdings, CC VI Operating or CC VI Operating's subsidiaries.
Various negative covenants place limitations on the ability of CC VI
Operating and its subsidiaries to, among other things:
-- incur debt;
-- pay dividends or make other distributions;
-- incur liens;
-- make acquisitions;
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-- make investments or asset sales; or
-- enter into transactions with affiliates.
Distributions under the CC VI (Fanch) credit facilities to pay interest on
the March 1999, January 2000, January 2001 and the May 2001 Charter Holdings
notes are generally permitted, provided CC VI Operating's cash flow for the four
complete quarters preceding the distribution exceeds 1.75 times its cash
interest expense, including the amount of such distribution. Distributions to
Charter Holdings will also be permitted if CC VI Operating meets specified
financial ratios. In each case, such distributions to Charter Holdings are not
permitted during the existence of a default under the CC VI (Fanch) credit
facilities.
As of March 31, 2001, there was approximately $901.0 million outstanding
and approximately $299.0 million was available for borrowing under the Fanch
credit facilities. As of March 31, 2001, pro forma for the sale of the May 2001
Charter Holdings notes and the application of the net proceeds therefrom and the
closing of the pending AT&T transactions, outstanding borrowings would have been
approximately $850.0 million and the unused availability would have been
approximately $350.0 million. However, debt covenants limit the amount that can
be borrowed to $122.3 million at March 31, 2001.
BRESNAN CREDIT FACILITIES. In connection with the CC VIII (Bresnan)
acquisition, our subsidiary, CC VIII Operating, LLC (formerly Bresnan
Telecommunications Company, LLC) amended and restated its previous senior
secured credit facilities and increased the available borrowings under the
facilities. 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 $31.3 million to fund a portion of the Bresnan
purchase price.
Upon completion of the Bresnan/Avalon combination, the CC VIII (Bresnan)
credit facilities were again amended and restated. The following description
reflects such amendment and restatement.
The obligations under the CC VIII (Bresnan) credit facilities are
guaranteed by the parent company of the Bresnan borrower, CC VIII Holdings, LLC
(formerly Bresnan Communications Group LLC), and by the subsidiaries of the
Bresnan borrower. The obligations under the CC VIII (Bresnan) credit facilities
are secured by pledges of the ownership interests and intercompany obligations
of the Bresnan borrower and its subsidiaries, but are not secured by other
assets of the Bresnan borrower or its subsidiaries. The CC VIII (Bresnan) credit
facilities are also secured by a pledge of CC VIII Holdings' equity interest in
the Bresnan borrower and intercompany obligations with respect to the Bresnan
borrower.
The CC VIII (Bresnan) credit facilities provide for borrowings of up to
$1.45 billion, consisting of:
-- a reducing revolving loan facility in the amount of $450.0 million;
-- two tranch term loans A facilities in the aggregate amount of $500.0
million; and
-- two tranch term loans B facilities in the amount of $500.0 million.
The CC VIII (Bresnan) credit facilities provide for the amortization of the
principal amount of the term loan A facilities and the reduction of the
revolving loan facility beginning March 31, 2002, with a final maturity date of
June 30, 2007. The amortization of the term loan B facilities is substantially
"back-ended", with more than ninety percent of the principal balance due on the
final maturity date of February 2, 2008. The CC VIII (Bresnan) credit facilities
also provide for two incremental facilities of up to a total $500.0 million,
which are conditioned upon receipt of additional commitments from lenders. If
the incremental facilities become available, they may be in the form of
revolving loans, term A loans or to a limited extent term B loans, but may not
amortize more quickly than the reducing revolving loan facility or the term loan
A facilities, and may not have a final maturity date earlier than six calendar
months after the maturity date of the term loan B facilities.
The CC VIII (Bresnan) credit facilities provide the following two interest
rate options, to which a margin is added: a base rate, generally the "prime
rate" of interest; and an interest rate option based on the interbank
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eurodollar rate. Interest rate margins for the CC VIII (Bresnan) credit
facilities depend upon performance measured by a leverage ratio, which is the
ratio of total debt to annualized operating cash flow. The leverage ratio is
based on the debt of the Bresnan borrower and its subsidiaries. The interest
rate margins for the CC VIII (Bresnan) credit facilities are as follows:
-- with respect to the term loan A facilities and the revolving loan
facility, the margin ranges from 0.75% to 2.25% for eurodollar loans
and from 0.0% to 1.25% for base rate loans; and
-- with respect to the term loan B facilities, the margin ranges from
2.5% to 2.75% for eurodollar loans and from 1.5% to 1.75% for base
rate loans.
The CC VIII (Bresnan) credit facilities contain various representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default for the CC VIII
(Bresnan) credit facilities include a cross-default provision that is triggered
by, among other things, the failure to make payment on the debt of the Bresnan
borrower, its subsidiaries and CC VIII Holdings in a total amount in excess of
$25.0 million, the acceleration of debt of this amount prior to its maturity or
failure to comply with specified covenants. The financial covenants, which are
generally tested on a quarterly basis, measure performance against standards set
for leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
Certain negative covenants place limitations on the ability of the Bresnan
borrower and its restricted subsidiaries to, among other things:
-- incur debt;
-- pay dividends or make other distributions;
-- incur liens;
-- make acquisitions;
-- make investments or asset sales; or
-- enter into transactions with affiliates.
The CC VIII (Bresnan) credit facilities contain a change in control
provision making it an event of default permitting acceleration of the debt in
the event of any of the following:
-- Mr. Allen, including his estate, heirs and related entities, fails to
maintain, directly or indirectly, at least 51% voting interest in the
Bresnan borrower, or ceases to own of record or beneficially,
directly or indirectly, at least 25% of the equity interests of the
Bresnan borrower;
-- a change of control or similar defined term shall occur in any
agreement governing debt of CC VIII Holdings or the Bresnan borrower,
and such debt is at least in the amount of $25.0 million;
-- Charter Communications Holding Company shall cease to own, directly
or indirectly, at least 51% of the equity interests in the Bresnan
borrower; or
-- the Bresnan borrower shall cease to be a direct wholly owned
subsidiary of CC VIII Holdings.
Distributions under the CC VIII (Bresnan) credit facilities to Charter
Holdings to pay interest on the March 1999, January 2000, January 2001 and May
2001 Charter Holdings notes are generally permitted, provided the borrower's
consolidated cash flow for the four complete quarters preceding the distribution
exceeds 1.75 times its cash interest expense, including the amount of such
distribution. Distributions to Charter Holdings are also conditioned on the
borrower meeting specified financial ratios. In each case, such distributions to
Charter Holdings are not permitted during the existence of a default under the
CC VIII (Bresnan) credit facilities. Distributions to Charter Holdings to pay
interest on the March 1999, January 2000, January 2001 and May 2001 Charter
Holdings notes are also subject to the restricted payment
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provisions contained in the indenture for the 11.875% notes of CC V Holdings,
LLC, the parent of the Bresnan borrower.
As of March 31, 2001, there was approximately $1.0 billion outstanding and
approximately $445.0 million was available for borrowing under the CC VIII
(Bresnan) credit facilities. As of March 31, 2001, pro forma for the sale of the
May 2001 Charter Holdings notes and the application of the net proceeds
therefrom and the closing of the pending AT&T transactions, outstanding
borrowings would have been approximately $1.0 billion and unused availability
would have been approximately $450.0 million was available for borrowing under
the CC VIII (Bresnan) credit facilities.
COMMITTED BRIDGE FACILITY
CHARTER HOLDINGS 2001 SENIOR BRIDGE LOAN COMMITMENT. Charter Holdings and
Charter Capital have entered into a commitment letter with affiliates of the
underwriters 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 are not completed, the commitment would be reduced by the amount of
the commitment allocated to such portion of the transaction, up to $1 billion.
On May 10, 2001, Charter Holdings and Charter Capital and the prospective
lenders under the committed facility amended the commitment letter. Giving
effect to this amendment, the bridge loan availability is approximately $1
billion. Pursuant to commitment reduction provisions of the committed facility,
the aggregate commitments of the prospective lenders will be reduced by the net
proceeds received by Charter Communications, Inc. from the offer of the Class A
common stock described in this prospectus supplement (except for $501.5 million
of the net proceeds that we will set aside to pay a portion of the purchase
price of the pending AT&T transactions) and the net proceeds received by Charter
Communications, Inc. from the offering of the notes described in this prospectus
supplement.
The bridge loans would bear interest initially at a rate equal to either
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 commitments expire on December 31, 2001. The bridge loans would mature
one year from the date of first funding, but if not repaid in full by such date
will automatically convert into senior term loans that would be due nine years
after such conversion. Interest on the senior 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-day 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 redeemable at the option of
Charter Holdings until the fifth anniversary of the first funding of the bridge
loan. After the fifth anniversary, the notes would be redeemable at a premium
initially 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 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 to fund our anticipated capital
expenditures and meet our other
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obligations. See "Risk Factors -- Our Business -- The prospective lenders'
commitments to lend to us under the Charter Holdings 2001 senior bridge loan
facility are subject to a number of conditions."
EXISTING PUBLIC DEBT
MARCH 1999 CHARTER HOLDINGS NOTES. The March 1999 Charter Holdings notes
were issued under three separate indentures, each dated as of March 17, 1999,
among Charter Holdings and Charter Capital, as the issuers, and BNY Midwest
Trust Company, as trustee. Charter Holdings and Charter Capital exchanged these
notes for new March 1999 Charter Holdings notes with substantially similar
terms, except that the new March 1999 Charter Holdings notes are registered
under the Securities Act and, therefore, do not bear legends restricting their
transfer.
The March 1999 Charter Holdings notes are general unsecured obligations of
Charter Holdings and Charter Capital. The March 1999 8.250% Charter Holdings
notes mature on April 1, 2007 and as of December 31, 2000, there was $600
million in total principal amount outstanding. The March 1999 8.625% Charter
Holdings notes mature on April 1, 2009 and as of December 31, 2000, there was
$1.5 billion in total principal amount outstanding. The March 1999 9.920%
Charter Holdings notes mature on April 1, 2011 and as of December 31, 2000, the
total accreted value was $1.08 billion. Cash interest on the March 1999 9.920%
Charter Holdings notes will not accrue prior to April 1, 2004.
The March 1999 Charter Holdings notes are senior debts of Charter Holdings
and Charter Capital. They rank equally with the current and future unsecured and
unsubordinated debt of Charter Holdings, including the January 2000 and January
2001 Charter Holdings notes.
Charter Holdings and Charter Capital will not have the right to redeem the
March 1999 8.250% Charter Holdings notes prior to their maturity date on April
1, 2007. Before April 1, 2002, Charter Holdings and Charter Capital may redeem
up to 35% of each of the March 1999 8.625% Charter Holdings notes and the March
1999 9.920% Charter Holdings notes, in each case, at a premium with the proceeds
of certain offerings of equity securities. In addition, on or after April 1,
2004, Charter Holdings and Charter Capital may redeem some or all of the March
1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter Holdings
notes at any time, in each case, at a premium. The optional redemption price
declines to 100% of the principal amount of March 1999 Charter Holdings notes
redeemed, plus accrued and unpaid interest, if any, for redemption on or after
April 1, 2007.
In the event of a specified change of control event, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding March 1999 Charter
Holdings notes at 101% of their principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The indentures governing the March 1999 Charter Holdings notes contain
certain covenants that restrict the ability of Charter Holdings and Charter
Capital and their restricted subsidiaries to:
-- incur additional debt;
-- create specified liens;
-- pay dividends on stock or repurchase stock;
-- make investments;
-- sell all or substantially all of our assets or merge with or into
other companies;
-- sell assets;
-- in the case of restricted subsidiaries, create or permit to exist
dividend or payment restrictions with respect to us; and
-- engage in certain transactions with affiliates.
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JANUARY 2000 CHARTER HOLDINGS NOTES. The January 2000 Charter Holdings
notes were issued under three separate indentures, each dated as of January 12,
2000, among Charter Holdings and Charter Capital, as the issuers, and BNY
Midwest Trust Company, as trustee. In June 2000, Charter Holdings and Charter
Capital exchanged these notes for new January 2000 Charter Holdings notes, with
substantially similar terms, except that the new January 2000 Charter Holdings
notes are registered under the Securities Act and, therefore, do not bear
legends restricting their transfer.
The January 2000 Charter Holdings notes are general unsecured obligations
of Charter Holdings and Charter Capital. The January 2000 10.00% Charter
Holdings notes mature on April 1, 2009, and as of December 31, 2000, there was
$675 million in total principal amount of these notes outstanding. The January
2000 10.25% Charter Holdings notes mature on January 15, 2010 and as of December
31, 2000, there was $325 million in total principal amount of these notes
outstanding. The January 2000 11.75% Charter Holdings notes mature on January
15, 2010 and as of December 31, 2000, the total accreted value of these notes
was approximately $335.5 million. Cash interest on the January 2000 11.75%
Charter Holdings notes will not accrue prior to January 15, 2005.
The January 2000 Charter Holdings notes are senior debts of Charter
Holdings and Charter Capital. They rank equally with the current and future
unsecured and unsubordinated debt of Charter Holdings, including the March 1999
and January 2001 Charter Holdings notes.
Charter Holdings and Charter Capital will not have the right to redeem the
January 2000 10.00% Charter Holdings notes prior to their maturity date on April
1, 2009. Before January 15, 2003, Charter Holdings and Charter Capital may
redeem up to 35% of the January 2000 10.25% Charter Holdings notes and the
January 2000 11.75% Charter Holdings notes, in each case, at a premium with the
proceeds of certain offerings of equity securities. In addition, on or after
January 15, 2005, Charter Holdings and Charter Capital may redeem some or all of
the January 2000 10.25% Charter Holdings notes and the January 2000 11.75%
Charter Holdings notes at any time, in each case, at a premium. The optional
redemption price declines to 100% of the principal amount of the January 2000
Charter Holdings notes redeemed, plus accrued and unpaid interest, if any, for
redemption on or after January 15, 2008.
In the event of a specified change of control event, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2000
Charter Holdings notes at 101% of their aggregate principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The indentures governing the January 2000 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999 Charter
Holdings notes.
JANUARY 2001 CHARTER HOLDINGS NOTES. The January 2001 Charter Holdings
notes were issued under three separate indentures, each dated as of January 10,
2001, each among Charter Holdings and Charter Capital, as the issuers, and BNY
Midwest Trust Company, as trustee. In March 2001, Charter Holdings and Charter
Capital exchanged these notes for new January 2001 Charter Holdings notes, with
substantially similar terms, except that the new January 2001 Charter Holdings
notes are registered under the Securities Act and, therefore, do not bear
legends restricting their transfer, registration rights or provisions for
special interest.
The January 2001 Charter Holdings notes are general unsecured obligations
of Charter Holdings and Charter Capital. The January 2001 10.750% Charter
Holdings notes issued in the aggregate principal amount of $900 million mature
on October 1, 2009. The January 2001 11.125% Charter Holdings notes issued in
the aggregate principal amount of $500 million mature on January 15, 2011. The
January 2001 13.500% Charter Holdings notes issued in the aggregate principal
amount at maturity of $675 million mature on January 15, 2011. Cash interest on
the January 2001 13.500% Charter Holdings notes will not accrue prior to January
15, 2006.
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The January 2001 Charter Holdings notes are senior debts of Charter
Holdings and Charter Capital. They rank equally with the current and future
unsecured and unsubordinated debt of Charter Holdings, including the March 1999
and January 2000 notes.
Charter Holdings and Charter Capital will not have the right to redeem the
January 2001 10.750% Charter Holdings notes prior to their maturity date on
October 1, 2009. Before January 15, 2004, Charter Holdings and Charter Capital
may redeem up to 35% of the January 2001 11.125% Charter Holdings notes and the
January 2001 13.500% Charter Holdings notes, in each case at a premium, with the
proceeds of certain offerings of equity securities. In addition, on or after
January 15, 2006, Charter Holdings and Charter Capital may redeem some or all of
the January 2001 11.125% Charter Holdings notes and the January 2001 13.500%
Charter Holdings notes at any time, in each case, at a premium. The optional
redemption price declines to 100% of the principal amount of the January 2001
Charter Holdings notes redeemed, plus accrued and unpaid interest, if any, for
redemption on or after January 15, 2009.
In the event of a specified change of control event, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2001
Charter Holdings notes at 101% of their aggregate principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The indentures governing the January 2001 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999 and
January 2000 Charter Holdings notes.
MAY 2001 CHARTER HOLDINGS NOTES. The May 2001 Charter Holdings notes were
issued under three separate indentures, each dated as of May 15, 2001, each
among Charter Holdings and Charter Capital, as the issuers, and BNY Midwest
Trust Company, as trustee.
The May 2001 Charter Holdings notes are general unsecured obligations of
Charter Holdings and Charter Capital. The May 2001 9.625% Charter Holdings notes
issued in the aggregate principal amount of $350 million mature on November 15,
2009. The May 2001 10.000% Charter Holdings notes issued in the aggregate
principal amount of $575 million mature on May 15, 2011. The May 2001 11.750%
Charter Holdings notes issued in the aggregate principal amount at maturity of
$1,018 million mature on May 15, 2011. Cash interest on the May 2001 11.750%
Charter Holdings notes will not accrue prior to May 15, 2006.
The May 2001 Charter Holdings notes are senior debts of Charter Holdings
and Charter Capital. They rank equally with the current and future unsecured and
unsubordinated debt of Charter Holdings, including the March 1999, January 2000
and January 2001 notes.
Charter Holdings and Charter Capital will not have the right to redeem the
May 2001 9.625% Charter Holdings notes prior to their maturity date on November
15, 2009. Before May 15, 2004, Charter Holdings and Charter Capital may redeem
up to 35% of the May 2001 10.000% Charter Holdings notes and the May 2001
11.750% Charter Holdings notes, in each case at a premium, with the proceeds of
certain offerings of equity securities. In addition, on or after May 15, 2006,
Charter Holdings and Charter Capital may redeem some or all of the May 2001
10.000% Charter Holdings notes and the May 2001 11.750% Charter Holdings notes
at any time, in each case, at a premium. The optional redemption price declines
to 100% of the principal amount of the May 2001 Charter Holdings notes redeemed,
plus accrued and unpaid interest, if any, for redemption on or after May 15,
2009.
In the event of a specified change of control event, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding May 2001 Charter
Holdings notes at 101% of their aggregate principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The indentures governing the May 2001 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999, January
2000 and January 2001 Charter Holdings notes.
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RENAISSANCE NOTES. The 10% senior discount notes due 2008 were issued by
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Holdings Capital Corporation, with Renaissance Media Group LLC
as guarantor and the United States Trust Company of New York as trustee.
Renaissance Media Group LLC, which is the direct or indirect parent company of
these issuers, is now a subsidiary of Charter Operating. The Renaissance 10%
notes and the Renaissance guarantee are unsecured, unsubordinated debt of the
issuers and the guarantor, respectively. In October 1998, the issuers of the
Renaissance notes exchanged $163.2 million of the original issued and
outstanding Renaissance notes for an equivalent value of new Renaissance notes.
The form and terms of the new Renaissance notes are the same in all material
respects as the form and terms of the original Renaissance notes except that the
issuance of the new Renaissance notes was registered under the Securities Act.
There will not be any payment of interest in respect of the Renaissance
notes prior to October 15, 2003. Interest on the Renaissance notes shall be paid
semi-annually in cash at a rate of 10% per annum beginning on October 15, 2003.
The Renaissance notes are redeemable at the option of the issuers thereof, 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 interest, declining to 100% of
the principal amount at maturity, plus accrued interest, on or after April 15,
2006. In addition, at any time prior to April 15, 2001, the issuers of the
Renaissance notes may redeem up to 35% of the original total principal amount at
maturity of the Renaissance notes with the proceeds of one or more sales of
equity interests at 110% of their accreted value on the redemption date,
provided that after any such redemption at least $106.0 million total principal
amount at maturity of Renaissance notes remains outstanding.
Our acquisition of Renaissance triggered change of control provisions of
the Renaissance notes that required us to offer to purchase the Renaissance
notes at a purchase price equal to 101% of their accreted value on the date of
the purchase, plus accrued interest, if any. In May 1999, we made an offer to
repurchase the Renaissance notes, and holders of Renaissance notes representing
30% of the total principal amount outstanding at maturity tendered their
Renaissance notes for repurchase.
The indentures governing the Renaissance 10% notes contain certain
covenants that restrict the ability of the issuers of the Renaissance notes and
their restricted subsidiaries to:
-- incur additional debt;
-- create liens;
-- engage in sale-leaseback transactions;
-- pay dividends or make other distributions in respect of their equity
interests;
-- redeem capital stock;
-- make investments or certain other restricted payments;
-- sell assets;
-- issue or sell capital stock of restricted subsidiaries;
-- enter into transactions with shareholders or affiliates; and
-- effect a consolidation or merger.
The Renaissance notes contain events of default that include a
cross-default provision triggered by the failure of Renaissance Media Group LLC
or any of its specified subsidiaries to make payment on debt at maturity with a
total principal amount of $10.0 million or more or the acceleration of debt of
this amount prior to maturity.
As of March 31, 2001, there was outstanding $114.4 million total principal
amount at maturity of Renaissance notes, with an accreted value of $96.7
million.
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AVALON 11.875% NOTES. On December 10, 1998, CC V Holdings, LLC, formerly
known as Avalon Cable LLC, and CC V Holdings Finance, Inc. (formerly Avalon
Cable Holdings Finance, Inc.) jointly issued $196.0 million total principal
amount at maturity of 11.875% senior discount notes due 2008. On July 22, 1999,
the issuers exchanged $196.0 million of the original issued and outstanding
Avalon notes for an equivalent amount of new Avalon notes. The form and terms of
the new Avalon notes are substantially identical to the original Avalon notes
except that they are registered under the Securities Act and, therefore, are not
subject to the same transfer restrictions.
The Avalon notes are guaranteed by certain subsidiaries of CC V Holdings.
There will be no current payments of cash interest on the Avalon notes
before December 1, 2003. The Avalon notes accrete in value at a rate of 11.875%
per annum, compounded semi-annually, to an aggregate principal amount of $196.0
million on December 1, 2003. After December 1, 2003, cash interest on the Avalon
notes:
-- will accrue at the rate of 11.875% per year on the principal amount
at maturity; and
-- will be payable semi-annually in arrears on June 1 and December 1 of
each year, commencing June 1, 2004.
On December 1, 2003, the issuers of the Avalon notes will be required to
redeem an amount equal to $369.79 per $1,000 in principal amount at maturity of
each Avalon note, on a pro rata basis, at a redemption price of 100% of the
principal amount then outstanding at maturity of the Avalon notes so redeemed.
On or after December 1, 2003, the issuers of the Avalon notes may redeem
the Avalon notes, in whole or in part, at a specified premium. The optional
redemption price declines to 100% of the principal amount of the Avalon notes
redeemed, plus accrued and unpaid interest, if any, for redemptions on or after
December 1, 2006. Before December 1, 2001, the issuers may redeem up to 35% of
the total principal amount at maturity of the Avalon notes with the proceeds of
one or more equity offerings and/or equity investments.
In the event of specified change of control events, holders of the Avalon
notes have the right to sell their Avalon notes to the issuers of the Avalon
notes at 101% of:
-- the accreted value of the Avalon notes in the case of repurchases of
Avalon notes prior to December 1, 2003; or
-- the total principal amount of the Avalon notes in the case of
repurchases of Avalon notes on or after December 1, 2003, plus
accrued and unpaid interest and liquidated damages, if any, to the
date of purchase.
Our acquisition of Avalon triggered this right. On December 3, 1999, we
commenced a change of control repurchase offer with respect to the Avalon notes.
In January 2000, we completed change of control offers in which we repurchased
$16.3 million aggregate principal amount of the 11.875% notes at a purchase
price of 101% of accreted value as of January 28, 2000. The aggregate repurchase
price of $10.5 million was funded with proceeds of the sale of the January 2000
Charter Holdings notes.
Among other restrictions, the indenture governing the Avalon notes limits
the ability of the issuers and their specified subsidiaries to:
-- incur additional debt;
-- pay dividends or make other specified restricted payments;
-- enter into transactions with affiliates;
-- make certain investments;
-- sell assets or subsidiary stock;
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-- engage in sale-leaseback transactions;
-- create liens;
-- create or permit to exist restrictions dividends or other payments
from restricted subsidiaries;
-- redeem equity interests;
-- merge, consolidate or sell all or substantially all of their combined
assets; and
-- with respect to restricted subsidiaries, issue capital stock.
The Avalon notes contain events of default that include a cross-default
provision triggered by the failure of CC V Operating, CC V Holdings Finance,
Inc. or any specified subsidiary to make payment on debt with a total principal
amount of $5.0 million or more or the acceleration of debt of this amount prior
to maturity.
As of March 31, 2001, the total principal amount at maturity of the
outstanding Avalon notes was $179.8 million, with an accreted value of $135.2
million.
CHARTER COMMUNICATIONS, INC. 2000 CONVERTIBLE SENIOR NOTES. The Charter
Communications, Inc. 2000 convertible senior notes were issued under an
indenture dated October 30, 2000 between Charter Communications, Inc., as the
issuer, and BNY Midwest Trust Company, as trustee. Charter Holdings is not an
obligor or guarantor with respect to the convertible senior notes.
The Charter Communications, Inc. 2000 convertible senior notes are general
unsecured obligations of Charter Communications, Inc. The Charter
Communications, Inc. 2000 convertible senior notes mature on October 15, 2005.
There are $750.0 million total principal amount of these notes outstanding.
The Charter Communication, Inc. 2000 convertible senior notes are senior
debts of Charter Communications, Inc. and rank equally with any of Charter
Communications, Inc.'s future unsecured and unsubordinated debt, but are
structurally subordinated to all existing and future indebtedness and other
liabilities of Charter Communications, Inc.'s subsidiaries.
Charter Communications, Inc. has the right to redeem the Charter
Communications, Inc. 2000 convertible senior notes on or after October 15, 2003
at specified redemption prices plus accrued and unpaid interest to the
redemption date. The Charter Communications, Inc. 2000 convertible senior notes
are convertible at the option of the holder into shares of Charter
Communications, Inc.'s Class A common stock at a conversion rate of 46.3822
shares of Class A common stock per $1,000 principal amount of notes, which is
equivalent to a conversion price of approximately $21.56 per share. The
conversion rate is subject to adjustment in certain events. The Charter
Communications, Inc. 2000 convertible senior notes are convertible at any time
before the close of business on October 15, 2005, unless Charter Communications,
Inc. has previously redeemed or repurchased the notes. Holders of the 2000
convertible senior notes called for redemption or submitted for repurchase are
entitled to convert the notes up to and including, but not after, the business
day prior to the date fixed for redemption or repurchase, as the case may be.
In the event of a specified change of control event, Charter
Communications, Inc. must offer to repurchase any then-outstanding Charter
Communications, Inc. 2000 convertible senior notes at 100% of their principal
amount plus accrued interest to the repurchase date.
INTERCOMPANY LOANS
For a description of certain intercompany loans made by Charter
Communications, Inc., Charter Communications Holding Company and Charter
Holdings to certain of their subsidiaries, see "Certain Relationships and
Related Transactions--Transactions with Management and Others--Intercompany
Loans."
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DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS
We describe our Class A common stock and Class B common stock and the
membership units of Charter Communication Holding Company in "Description of
Capital Stock and Membership Units" on page 17 of the accompanying prospectus.
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DESCRIPTION OF NOTES
We will issue the notes under a document called the "indenture." The
indenture is a contract between us and BNY Midwest Trust Company, as trustee.
Because this section is a summary, it does not describe every aspect of the
notes and the indenture that may be important to you. In this section, we use
capitalized words to signify defined terms that have been given special meaning
in the indenture. We describe the meaning of only the more important terms. You
should read the indenture itself for a full description of the terms of the
notes. Whenever we refer to particular defined terms, those defined terms are
incorporated by reference here. In this section, references to "Charter
Communications, Inc.", "we", "our" or "us" refer solely to Charter
Communications, Inc., a Delaware corporation, and its successors under the
indenture and not to any of its subsidiaries.
GENERAL
The notes will be general, unsecured obligations of Charter Communications,
Inc. The notes will be limited to $550,000,000 aggregate principal amount
($632,500,000 if the underwriters exercise their over-allotment option in full).
We will be required to repay the principal amount of the notes in full on June
1, 2006. The notes will bear interest at the rate per annum shown on the front
cover of this prospectus supplement from May 30, 2001. Interest will be computed
on the basis of a 360-day year of twelve thirty day months. We will pay interest
on the notes on December 1 and June 1 of each year, commencing on December 1,
2001.
You may convert the notes into shares of our Class A common stock initially
at the conversion rate stated on the front cover of this prospectus supplement
at any time before the close of business on the business day preceding June 1,
2006, unless the notes have been previously redeemed or repurchased by us. The
conversion rate may be adjusted as described below.
We may redeem the notes at our option at any time on or after June 4, 2004,
in whole or in part, at the redemption prices set forth below under "-- Optional
Redemption," plus accrued and unpaid interest to the redemption date. If there
is a Change of Control of Charter Communications, Inc., you may have the right
to require us to repurchase your notes as described below under "-- Repurchase
at Option of Holders Upon a Change of Control."
The notes will be structurally subordinated to all existing and future
indebtedness and other liabilities of our subsidiaries. Our subsidiaries have a
substantial amount of existing debt and may incur substantial additional debt in
the future. See "Risk Factors -- Our Business."
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
The notes will be issued:
- only in full registered form;
- without interest coupons; and
- in denominations of $1,000 and greater multiples.
The notes will be evidenced by one or more global notes which will be
deposited with the trustee as custodian for DTC and registered in the name of
Cede & Co. as nominee of DTC. Except as set forth below, record ownership of
global notes may be transferred, in whole or in part, only to another nominee of
DTC or to a successor of DTC or its nominee.
The global notes will not be registered in the name of any person, or
exchanged for notes that are registered in the name of any person, other than
DTC or its nominee unless either of the following occurs:
- DTC notifies us that it is unwilling, unable or no longer qualified to
continue acting as the depositary for the global notes; or
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- an Event of Default with respect to the notes represented by the global
notes has occurred and is continuing;
In those circumstances, DTC will determine in whose names any securities issued
in exchange for the global notes will be registered.
DTC or its nominee will be considered the sole owner and holder of the
global notes for all purposes, and as a result:
- you cannot get notes registered in your name if they are represented by a
global note;
- you cannot receive certificated (physical) notes in exchange for your
beneficial interest in a global note;
- you will not be considered to be the owner or holder of a global note or
any note it represents for any purpose; and
- all payments on the global notes will be made to DTC or its nominee.
The laws of some jurisdictions require that certain kinds of purchasers
(for example, certain insurance companies) can only own securities in definitive
(certificated) form. These laws may limit your ability to transfer your
beneficial interests in the global notes to these types of purchasers.
Only institutions (such as a securities broker or dealer) that have
accounts with DTC or its nominee (called "participants") and persons that may
hold beneficial interests through participants can own a beneficial interest in
the global notes. The only place where the ownership of beneficial interests in
the global notes will appear and the only way the transfer of those interests
can be made will be on the records kept by DTC (for their participants'
interests) and the records kept by those participants (for interests of persons
held by participants on their behalf).
Secondary trading in bonds and notes of corporate issuers is generally
settled in clearinghouse (that is, next-day) funds. In contrast, beneficial
interests in a global note usually trade in DTC's same-day funds settlement
system, and settle in immediately available funds. We make no representations as
to the effect that settlement in immediately available funds will have on
trading activity in those beneficial interests.
We will make cash payments of interest on and principal of and the
redemption or repurchase price of the global notes to Cede, the nominee for DTC,
as the registered owner of the global notes. We will make these payments by wire
transfer of immediately available funds on each payment date.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the notes represented by the global notes as
shown on DTC's records, unless DTC has reason to believe that it will not
receive payment on that payment date. Payments by participants to owners of
beneficial interests in notes represented by the global notes held through
participants will be the responsibility of those participants.
We will send any redemption notices to Cede. We understand that if less
than all the notes are being redeemed, DTC's practice is to determine by lot the
amount of the holdings of each participant to be redeemed.
We also understand that neither DTC nor Cede will consent or vote with
respect to the notes. We have been advised that under its usual procedures, DTC
will mail an "omnibus proxy" to us as soon as possible after the record date.
The omnibus proxy assigns Cede's consenting or voting rights to those
participants to whose accounts the notes are credited on the record date
identified in a listing attached to the omnibus proxy.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by a global note to pledge the
interest to persons or entities that do not participate in the DTC book-entry
system, or otherwise take actions in respect of that interest, may be affected
by the lack of a physical certificate evidencing its interest.
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DTC has advised us that it will take any action permitted to be taken by a
holder of notes (including the presentation of notes for exchange) only at the
direction of one or more participants to whose account DTC interests in the
global notes are credited and only in respect of such portion of the principal
amount of the notes represented by the global notes as to which such participant
or participants has or have given such direction.
DTC has also advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
The policies and procedures of DTC, which may change periodically, will
apply to payments, transfers, exchanges and other matters relating to beneficial
interests in the global notes. We and the trustee have no responsibility or
liability for any aspect of DTC's or any participants' records relating to
beneficial interests in the global notes, including for payments made on the
global notes, and we and the trustee are not responsible for maintaining,
supervising or reviewing any of those records.
CONVERSION RIGHTS
You may, at your option, convert any portion of the principal amount of any
note that is an integral multiple of $1,000 into shares of our Class A common
stock at any time on or prior to the close of business on the business day prior
to the maturity date, unless the notes have been previously redeemed or
repurchased, at a conversion rate of 38.0952 shares of common stock per $1,000
principal amount of notes. The conversion rate is equivalent to a conversion
price of $26.25 per share, subject to adjustment as set forth below. Your right
to convert a note called for redemption or delivered for repurchase will
terminate at the close of business on the business day prior to the redemption
date or repurchase date for that note, unless we default in making the payment
due upon redemption or repurchase.
You may convert all or part of any note by delivering the note at the
corporate trust office of the trustee in the Borough of Manhattan, The City of
New York, accompanied by a duly signed and completed notice of conversion, a
copy of which may be obtained by the trustee. The conversion date will be the
date on which the note and the duly signed and completed notice of conversion
are so delivered.
As promptly as practicable on or after the conversion date, we will issue
and deliver to the trustee a certificate or certificates for the number of full
shares of our Class A common stock issuable upon conversion, together with
payment in lieu of any fraction of a share. The certificate will then be sent by
the trustee to the conversion agent for delivery to the holder. The shares of
our Class A common stock issuable upon conversion of the notes will be fully
paid and nonassessable and will rank equally with the other shares of our Class
A common stock.
If you surrender a note for conversion on a date that is not an interest
payment date, you will not be entitled to receive any interest for the period
from the next preceding interest payment date to the conversion date, except as
described below in this paragraph. Any note surrendered for conversion during
the period from the close of business on any Regular Record Date (as defined
below under "--Payment and Conversion") to the opening of business on the next
succeeding interest payment date (except notes (or portions thereof) called for
redemption on a redemption date for which the right to convert would terminate
during such period) must be accompanied by payment of an amount equal to the
interest payable on such interest payment date on the principal amount of notes
being surrendered for conversion. In the case of any note which has been
converted after any Regular Record Date but before the next succeeding interest
payment date, interest
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payable on such interest payment date shall be payable on such interest payment
date notwithstanding such conversion, and such interest shall be paid to the
holder of such note on such Regular Record Date.
No other payment or adjustment for interest, or for any dividends in
respect of our Class A common stock, will be made upon conversion. Holders of
our Class A common stock issued upon conversion will not be entitled to receive
any dividends payable to holders of our Class A common stock as of any record
time or date before the close of business on the conversion date. We will not
issue fractional shares upon conversion. Instead, we will pay cash based on the
market price of our Class A common stock at the close of business on the
conversion date or round up the number of shares of Class A common stock
issuable upon conversion of the notes to the nearest whole share.
You will not be required to pay any taxes or duties relating to the issue
or delivery of shares of our Class A common stock on conversion but you will be
required to pay any tax or duty relating to any transfer involved in the issue
or delivery of shares of our Class A common stock in a name other than yours.
Certificates representing shares of our Class A common stock will not be issued
or delivered unless all taxes and duties, if any, payable by you have been paid.
The conversion rate will be subject to adjustment for, among other things:
- dividends (and other distributions) payable in our Class A common stock
on shares of our capital stock;
- the issuance to all holders of our Class A common stock of rights,
options or warrants entitling them to subscribe for or purchase our Class
A common stock at less than the then Current Market Price of such Class A
common stock (determined as provided in the indenture) as of the record
date for shareholders entitled to receive such rights, options or
warrants;
- subdivisions, combinations and reclassifications of our Class A common
stock;
- distributions to all holders of our Class A common stock of evidences of
indebtedness of Charter Communications, Inc., shares of capital stock,
cash or assets (including securities, but excluding those dividends,
rights, options, warrants and distributions referred to above, dividends
and distributions paid exclusively in cash and distributions upon mergers
or consolidations);
- distributions consisting exclusively of cash (excluding any cash portion
of distributions referred to in the immediately preceding clause, or cash
distributed upon a merger or consolidation as discussed below) to all
holders of our Class A common stock in an aggregate amount that, combined
together with (1) other such all-cash distributions made within the
preceding 365-day period in respect of which no adjustment has been made
and (2) any cash and the fair market value of other consideration payable
in connection with any tender offer by us or any of our subsidiaries for
our Class A common stock concluded within the preceding 365-day period in
respect of which no adjustment has been made, exceeds 12.5% of our market
capitalization (being the product of the Current Market Price per share
of the Class A common stock on the record date for such distribution and
the number of shares of Class A common stock then outstanding); and
- the successful completion of a tender offer made by us or any of our
subsidiaries for our Class A common stock which involves an aggregate
consideration that, combined together with (1) any cash and other
consideration payable in a tender offer by us or any of our subsidiaries
for our Class A common stock expiring within the 365-day period preceding
the expiration of such tender offer in respect of which no adjustment has
been made and (2) the aggregate amount of any such all-cash distributions
referred to in the immediately preceding clause above to all holders of
our Class A common stock within the 365-day period preceding the
expiration of such tender offer in respect of which no adjustments have
been made, exceeds 12.5% of our market capitalization on the expiration
of such tender offer.
We reserve the right to effect such increases in the conversion rate in
addition to those required by the foregoing provisions as we consider to be
advisable in order that any event treated for United States federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
recipients. We will not be
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required to make any adjustment to the conversion rate until the cumulative
adjustments amount to 1.0% or more of the conversion rate. We will compute all
adjustments to the conversion rate and will give notice by mail to holders of
the notes of any adjustments.
In case of any consolidation or merger of Charter Communications, Inc. with
or into another entity or any merger of another entity into Charter
Communications, Inc. (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of our Class A common
stock), or in case of any sale or transfer of all or substantially all of our
assets, each note then outstanding will become convertible only into the kind
and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Class A common stock into which the notes were convertible immediately prior to
the consolidation, merger, sale or transfer.
We may increase the conversion rate for any period of at least 20 days,
upon at least 15 days notice, if our Board of Directors determines that the
increase would be in our best interest. The Board of Directors' determination in
this regard will be conclusive. We will give holders of notes at least 15 days
notice of such an increase in the conversion rate. Any increase, however, will
not be taken into account for purposes of determining whether the closing price
of our Class A common stock exceeds the conversion price by 105% in connection
with an event which otherwise would be a Change of Control as defined below.
We may also increase the conversion rate for the remaining term of the
notes or any shorter period in order to avoid or diminish any income tax to any
holders of shares of Class A common stock resulting from any dividend or
distribution of stock or issuance of rights or warrants to purchase or subscribe
for stock or from any event treated as such for income tax purposes. If at any
time we make a distribution of property to our shareholders that would be
taxable to such shareholders as a dividend for United States federal income tax
purposes, such as distributions of evidences of indebtedness or assets of
Charter Communications, Inc., but generally not stock dividends on Class A
common stock or rights to subscribe for Class A common stock, and, pursuant to
the adjustment provisions of the indenture, the number of shares into which
notes are convertible is increased, that increase may be deemed for United
States federal income tax purposes to be the payment of a taxable dividend to
holders of notes; in specified other circumstances, the absence of such an
adjustment may result in a taxable dividend to the holders of the Class A common
stock. See "Summary of Certain United States Federal Income Tax Considerations
for Holders of Notes -- United States Federal Income Taxation of U.S. Holders".
OPTIONAL REDEMPTION
After June 4, 2004, we may redeem the notes, in whole or in part, in cash
at the prices set forth below. If we elect to redeem all or part of the notes,
we will give at least 30 but no more than 60 days notice to you.
The redemption price, expressed as a percentage of principal amount, is as
follows for the 12-month periods beginning on June 4 of the following years:
REDEMPTION
YEAR PRICE
---- ----------
2004........................................................ 101.900%
2005........................................................ 100.950%
and thereafter is equal to 100% of the principal amount, in each case together
with accrued interest to the date of redemption.
No sinking fund is provided for the notes, which means that the indenture
does not require us to redeem or retire the notes periodically.
We may, to the extent permitted by applicable law, at any time purchase
notes in the open market, by tender at any price or by private agreement. Any
note that we purchase may, to the extent permitted by applicable law, be
re-issued or resold or may, at our option, be surrendered to the trustee for
cancellation. Any notes surrendered for cancellation may not be re-issued or
resold and will be canceled promptly.
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PAYMENT AND CONVERSION
Payment of any interest on the notes will be made to the person in whose
name the note, or any predecessor note, is registered at the close of business
on the November 15 or the May 15 (whether or not a business day) immediately
preceding the relevant interest payment date (a "Regular Record Date"). Payments
on any global note registered in the name of DTC or its nominee will be payable
by the trustee to DTC or its nominee in its capacity as the registered holder
under the indenture. Under the terms of the indenture, we and the trustee will
treat the persons in whose names the notes, including any global note, are
registered as the owners for the purpose of receiving payments and for all other
purposes. Consequently, neither we, the trustee nor any of our agents or the
trustee's agents has or will have any responsibility or liability for (1) any
aspect of DTC's records or any participant's or indirect participant's records
relating to or payments made on account of beneficial ownership interests in the
global note, or for maintaining, supervising or reviewing any of DTC's records
or any participant's or indirect participant's records relating to the
beneficial ownership interests in the global note, or (2) any other matter
relating to the actions and practices of DTC or any of its participants or
indirect participants.
We will not be required to make any payment on the notes due on any day
which is not a business day until the next succeeding business day. The payment
made on the next succeeding business day will be treated as though it were paid
on the original due date and no interest will accrue on the payment for the
additional period of time.
Notes may be surrendered for conversion at the corporate trust office of
the trustee in the Borough of Manhattan, The City of New York. Notes surrendered
for conversion must be accompanied by appropriate notices and any payments in
respect of interest or taxes, as applicable, as described above under
"-- Conversion Rights."
We have initially appointed the trustee as paying agent and conversion
agent. We may terminate the appointment of any paying agent or conversion agent
and appoint additional or other paying agents and conversion agents. However,
until the notes have been delivered to the trustee for cancellation, or moneys
sufficient to pay the principal of, premium, if any, and interest on the notes
have been made available for payment and either paid or returned to us as
provided in the indenture, the trustee will maintain an office or agency in the
Borough of Manhattan, The City of New York for surrender of notes for
conversion. Notice of any termination or appointment and of any change in the
office through which any paying agent or conversion agent will act will be given
in accordance with "-- Notices" below.
All moneys deposited with the trustee or any paying agent, or then held by
us, in trust for the payment of principal of, premium, if any, or interest on
any notes which remain unclaimed at the end of two years after the payment has
become due and payable will be repaid to us, and you will then look only to us
for payment.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control occurs, you will have the right, at your option, to
require us to repurchase all of your notes not previously called for redemption,
or any portion of the principal amount thereof, that is equal to $1,000 or an
integral multiple of $1,000, pursuant to a "Change of Control Offer." In the
Change of Control Offer, we will offer a "Change of Control Payment" in cash
(or, as described below, shares of our Class A common stock) equal to 100% of
the aggregate principal amount of the notes to be repurchased, together with
interest accrued to, but excluding, the repurchase date.
At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in shares of our Class A common stock valued at 95% of the
average of the closing prices of our Class A common stock for the five trading
days immediately preceding and including the fifth trading day prior to the
repurchase date. We may only pay the repurchase price in shares of our Class A
common stock if we satisfy conditions provided in the indenture.
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A Change of Control means the occurrence of any of the following:
(1) the sale, transfer, conveyance, lease or other disposition
(including by way of liquidation or dissolution, but excluding by way of
merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of Charter Communications, Inc. and
its subsidiaries, taken as a whole, to any "person" (as such term is used
in Section 13(d)(3) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution
of Charter Communications, Inc.;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation), the result of which is that any
"person" (as defined above), other than Mr. Allen and Related Parties,
becomes the beneficial owner, directly or indirectly, of more than 35% of
the Voting Stock of Charter Communications, Inc., measured by voting power
rather than number of shares, unless Mr. Allen or a Related Party
beneficially owns, directly or indirectly, a greater percentage of Voting
Stock of Charter Communications, Inc., measured by voting power rather than
number of shares, than such person;
(4) after the issue date, the first day on which a majority of the
members of the board of directors of Charter Communications, Inc. are not
Continuing Directors; or
(5) Charter Communications, Inc. consolidates with, or merges with or
into, any person, or any person consolidates with, or merges with or into,
Charter Communications, Inc., in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of Charter Communications,
Inc. is converted into or exchanged for cash securities or other property,
other than any such transaction where the Voting Stock of Charter
Communications, Inc. outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
person immediately after giving effect to such issuance.
However, a Change of Control will not be deemed to have occurred if either
(A) the closing price per share of our Class A common stock for any five trading
days within the period of 10 consecutive trading days ending immediately after
the later of the Change of Control or the public announcement of the Change of
Control, in the case of a Change of Control relating to an acquisition of Voting
Stock, or the period of 10 consecutive trading days ending immediately before
the Change of Control, in the case of Change of Control relating to a merger,
consolidation or asset sale, equals or exceeds 105% of the conversion price of
the notes in effect on each of those trading days or (B) all of the
consideration (excluding cash payments for fractional shares and cash payments
made pursuant to dissenters' appraisal rights) in a merger or consolidation
otherwise constituting a Change of Control under clause (3) and/or clause (5)
above issuable to the holders of our Class A common stock, consists of shares of
common stock traded on a national securities exchange or quoted on the Nasdaq
National Market (or will be so traded or quoted immediately following such
merger or consolidation) and as a result of such merger or consolidation the
notes become convertible into such common stock. For purposes of these
provisions the conversion price is equal to $1,000 divided by the conversion
rate then in effect.
Within ten days following any Change of Control, we will mail a notice to
each holder and the trustee describing the transaction or transactions that
constitute the Change of Control, offering to repurchase the notes on a certain
date (which shall not exceed 30 business days from the date of such notice) (the
"Change of Control Payment Date") specified in such notice and specifying
whether the repurchase price will be payable in cash or shares of Class A common
stock, pursuant to the procedures required by the indenture and described in
such notice. Rule 13e-4 under the Exchange Act requires the dissemination of
prescribed information to security holders in the event of an issuer tender
offer and may apply in the event that the repurchase option becomes available to
you. We will comply with this rule to the extent it applies at that time and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the notes as a
result of a Change of Control.
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On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all the notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(2) if the Change of Control Payment is to be paid in cash, deposit
with the paying agent an amount equal to the Change of Control Payment in
respect of all the notes or portions thereof so tendered, or if the Change
of Control Payment is to be paid in shares of our Class A common stock,
instruct the transfer agent to issues shares representing such Change of
Control Payment; and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions thereof being purchased by us.
The paying agent or, in the event we are paying the Change of Control
Payment in shares of our Class A common stock, the trustee will promptly mail to
each holder of notes so tendered the Change of Control Payment for such notes,
and the trustee will promptly authenticate and mail (or cause to be transferred
by book entry) to each holder a new note equal in principal amount or principal
amount at maturity, as applicable, to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount or principal amount at maturity, as applicable, of $1,000 or an integral
multiple thereof.
You will also have the right, at your option, to require us to repurchase
all of your notes not previously called for redemption or repurchase, or any
portion of the principal amount thereof, equal to $1,000 or an integral multiple
thereof, if at any time, (1) Mr. Allen or any of his Affiliates (as defined
below) purchases, in a transaction or series of transactions, shares of Class A
common stock, and solely as a result of such purchases, the aggregate number of
shares of Class A common stock held by Mr. Allen and his Affiliates exceeds 70%
of the total number of shares of Class A common stock issued and outstanding at
such time and (2) the closing price per share of the Class A common stock for
any five trading days within the period of the 10 consecutive trading days
immediately after the later of the last date of such purchases or the public
announcement of such purchase is less than 100% of the conversion price of the
notes in effect on each of those trading days, we will offer a payment equal to
100% of the aggregate principal amount of the notes to be repurchased together
with interest accrued to, but excluding, the repurchase date, provided that such
repurchase price may not be paid in shares of Class A common stock. For purposes
of this "Description of Notes", such event shall constitute a "Change of
Control" and we will follow procedures substantially similar to the procedures
for a Change of Control Offer as outlined above and described further in the
indenture.
For purposes of the foregoing paragraph, a purchase will not include any
shares of Class A common stock acquired by Mr. Allen or his Affiliates as a
result of the exchange or conversion of membership units of Charter
Communications Holding Company or shares of our Class B common stock, and the
calculation of the number of shares of Class A common stock held by Mr. Allen
and his Affiliates will not include securities exchangeable or convertible into
shares of Class A common stock. An "Affiliate" means any person in which Mr.
Allen, directly or indirectly, owns at least a 50.1% equity interest, provided
that Charter Communications, Inc., Charter Communications Holding Company or any
of its subsidiaries shall not be included in such definition.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable regardless of whether or
not any other provisions of the indenture are applicable. Except as described
above, the indenture does not contain provisions that permit the holders of the
notes to require that we repurchase or redeem the notes in the event of a
takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
of the notes validly tendered and not withdrawn under such Change of Control
Offer.
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The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Charter Communications, Inc. and our subsidiaries, taken as a
whole. Although there is a limited body of case law interpreting the phrase
"substantially all", there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
us to repurchase such notes as a result of a sale, lease, transfer, conveyance
or other disposition of less than all of the assets of Charter Communications,
Inc. and our subsidiaries, taken as a whole, to another Person or group may be
uncertain.
The foregoing provisions would not necessarily provide you with protection
if we are involved in a highly leveraged or other transaction that may adversely
affect you.
If a Change of Control were to occur, we cannot assure you that we would
have sufficient funds to pay the repurchase price for all the notes tendered by
the holders. Restrictions in our subsidiaries' credit facilities limit our
ability to fund such repurchases. See "Risk Factors -- Our Business" and "Risk
Factors -- The Offering of the Notes" for a discussion of these restrictions and
limitations.
MERGER, CONSOLIDATION OR SALE OF ASSETS
We may not, directly or indirectly, (1) consolidate or merge with or into
another person (whether or not we are the surviving corporation) or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of our
properties or assets, in one or more related transactions, to another person;
unless:
(A) either:
(i) we are the surviving corporation; or
(ii) the person formed by or surviving any such consolidation or
merger (if other than us) or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made is a person organized
or existing under the laws of the United States, any state thereof or the
District of Columbia (provided that if the person formed by or surviving
any such consolidation or merger with us is not a corporation, a corporate
co-issuer shall also be an obligor with respect to the notes);
(B) the Person formed by or surviving any such consolidation or merger
(if other than us) or the Person to which such sale, assignment, transfer,
conveyance or other disposition shall have been made assumes all our
obligations under the notes and the indenture pursuant to an agreement
reasonably satisfactory to the trustee; and
(C) immediately after such transaction, no Default or Event of Default
exists.
In addition, we may not, directly or indirectly, lease all or substantially
all of our properties or assets, in one or more related transactions, to any
other person.
These provisions will not apply to a sale, assignment, transfer, conveyance
or other disposition of assets between or among (i) Charter Communications, Inc.
and Charter Communications Holding Company or (ii) Charter Communications, Inc.
and any of the wholly owned subsidiaries of Charter Communications Holding
Company.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default with respect to the notes:
- default for 30 days in the payment when due of interest on the notes;
- default in payment when due of the principal of or premium, if any, on
the notes;
- failure to comply with the notice and repurchase provisions described
under the captions "--Repurchase at Option of Holders Upon a Change of
Control;"
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- failure for 30 days after written notice thereof has been given to us by
the trustee or to us and the trustee by holders of at least 25% of the
aggregate principal amount of the notes outstanding to comply with any of
the other covenants or agreements in the indenture;
- default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness
for money borrowed by us or any of our significant subsidiaries (or the
payment of which is guaranteed by us or any of our significant
subsidiaries) whether such indebtedness or guarantee now exists, or is
created after the issue date, if that default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such indebtedness prior to the expiration of the
grace period provided in such indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such indebtedness,
together with the principal amount of any other such indebtedness under
which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $100 million or more; and
- specified events of bankruptcy, insolvency or reorganization involving us
or any of our significant subsidiaries.
In the case of an Event of Default arising from events of bankruptcy,
insolvency or reorganization with respect to us, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or the holders of
at least 25% in principal amount of the then outstanding notes may declare all
notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of or premium on the notes.
We will be required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, we will be required to deliver to the trustee a statement
specifying such Default or Event of Default.
MEETINGS, MODIFICATION AND WAIVER
The indenture contains provisions for convening meetings of the holders of
the notes to consider matters affecting their interests.
Certain limited modifications of the indenture may be made without the
necessity of obtaining the consent of the holders of the notes. Other
modifications and amendments of the indenture may be made, and certain past
defaults by us may be waived, either (i) with the written consent of the holders
of not less than a majority in aggregate principal amount of the notes then
outstanding or (ii) by the adoption of a resolution, at a meeting of holders of
the notes at which a quorum is present, by the holders of at least 66 2/3% in
aggregate principal amount of the notes represented at such meeting or, if less,
holders of not less than a majority in aggregate principal amount of the notes
then outstanding. The quorum at any meeting called to adopt a resolution will be
persons holding or representing a majority in aggregate principal amount of the
notes then outstanding and, at any reconvened meeting adjourned for lack of a
quorum, 25% of such aggregate principal amount.
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However, a modification or amendment requires the consent of the holder of
each outstanding note affected if it would:
- change the stated maturity of the principal or interest of a note;
- reduce the principal amount of, or any premium or interest on, any note;
- reduce the amount payable upon a redemption or mandatory repurchase;
- modify the provisions with respect to the repurchase rights of holders of
notes in a manner adverse to the holders;
- change the place or currency of payment on a note;
- impair the right to institute suit for the enforcement of any payment on
any note;
- modify our obligation to maintain an office or agency in New York City;
- adversely affect the right to convert the notes;
- reduce the above-stated percentage of the principal amount of the holders
whose consent is needed to modify or amend the indenture;
- reduce the percentage of the principal amount of the holders whose
consent is needed to waive compliance with certain provisions of the
indenture or to waive certain defaults; or
- reduce the percentage required for the adoption of a resolution or the
quorum required at any meeting of holders of notes at which a resolution
is adopted.
The holders of a majority in aggregate principal amount of the then
outstanding notes may waive compliance by us with certain restrictive provisions
of the indenture by written consent. Holders of at least 66 2/3% in aggregate
principal amount of notes represented at a meeting or, if less, holders of not
less than a majority in aggregate principal amount of the notes then outstanding
may also waive compliance by us with certain restrictive provisions of the
indenture by the adoption of a resolution at the meeting if a quorum of holders
are present and certain other conditions are met. The holders of a majority in
aggregate principal amount of the then outstanding notes also may waive by
written consent any past default under the indenture, except a default in the
payment of principal, premium, if any, or interest which has not been cured.
NOTICES
Notice to holders of the notes will be given by mail to the addresses as
they appear in the security register. Notices will be deemed to have been given
on the date of such mailing.
Notice of a redemption of notes will be given not less than 30 nor more
than 60 days prior to the redemption date and will specify the redemption date.
A notice of redemption of the notes will be irrevocable.
REPLACEMENT OF NOTES
We will replace any note that becomes mutilated, destroyed, stolen or lost
at the expense of the holder upon delivery to the trustee of the mutilated notes
or evidence of the loss, theft or destruction satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity satisfactory
to the trustee and us may be required at the expense of the holder of the note
before a replacement note will be issued.
PAYMENT OF STAMP AND OTHER TAXES
We will pay all stamp and other duties, if any, which may be imposed by the
United States or any political subdivision thereof or taxing authority thereof
or therein with respect to the issuance of the notes. We will not be required to
make any payment with respect to any other tax, assessment or governmental
charge imposed by any government or any political subdivision thereof or taxing
authority thereof or therein.
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GOVERNING LAW
The indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Charter Communications, Inc., the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indentures at the request of any
holder of notes, unless such holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of Charter
Communications, Inc. as such shall have any liability for any obligations of
Charter Communications, Inc. under the notes or the indenture, or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder of notes by accepting a note waives and releases all such liability.
The waiver and release will be part of the consideration for issuance of the
notes. The waiver may not be effective to waive liabilities under the federal
securities laws.
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CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS OF CLASS A COMMON STOCK
GENERAL
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our Class
A common stock by a non-U.S. holder. As used in this prospectus, the term
"non-U.S. holder" is any person or entity that, for United States federal income
tax purposes, is either a nonresident alien individual, a foreign corporation, a
foreign partnership, foreign estate or a foreign trust, in each case not subject
to United States federal income tax on a net basis in respect of income or gain
with respect to our common stock.
This discussion does not address all aspects of United States federal
income and estate taxes that may be relevant to a particular non-U.S. holder in
light of the holder's particular circumstances. This discussion is not intended
to be applicable in all respects to all categories of non-U.S. holders, some of
whom may be subject to special treatment under United States federal income tax
laws, including "controlled foreign corporations," "passive foreign investment
companies," and "foreign personal holding companies". Moreover, this discussion
does not address United States state or local or foreign tax consequences. This
discussion is based on provisions of the Internal Revenue Code of 1986, as
amended, existing and proposed regulations promulgated under, and administrative
and judicial interpretations of, the Internal Revenue Code in effect on the date
of this prospectus supplement. All of these authorities may change, possibly
with retroactive effect or different interpretations. The following summary is
included in this prospectus supplement for general information. ACCORDINGLY,
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
An individual may be deemed to be a resident alien, as opposed to a
nonresident alien, by virtue of being present in the United States for at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year. In determining whether an
individual is present in the United States for at least 183 days, all of the
days present in the current year, one-third of the days present in the
immediately preceding year and one-sixth of the days present in the second
preceding year are counted. Resident aliens are subject to United States federal
income and estate tax in the same manner as United States citizens and
residents.
DIVIDENDS
We do not anticipate paying cash dividends on our capital stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of our Class A common stock, dividends paid to a non-U.S.
holder of our Class A common stock generally will be subject to United States
withholding tax at a 30% rate, unless an applicable income tax treaty provides
for a lower withholding rate. Non-U.S. holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.
United States Treasury regulations provide that backup withholding tax at a
31% rate will be imposed on dividends paid to non-U.S. holders if the
certification or documentary evidence procedures and requirements set forth in
such regulations are not satisfied directly or through an intermediary. Further,
in order to claim the benefit of an applicable income tax treaty rate for
dividends, a non-U.S. holder must comply with certain certification
requirements. The United States Treasury regulations also provide special rules
for dividend payments made to foreign intermediaries, United States or foreign
wholly owned entities that are disregarded for United States federal income tax
purposes and entities that are treated as fiscally transparent in the United
States, the applicable income tax treaty jurisdiction, or both. Prospective
investors should consult with their own tax advisors concerning the effect, if
any, of these tax regulations on an investment in the Class A common stock.
A non-U.S. holder of Class A common stock that is eligible for a reduced
rate of United States withholding tax pursuant to an income tax treaty may
obtain a refund of any excess amounts withheld by filing an appropriate claim
for a refund with the Internal Revenue Service.
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Dividends paid to a non-U.S. holder are taxed generally on a net income
basis at regular graduated rates where such dividends are either effectively
connected with the conduct of a trade or business of such holder in the United
States or attributable to a permanent establishment of such holder in the United
States if required by an applicable income tax treaty as a condition for
subjecting the non-U.S. holder to United States taxation on a net income basis.
The 30% withholding tax generally is not applicable to the payment of such
dividends if the non-U.S. holder files Form W-8ECI or any successor form with
the payor, or, such holder provides its United States taxpayer identification
number to the payor. In the case of a non-U.S. holder that is a corporation,
such income may also be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
GAIN ON DISPOSITION OF CLASS A COMMON STOCK
A non-U.S. holder generally will not have to comply with United States
federal income or withholding tax requirements in respect of gain recognized on
a disposition of Class A common stock unless:
(1) the gain is effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States or of a
partnership, trust or estate in which the non-U.S. holder is a partner or
beneficiary within the United States, and the gain is attributable to a
permanent establishment of the non-U.S. holder within the United States if
required by an applicable income tax treaty as a condition for subjecting
the non-U.S. holders to United States taxation on a net income basis and
the non-U.S. holder invokes the benefits of such treaty,
(2) the non-U.S. holder is an individual who holds the Class A common
stock as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code, is present in the United States for 183 or more days in the
taxable year of the disposition and meets certain other tax law
requirements,
(3) the non-U.S. holder is a United States expatriate required to pay
tax pursuant to the provisions of United States tax law, or
(4) we are or have been a "United States real property holding
corporation" for federal income tax purposes at any time during the shorter
of the five-year period preceding such disposition or the period that the
non-U.S. holder holds the common stock.
Generally, a corporation is a United States real property holding
corporation if the fair market value of its United States real property
interests equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or held for use in
a trade or business. We believe that we are not, have not been and do not
anticipate becoming, a United States real property holding corporation for
United States federal income tax purposes. If we were to become a United States
real property holding corporation, any gain realized by a non-U.S. holder would
generally be subject to United States federal income taxation at regular
graduated tax rates. In addition, the transferee of such stock will be required
to withhold 10% of the proceeds unless an exemption from withholding applies.
A non-U.S. holder who is an individual and meets the requirements of clause
(1) or (3) above will be required to pay tax on the net gain derived from a sale
of Class A common stock at regular graduated United States federal income tax
rates. Further, a non-U.S. holder who is an individual and who meets the
requirements of clause (2) above generally will be subject to a flat 30% tax on
the gain derived from such sale (net of an applicable capital loss). Thus,
individual non-U.S. holders who have spent or expect to spend a short period of
time in the United States should consult their tax advisors prior to the sale of
Class A common stock to determine the United States federal income tax
consequences of the sale. A non-U.S. holder who is a corporation and who meets
the requirements of clause (1) above generally will be required to pay tax on
its net gain at regular graduated United States federal income tax rates. Such
non-U.S. holder may also have to pay a branch profits tax.
FEDERAL ESTATE TAX
For United States federal estate tax purposes, an individual non-U.S.
holder's gross estate will generally include the Class A common stock owned, or
treated as owned, by such individual. Subject to applicable treaty limitations,
if any, an individual non-U.S. holder's estate may be subject to U.S. federal
estate tax on the Class A common stock so included in the gross estate.
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, we must report annually to the
Internal Revenue Service and to each non-U.S. holder the amount of dividends
paid to such holder and the tax withheld with respect to such dividends. These
information reporting requirements apply regardless of whether withholding is
required. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which the non-U.S. holder is a resident under the provisions of an applicable
income tax treaty or agreement.
The United States Treasury regulations provide that a non-U.S. holder
generally will be subject to backup withholding tax at the rate of 31% and
additional information reporting unless
(1) certification procedures, or
(2) documentary evidence procedures, in the case of payments made outside
the United States with respect to an offshore account
are satisfied. These regulations generally presume a non-U.S. holder is subject
to backup withholding at the rate of 31% and additional information reporting
requirements unless we receive certification of the holder's non-United States
status. Depending on the circumstances, this certification will need to be
provided either:
(1) directly by the non-U.S. holder,
(2) in the case of a non-U.S. holder that is treated as a partnership or
other fiscally transparent entity, by the partners, shareholders or
other beneficiaries of such entity, or
(3) by qualified financial institutions or other qualified entities on
behalf of the non-U.S. holder.
If any payments are made to the beneficial owner of Class A common stock by
or through the foreign office of a foreign custodian, foreign nominee or other
foreign agent of such beneficial owner, or if the foreign office of a foreign
"broker", as defined in the applicable United States Treasury regulations, pays
the proceeds of the sale, redemption or other disposition of the Class A common
stock to the seller thereof, backup withholding and additional information
reporting requirements will generally not apply. Unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met or the holder otherwise establishes an
exemption, additional information reporting requirements, but not backup
withholding, will generally apply to a payment by a foreign office of a broker
that is a U.S. person or a "U.S. related person." For this purpose, a "U.S.
related person" is: (1) a foreign person that derives 50% or more of its gross
income from all sources for the three year period ending with the close of its
taxable year preceding the payment, or such period during which the broker has
been in existence, from activities that are effectively connected with the
conduct of a trade or business in the U.S., (2) a "controlled foreign
corporation," that is, a foreign corporation controlled by certain U.S.
shareholders, with respect to the U.S., or (3) a foreign partnership, if at any
time during its tax year, one or more of its partners are U.S. persons, as
defined in regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership, or if at any time during its taxable year,
such foreign partnership is engaged in a U.S. trade or business. Payment by a
U.S. office of any U.S. or foreign broker is generally subject to both backup
withholding at a rate of 31% and additional information reporting unless the
holder certifies under penalties of perjury that it is a non-U.S. holder or
otherwise establishes an exemption. Prospective investors should consult with
their own tax advisors regarding the regulations under the Internal Revenue Code
and in particular with respect to whether the use of a particular broker would
subject the investor to these rules.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be either refunded or credited against the holder's United
States federal tax liability, provided sufficient information is furnished to
the Internal Revenue Service.
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SUMMARY OF CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF NOTES
GENERAL
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the purchase, ownership and disposition of the
notes and the Class A common stock into which the notes may be converted by a
person who acquires notes from the initial purchasers. Except where noted, the
summary deals only with notes and Class A common stock held as capital assets
within the meaning of section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), and does not deal with special situations, such as those
of broker-dealers, tax-exempt organizations, individual retirement accounts and
other tax deferred accounts, financial institutions, insurance companies, or
persons holding notes or common stock as part of a hedging or conversion
transaction or a straddle, or a constructive sale. Based upon the description of
the DTC's book-entry procedures discussed in the section entitled "Description
of Notes -- Form, Denomination, Transfer, Exchange and Book-Entry Procedures",
this discussion further assumes that upon issuance and throughout the term, all
the notes will be in registered form within the meaning of the Code and
applicable regulations, so that interest, paid to non-U.S. holders of the notes
should qualify as "portfolio interest" if, as discussed below in section "United
States Federal Income Taxation of Non-U.S. Holders" certain additional
conditions and certification requirements are satisfied. Furthermore, the
discussion below is based upon the provisions of the Code and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked, or modified, possibly with retroactive
effect, so as to result in United States federal income tax consequences
different from those discussed below. In addition, except as otherwise
indicated, the following does not consider the effect of any applicable foreign,
state, local or other tax laws or estate or gift tax considerations.
As used herein, a "United States person" is (1) a citizen or resident of
the U.S., (2) a corporation, partnership or other entity created or organized in
or under the laws of the U.S. or any political subdivision thereof, (3) an
estate the income of which is subject to U.S. federal income taxation regardless
of its source, (4) a trust if (A) a United States court is able to exercise
primary supervision over the administration of the trust and (B) one or more
United States persons have the authority to control all substantial decisions of
the trust, (5) a certain type of trust in existence on August 20, 1996, which
was treated as a United States person under the Code in effect immediately prior
to such date and which has made a valid election to be treated as a United
States person under the Code and (6) any person otherwise subject to U.S.
federal income tax on a net income basis in respect of its worldwide taxable
income. A "U.S. holder" is a beneficial owner of a note or Class A common stock
who is a United states person. A "non-U.S. holder" is a beneficial owner of a
note or Class A common stock that is not a U.S. holder.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR
PARTICULAR SITUATIONS, AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAX LAWS, OR SUBSEQUENT REVISIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST ON THE NOTES
Interest on the notes will be taxable to a U.S. holder as ordinary income
from domestic sources at the time such interest is accrued or actually or
constructively received in accordance with the U.S. holder's regular method of
accounting for U.S. federal income tax purposes.
CONVERSION OF NOTES
A U.S. holder generally will not recognize gain or loss on the conversions
of notes solely into Class A common stock, except to the extent the Class A
common stock is considered attributable to accrued interest not previously
included in income (which is taxable as ordinary income). The adjusted basis in
the shares of Class A common stock received on conversion of the note generally
will be equal to the U.S. holder's adjusted
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basis in the note converted at the time of conversion, less any portion of that
adjusted basis allocable to cash received in lieu of a fractional share. The
holding period of Class A common stock received on conversion will generally
include the period during which the U.S. holder held such notes prior to the
conversion. However, a U.S. holder's tax basis in shares of Class A common stock
considered attributable to accrued interest as described above generally will
equal the amount of such accrued interest included in income, and the holding
period for such shares shall begin as of the date of conversion. Cash received
in lieu of a fractional share of Class A common stock should generally be
treated as a payment in exchange for such fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash paid in lieu of such
fractional share generally will be capital gain or loss equal to the difference
between the amount of cash received and the amount of tax basis allocable to the
fractional shares.
The conversion rate of the notes is subject to adjustment under certain
circumstances. Section 305(c) of the Code and the Treasury Regulations issued
thereunder may treat the holder of the notes as having received a constructive
distribution to the extent that certain adjustments in the conversion rate,
which may occur in limited circumstances (particularly an adjustment to reflect
a taxable dividend to holders of Class A common stock), increase the
proportionate interest of a holder of notes in the fully diluted common stock,
whether or not such holder ever exercises its conversion privilege. Similarly,
if there is not a full adjustment to the conversion ratio of the notes to
reflect a stock dividend or other event increasing the proportionate interest of
the holders of outstanding Class A common stock in our assets or earnings and
profits, then such increase in the proportionate interest of the holders of the
Class A common stock generally will be treated as a distribution to such
holders. Deemed distributions will be treated as a dividend, return of capital
in accordance with the earnings and profits rules discussed in "Common Stock"
below. Therefore, U.S. holders may recognize income in the event of a deemed
distribution even though they may not receive any cash or property.
SALE, EXCHANGE, REDEMPTION OR RETIREMENT OF THE NOTES
In general, subject to the discussion in "Market Discount" below, upon the
sale, exchange, redemption or retirement of a note the holder will generally
recognize gain or loss in an amount equal to the difference between (1) the
amount of cash and the fair market value of other property received in exchange
therefor and (2) the holder's adjusted tax basis in such note. Amounts
attributable to accrued but unpaid interest on the notes will be treated as
ordinary interest income. A holder's adjusted tax basis in a note will generally
equal the purchase price paid by such holder for the note.
Gain or loss realized on the sale, exchange, redemption or retirement of a
note generally will be capital gain or loss and will be long-term capital gain
or loss if at the time of sale, exchange, redemption or retirement, the note has
been held by the holder for more than 12 months. The maximum rate of tax on
long-term capital gains with respect to notes held by an individual is 20%. The
deductibility of capital losses is subject to certain limitations.
MARKET DISCOUNT
The resale of notes may be affected by the impact on a purchaser of the
market discount provisions of the Code. For this purpose, the market discount on
a note generally will be equal to the amount, if any, by which the stated
redemption price at maturity of the note immediately after its acquisition,
other than at original issue, exceeds the U.S. holder's adjusted tax basis in
the note. Subject to a de minimis exception, these provisions generally require
a U.S. holder who acquires a note at a market discount to treat as ordinary
income any gain recognized on the disposition of such note to the extent of the
accrued market discount on such note at the time of disposition, unless the U.S.
holder elects to include accrued market discount in income currently. In
general, market discount will be treated as accruing on a straight-line basis
over the remaining term of the note at the time of acquisition, or at the
election of the U.S. holder, under a constant yield method. A U.S. holder who
acquires a note at a market discount and who does not elect to include accrued
market discount in income currently may be required to defer the deduction of a
portion of the interest on any indebtedness incurred or maintained to purchase
or carry such note. In addition, a U.S. holder that does not elect to include
market discount currently in income, and receives common stock upon conversion
of the note,
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will have to treat the amount of accrued market discount not previously included
in income with respect to the note through the date of conversion as ordinary
income upon the disposition of the common stock.
THE CLASS A COMMON STOCK
In general, subject to the discussion under "Market Discount" above, the
amount of any distribution by us on the Class A common stock will be equal to
the amount of cash and the fair market value, on the date of distribution, of
any property distributed. Generally, distributions will be treated first as
ordinary dividend income (subject to a possible dividends received deduction in
the case of corporate holders) to the extent paid out of our current or
accumulated earnings and profits, next as a nontaxable return of capital that
reduces a holder's basis in the stock dollar-for-dollar until the basis has been
reduced to zero and finally as capital gain from the sale or exchange of the
stock.
Gain or loss realized on the sale, exchange or other disposition of the
Class A common stock will equal the difference between the (i) the amount of
cash and the fair market value of any property received in exchange therefor and
(ii) the holder's adjusted tax basis in such common stock. (For a discussion of
the basis and holding period of shares of common stock, see "-- Conversion of
Notes" above). Such gain or loss will generally be long-term capital gain or
loss if the holder has held or is deemed to have held the common stock for more
than 12 months. However, special rules may apply to a redemption of Class A
common stock, which may result in the proceeds of the redemption being treated
as a dividend.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding and information reporting requirements may apply to
certain payments of interest on a note, dividends on Class A common stock and to
the proceeds of the sale, redemption or other disposition of a note or Class A
common stock. We, our agent, a broker, the Trustee or the paying agent, as the
case may be, will be required to withhold from any payment that is subject to
backup withholding a tax equal to 31% of such payment if a U.S. holder (other
than an exempt recipient such as a corporation) fails to furnish its taxpayer
identification number, certify that such number is correct, certify that such
holder is not subject to backup withholding or otherwise comply with the
applicable backup withholding rules. A U.S. holder will generally be eligible
for an exemption from backup withholding by providing a properly completed Form
W-9 to the applicable payor.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
PAYMENTS OF INTEREST
The payment to a non-U.S. holder of interest on a note generally will not
be subject to United States federal withholding tax pursuant to the "portfolio
interest exception," provided that (1) the non-U.S. holder does not actually or
constructively own 10% or more of the combined voting power of all of our
classes of stock and is not a controlled foreign corporation that is related to
us through stock ownership within the meaning of the Code and (2) either (A) the
beneficial owner of the notes certifies to us or our agent, under penalties of
perjury, that it is not a U.S. holder and provides its name and address on U.S.
Treasury Form W-8BEN (or a suitable substitute form) or (B) a securities
clearing organization, bank or other financial institution that holds the notes
on behalf of such non-U.S. holder in the ordinary course of its trade or
business (a "financial institution") certifies under penalties of perjury that
such a Form W-8BEN or W-8IMY (or suitable substitute form) has been received
from the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payor with a copy thereof. Alternative
methods may be applicable for satisfying the certification requirement described
in (2) above. These methods will generally require, in the case of notes held by
a foreign partnership, that the certificate described in (2) above be provided
by the partners in addition to the foreign partnership, and that the partnership
provide certain additional information. A look-through rule would apply in the
case of tiered partnerships.
If a non-U.S. holder cannot satisfy the requirements of the portfolio
interest exception described above, payments of interest made to such non-U.S.
holder will be subject to a 30% withholding tax, unless the beneficial owner of
the note provides us or our paying agent, as the case may be, with a properly
executed
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(1) Form W-8BEN (or successor form) claiming an exemption from or reduction in
the rate of withholding under the benefit of a tax treaty or (2) Form W-8ECI (or
successor form) stating that interest paid on the note is not subject to
withholding tax because it is effectively connected with the beneficial owner's
conduct of a trade or business in the United States. In addition, the non-U.S.
holder may under certain circumstances be required to obtain a U.S. taxpayer
identification number and make certain certifications to us. Prospective
investors should consult their tax advisors regarding the effect, if any, of the
withholding regulations.
If a non-U.S. holder of a Note is engaged in a trade or business in the
United States and interest on the Note is effectively connected with the conduct
of such trade or business, such non-U.S. holder will be subject to U.S. federal
income tax on such interest, in the same manner as if it were a U.S. holder. In
addition, if such non-U.S. holder is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its effectively connected earnings and
profits, subject to adjustment, for that taxable year unless it qualifies for a
lower rate under an applicable income tax treaty.
SALE, EXCHANGE, REDEMPTION OR RETIREMENT OF NOTES
Generally, any gain realized on the sale, exchange, redemption or
retirement of a note (including the receipt of cash in lieu of fractional shares
upon conversion of a note into Class A common stock) by a non-U.S. holder will
not be subject to U.S. federal income tax provided (1) such gain is not
effectively connected with the conduct by such holder of a trade or business in
the United States and the gain is not attributable to a permanent establishment
maintained in the United States if required by an applicable income tax treaty
as a condition for subjecting the non-U.S. holder to United States taxation on a
net income basis and the non-U.S. holder invokes the benefits of such treaty,
(2) in the case of gains derived by an individual, such individual is not
present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are met, (3) the non-U.S. holder is not
subject to tax pursuant to the provisions of U.S. federal income tax law
applicable to certain expatriates, and (4) we are not or have not been a "U.S.
real property holding corporation" for U.S. federal income tax purposes.
We believe that we are not, have not been and we do not anticipate becoming
a "U.S. real property holding corporation" for U.S. federal income tax purposes.
CONVERSION OF NOTES
In general, a non-U.S. holder will not be subject to U.S. federal income
tax on the conversion of notes into Class A common stock. However, cash received
in lieu of a fractional share may give rise to gain that would be subject to the
rules described above for the sale of notes, and cash or Class A common stock
treated as issued for accrued interest may be treated as interest under the
rules described above.
ADJUSTMENT OF CONVERSION RATE. The conversion rate of the note is subject
to adjustment in certain circumstances. Any such adjustment could, in certain
circumstances, give rise to a deemed distribution to a non-U.S. holder of the
notes. In such case, the deemed distribution would be subject to the rules below
regarding withholding of U.S. federal income tax on dividends in respect of
common stock. See "Distributions on Common Stock" below.
DISTRIBUTIONS ON COMMON STOCK
In general, distributions paid (or deemed distributions on the notes or
Class A common stock, as described above under "United States Federal Income
Taxation of U.S. Holders -- Conversion of Notes") to a non-U.S. holder of Class
A common stock will constitute a dividend for U.S. federal income tax purposes
to the extent of our current or accumulated earnings and profits determined
under U.S. federal income tax principles. Dividends will be subject to U.S.
withholding tax at a 30% rate unless such rate is reduced by an applicable
income tax treaty. Dividends that are effectively connected with a non-U.S.
holder's trade or business conducted in the U.S. are generally subject to U.S.
federal income tax at regular income tax rates. Any income that is effectively
connected with a corporate non-U.S. holder's trade or business conducted in the
U.S. may also, under certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate or such lower rate as may be applicable under an
income tax treaty.
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SALE OR EXCHANGE OF CLASS A COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income or
withholding tax on the sale or exchange of Class A common stock unless any of
the conditions described above under "United States Federal Income Taxation of
Non-U.S. Holders -- Sale, Exchange, Redemption or Retirement of Notes" are
satisfied.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, notes held by an
individual non-U.S. holder at the time of his or her death will generally not be
subject to U.S. federal estate tax if the interest on the notes qualifies for
the portfolio interest exemption from U.S. federal income tax under the rules
described above, and payments with respect to such notes would not have been
effectively connected with the conduct of a trade or business in the U.S. by a
nonresident decedent.
Class A common stock actually or beneficially held by an individual
non-U.S. holder at the time of his or her death (or previously transferred
subject to certain retained rights or powers) will generally be included in such
individual non-U.S. holder's gross estate and may be subject to U.S. federal
estate tax unless otherwise provided by an applicable estate tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the IRS and to each non-U.S. holder any interest
or dividend that is subject to withholding, or that is exempt from U.S.
withholding tax pursuant to a tax treaty, or interest that is exempt from U.S.
withholding tax under the portfolio interest exception. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement of the tax authorities of the country in which the
non-U.S. holder resides.
Non-U.S. holders other than corporations may be subject to backup
withholding at a rate of 31% and additional information reporting requirements.
However, backup withholding and additional information reporting requirements do
not apply to payments of portfolio interest made by us or a paying agent to
non-U.S. holders if the certification described above under "-- United States
Federal Income Taxation of Non-U.S. Holders -- Payments of Interest" is
received, provided that the payor does not have actual knowledge that the holder
is a U.S. holder. If any payments are made to the beneficial owner of a note or
Class A common stock by or through the foreign office of a foreign custodian,
foreign nominee or other foreign agent of such beneficial owner, or if the
foreign office of a foreign "broker", as defined in the applicable Treasury
Regulations, pays the proceeds of the sale, redemption or other disposition of a
note or the Class A common stock to the seller thereof, backup withholding and
additional information reporting requirements will generally not apply. Unless
the broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain other conditions are met or the holder otherwise establishes
an exemption, additional information reporting requirements, but not backup
withholding, will generally apply to a payment by a foreign office of a broker
that is a U.S. person or a "U.S. related person." For this purpose, a "U.S.
related person" is: (1) a foreign person that derives 50% of more of its gross
income from all sources for the three year period ending with the close of its
taxable year preceding the payment, or such period during which the broker has
been in existence, from activities that are effectively connected with the
conduct of a trade or business in the U.S., (2) a "controlled foreign
corporation," that is, a foreign corporation controlled by certain U.S.
shareholders, with respect to the U.S., or (3) a foreign partnership, if at any
time during its tax year, one or more of its partners are U.S. persons, as
defined in regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership, or if at any time during its taxable year,
such foreign partnership is engaged in a U.S. trade or business. Payment by a
U.S. office of any U.S. or foreign broker is generally subject to both backup
withholding at a rate of 31% and additional information reporting unless the
holder certifies under penalties of perjury that it is a non-U.S. holder or
otherwise establishes an exemption.
Dividends on Class A common stock held by a non-U.S. holder will generally
be subject to additional information reporting and backup withholding unless
applicable certification requirements are satisfied.
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Any amounts withheld under the backup withholding rules from a payment to a
holder of the notes or Class A common stock will be allowed as a refund or a
credit against such holder's U.S. federal income tax liability, provided that
the required information is furnished to the IRS.
Holders of the notes and Class A common stock should consult their tax
advisers concerning the possible application of the Treasury Regulations to any
payments made on or with respect to the notes and Class A common stock.
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UNDERWRITING
OFFERING OF THE CLASS A COMMON STOCK
Charter Communications, Inc., Charter Communications Holding Company and
the underwriters named below have entered into an underwriting agreement with
respect to the Class A common stock being offered in this prospectus supplement.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of shares indicated in the following table. The underwriters are
obligated to purchase all of these shares if any shares are purchased. Morgan
Stanley & Co. Incorporated, Goldman, Sachs & Co., Banc of America Securities
LLC, Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc., J.P. Morgan Securities Inc., Credit
Lyonnais Securities (USA) Inc., Fleet Securities, Inc., BMO Nesbitt Burns and
Dresdner Kleinwort Wasserstein Securities LLC are the representatives of the
underwriters of the offering of Class A common stock.
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
Morgan Stanley & Co. Incorporated........................... 18,336,150
Goldman, Sachs & Co. ....................................... 18,336,150
Banc of America Securities LLC.............................. 2,619,450
Bear, Stearns & Co. Inc. ................................... 2,619,450
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 2,619,450
Salomon Smith Barney Inc. .................................. 2,619,450
J.P. Morgan Securities Inc. ................................ 2,095,560
Credit Lyonnais Securities (USA) Inc. ...................... 1,047,780
Fleet Securities, Inc. ..................................... 1,047,780
BMO Nesbitt Burns........................................... 523,890
Dresdner Kleinwort Wasserstein Securities LLC............... 523,890
----------
Total............................................. 52,389,000
==========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
7,858,350 shares of Class A common stock from Charter Communications, Inc. to
cover such sales. They may exercise that option for 30 days from the date of
this prospectus supplement. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts to
be paid to the underwriters by Charter Communications, Inc. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share............................................... $ 0.735 $ 0.735
Total................................................... $38,505,915 $44,281,802
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover page of this prospectus
supplement. Any shares sold by the underwriters to securities dealers may be
sold at a discount of up to $0.475 per share from the public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $0.100 per share from
the public offering price. If all of the shares are not sold at the public
offering price, the representatives may change the offering price and the other
selling terms.
In connection with the Class A common stock offering, the underwriters may
purchase and sell shares of Class A common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a
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greater number of shares than they are required to purchase in the Class A
common stock offering. Stabilizing transactions consist of certain bids or
purchases made for the purpose of preventing or retarding a decline in the
market price of the Class A common stock while the Class A common stock offering
is in progress.
The underwriters may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Class A common stock. As a result, the price of
the Class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the underwriters at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
We estimate that the total expenses of the Class A common stock offering,
excluding underwriting discounts, will be approximately $8 million and will be
paid by Charter Communications, Inc. We have agreed to pay or cause to be paid
the fees and disbursements of counsel to the underwriters in connection with the
review of the offerings by the National Association of Securities Dealers, Inc.
Charter Communications, Inc. and Charter Communications Holding Company
have agreed to indemnify the several underwriters of the offering of the Class A
common stock against certain liabilities, including liabilities under the
Securities Act.
OFFERING OF THE CONVERTIBLE SENIOR NOTES
Charter Communications, Inc., Charter Communications Holding Company and
the underwriters named below have entered into an underwriting agreement with
respect to the notes being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the principal amount of notes
indicated in the following table. The underwriters are obligated to purchase all
of these notes if any notes are purchased. Morgan Stanley & Co. Incorporated,
Goldman, Sachs & Co., Banc of America Securities LLC, Bear, Stearns & Co. Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc.,
J.P. Morgan Securities Inc., Credit Lyonnais Securities (USA) Inc., Fleet
Securities, Inc., BMO Nesbitt Burns and Dresdner Kleinwort Wasserstein
Securities LLC are the representatives of the underwriters for the offering of
the notes.
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
------------ ----------------
Morgan Stanley & Co. Incorporated........................... $192,500,000
Goldman, Sachs & Co. ....................................... 192,500,000
Banc of America Securities LLC.............................. 27,500,000
Bear, Stearns & Co. Inc. ................................... 27,500,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 27,500,000
Salomon Smith Barney Inc. .................................. 27,500,000
J.P. Morgan Securities Inc. ................................ 22,000,000
Credit Lyonnais Securities (USA) Inc. ...................... 11,000,000
Fleet Securities, Inc. ..................................... 11,000,000
BMO Nesbitt Burns........................................... 5,500,000
Dresdner Kleinwort Wasserstein Securities LLC............... 5,500,000
------------
Total............................................. $550,000,000
============
If the underwriters sell more notes than the principal amount of notes set
forth in the table above, the underwriters have an option to buy up to an
additional $82,500,000 principal amount of notes from Charter Communications,
Inc. to cover such sales. They may exercise that option for 30 days from the
date of this
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prospectus supplement. If any notes are purchased pursuant to this option, the
underwriters will severally purchase notes in approximately the same proportion
as set forth in the table above.
The following table shows the per note and total underwriting discounts to
be paid to the underwriters. Such amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional notes.
NO EXERCISE FULL EXERCISE
----------- -------------
Per note................................................ 2.75% 2.75%
Total................................................... $15,125,000 $17,393,750
Notes sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover page of this prospectus
supplement. Any notes sold by the underwriters to securities dealers may be sold
at a discount of up to $16.50 per note from the public offering price. If all of
the notes are not sold at the public offering price, the representatives may
change the offering price and the other selling terms.
The notes are a new issue of securities with no established trading market.
Charter Communications, Inc. has been advised by the underwriters that the
underwriters intend to make a market in the notes but are not obligated to do so
and may discontinue market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for the notes.
In connection with the offering, the underwriters may purchase and sell the
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater principal
amount of the notes than they are required to purchase in the notes offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the notes
while the offering is in progress.
The underwriters may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased notes sold by or for
the account of such underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes. As a result, the price of the notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
We estimate that our share of the total expenses of the offering of the
notes, excluding underwriting discounts, will be approximately $5 million and
will be paid by Charter Communications Holding Company. Charter Communications
Holding Company will pay the underwriting discount. We have agreed to pay or
cause to be paid the fees and disbursements of counsel to the underwriters in
connection with the review of the offerings by the National Association of
Securities Dealers, Inc.
Charter Communications, Inc. and Charter Communications Holding Company
have agreed to indemnify the several underwriters of the offering of the notes
against certain liabilities, including liabilities under the Securities Act.
LOCK-UP RESTRICTIONS
Charter Communications, Inc., all of its directors and executive officers,
Charter Communications Holding Company, Charter Investment, Inc. and Vulcan
Cable III Inc. have agreed with the underwriters not to dispose of or hedge any
of their Class A common stock or securities convertible into or exchangeable for
Class A common stock during the period from the date of this prospectus
continuing through the date 90 days after the date of this prospectus
supplement, except with the prior written consent of Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated.
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RELATIONSHIPS WITH THE UNDERWRITERS
The underwriters and their affiliates have in the past provided, and may in
the future from time to time provide, investment banking and general financing
and banking services to Charter Communications, Inc. and its affiliates for
which they have in the past received, and may in the future receive, customary
fees.
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Banc of America
Securities LLC, Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc., J.P. Morgan Securities Inc., Credit
Lyonnais Securities (USA) Inc., Fleet Securities, Inc., BMO Nesbitt Burns and
Dresdner Kleinwort Wasserstein Securities LLC were placement agents in the May
2001 Rule 144A private placement of senior notes and senior discount notes of
Charter Holdings. Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc.
were placement agents in the January 2001 Rule 144A private placement of senior
notes and senior discount notes of Charter Holdings. Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Fleet Securities, Inc. and Chase Securities Inc. were initial
purchasers in the January 2000 Rule 144A private placement of senior notes and
senior discount notes of Charter Holdings. Goldman, Sachs & Co., Bear, Stearns &
Co. Inc., Chase Securities Inc., Salomon Smith Barney Inc., Credit Lyonnais
Securities (USA) Inc. and BMO Nesbitt Burns were initial purchasers in the March
1999 Rule 144A private placement of senior notes and senior discount notes of
Charter Holdings.
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Bear, Stearns &
Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated were initial
purchasers in the October 2000 Rule 144A placement of convertible senior notes
of Charter Communications, Inc.
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Bear, Stearns &
Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith
Barney Inc., Credit Lyonnais Securities (USA) Inc. and Dresdner Kleinwort
Wasserstein Securities LLC were underwriters for Charter Communications, Inc.'s
initial public offering in November 1999.
Affiliates of Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc.
were lenders under the Charter Holdings August 2000 senior bridge loan facility.
Affiliates of the underwriters are lenders and/or agents under credit
facilities of our subsidiaries and prospective lenders under the Charter
Holdings 2001 senior bridge loan commitment entered into in February 2001. At
that time, we agreed to offer the underwriters a right of first refusal to act
as underwriters in connection with public and private offerings by us for a
designated period which does not exceed 36 months from the date of effectiveness
of the registration statement relating to this prospectus supplement.
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as
financial advisers to Charter Communications, Inc. in connection with the
pending AT&T transactions.
Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. acted as dealer managers
in connection with three tender offers for debt securities of Charter Holdings'
subsidiaries which were made in the first quarter of 2000.
In March 2001, Goldman, Sachs & Co. provided a fairness opinion to Charter
Communications, Inc. and Charter Holdings in connection with the Digeo, Inc.
joint venture. Goldman, Sachs & Co. also provided a fairness opinion to Charter
Holdings in connection with the Digeo, Inc. joint venture in November 1999. In
February 2001, Morgan Stanley & Co. Incorporated provided a fairness opinion to
Charter Communications, Inc. in connection with the Bresnan/Avalon combination.
Goldman, Sachs & Co. acted as financial adviser to Charter Investment, Inc. in
connection with its acquisition by Paul G. Allen in December 1998.
The husband of Nancy B. Peretsman, a director of Charter Communications,
Inc., is a managing director of Morgan Stanley & Co. Incorporated.
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LEGAL MATTERS
The validity of the shares of Class A common stock and the notes offered in
this prospectus supplement and of the shares of Class A common stock issuable
upon conversion of the notes will be passed upon for Charter Communications,
Inc. by Paul, Hastings, Janofsky & Walker LLP, New York, New York. Certain legal
matters in connection with offerings will be passed upon for the underwriters by
Debevoise & Plimpton, New York, New York.
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$4,000,000,000
CHARTER COMMUNICATIONS, INC.
Debt Securities
Preferred Stock
Class A Common Stock
-------------------------
Charter Communications, Inc. may offer from time to time in one or more
separate offerings (1) debt securities, which may be senior or subordinated debt
securities, (2) shares of preferred stock, $.001 par value per share, and (3)
shares of Class A common stock, $.001 par value per share, with an aggregate
public offering price of up to $4 billion (or its equivalent based on the
exchange rate at the time of sale) in amounts, at prices and on terms to be
determined at the time of offering.
The securities covered by this prospectus may be offered, separately or
together, in separate classes or series, in amounts, at prices and on terms to
be set forth in one or more supplements to this prospectus. The specific terms
of the securities for which this prospectus is being delivered will be set forth
in the applicable prospectus supplement and will include, where applicable: (1)
in the case of debt securities, the specific title, aggregate principal amount,
ranking, currency, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of Charter
Communications, Inc. or repayment at the option of the holder thereof, terms for
sinking fund payments, terms for conversion into shares of preferred stock or
Class A common stock, covenants and any initial public offering price; (2) in
the case of preferred stock, the specific designation and stated value per
share, any dividend, liquidation, redemption, conversion, voting and other
rights, and any initial public offering price; and (3) in the case of Class A
common stock, any public offering price. In addition, such specific terms may
include limitations on direct or beneficial ownership and restrictions on
transfer of the securities, covered by this prospectus, in each case as may be
consistent with Charter Communications, Inc.'s certificate of incorporation. See
"Description of Capital Stock and Membership Units."
The prospectus supplement may add, update or change information contained
in this prospectus. You should read both this prospectus and the prospectus
supplement in conjunction with the additional information described under the
heading "Additional Information."
The securities covered by this prospectus may be offered by Charter
Communications, Inc. directly, through agents designated from time to time by
Charter Communications, Inc. or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them will be set forth or will be calculable from
the information set forth in the applicable prospectus supplement. See "Plan of
Distribution." No securities may be sold without delivery of a prospectus
supplement describing the method and terms of the offering of such securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The distribution of this prospectus and the offering and sale of the
securities covered by this prospectus in certain jurisdictions may be restricted
by law. Charter Communications, Inc. requires persons into whose possession this
prospectus comes to inform themselves about and to observe any such
restrictions. This prospectus does not constitute an offer of, or an invitation
to purchase, any of the securities covered by this prospectus in any
jurisdiction in which such offer or invitation would be unlawful.
Prospectus dated May 23, 2001.
168
TABLE OF CONTENTS
Disclosure Regarding Forward-Looking
Statements............................ 3
About this Prospectus................... 4
Additional Information.................. 4
Our Business ........................... 5
Use of Proceeds......................... 6
Ratio of Earnings to Fixed Charges...... 6
Description of Debt Securities.......... 7
Description of Capital Stock and
Membership Units...................... 17
Plan of Distribution.................... 31
Indemnification of Directors and
Officers.............................. 33
Legal Matters........................... 34
Experts................................. 34
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, regarding, among other things, our
plans, strategies and prospects, both business and financial. Although we
believe that our plans, intentions and expectations reflected in or suggested by
these forward-looking statements are reasonable, we cannot assure you that we
will achieve or realize these plans, intentions or expectations. Forward-looking
statements are inherently subject to risks, uncertainties and assumptions. Many
of the forward-looking statements contained in this prospectus 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 prospectus are set forth in
this prospectus and in other reports or documents that we file from time to time
with the Securities and Exchange Commission, or 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.
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ABOUT THIS PROSPECTUS
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may add, update or change information
contained in this prospectus. You should read both this prospectus and any
prospectus supplement together with additional information described below under
"Additional Information."
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-3 to register
the sale of the securities covered by this prospectus. This prospectus, which
forms part of that registration statement, does not contain all the information
included in the registration statement. For further information about us and the
securities described in this prospectus, you should refer to the registration
statement and its exhibits.
Our Class A common stock is quoted on the Nasdaq National Market under the
symbol "CHTR." We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy at prescribed rates
any document we file at the SEC's public reference rooms at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at 3475
Lenox Road, N.E., Suite 1006, in Atlanta, Georgia 30326-1232. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public at the SEC's Web site at
www.sec.gov.
Our principal executive offices are located at 12444 Powerscourt Drive,
Suite 100, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555 and
our Web site is located at www.charter.com. The information on our Web site is
not part of this prospectus.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
information superseded by this prospectus. The prospectus incorporates by
reference the documents set forth below that we have previously filed with the
SEC. These documents, listed below, contain important information about Charter
Communications, Inc.:
(1) The financial statements included in Charter Communications,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999;
(2) The financial statements included in Charter Communications,
Inc.'s Amendment No. 1 to the Registration Statement on Form S-1 filed
September 22, 2000 (File No. 333-41486);
(3) Charter Communications, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2000;
(4) Charter Communications, Inc.'s Proxy Statement, dated May 1, 2001,
relating to our 2001 annual meeting of stockholders;
(5) Charter Communications, Inc.'s Current Reports on Form 8-K filed
January 8, 2001, February 15, 2001, March 1, 2001, May 4, 2001, May 9, 2001
and May 23, 2001; and
(6) Charter Communications, Inc. Quarterly Report on Form 10-Q filed
May 15, 2001.
We are also incorporating by reference additional documents that we may
file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the termination of this offering. If you are a shareholder, we may have
sent you some of the documents incorporated by reference, but you can obtain any
of them through us or the SEC. Documents incorporated by reference are available
from us without charge, unless we have specifically incorporated by reference an
exhibit into a document that this prospectus incorporates. You may obtain
documents incorporated by reference into this prospectus by requesting them in
writing or by telephone from: Charter Communications, Inc., Investor Relations,
Attention: Carol Wolfe at the address indicated above.
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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%.
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USE OF PROCEEDS
Unless otherwise described in the applicable prospectus supplement, we
intend to use the net proceeds from the sale of securities for general corporate
purposes, which may include working capital, the repayment of outstanding
indebtedness or capital expenditures.
RATIO OF EARNINGS TO FIXED CHARGES
Earnings for the years ended December 31, 1996 and 1997; for the periods
from January 1, 1998 through December 23, 1998 and from December 24, 1998
through December 31, 1998 and for the years ended December 31, 1999 and 2000
were insufficient to cover fixed charges by $2.7 million, $4.6 million, $17.2
million, $5.3 million, $637.8 million and $2.1 billion, respectively. As a
result of such deficiencies, the ratios of earnings to fixed charges are not
presented.
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DESCRIPTION OF DEBT SECURITIES
This section describes the general terms and provisions of the debt
securities. The applicable prospectus supplement will describe the specific
terms of the debt securities offered through that prospectus supplement as well
as any general terms described in this section that will not apply to those debt
securities.
The debt securities will be issued under one or more separate indentures
between us and an institution to be named in the applicable prospectus
supplement as trustee. The debt securities will be either senior debt securities
or senior subordinated debt securities and may or may not be convertible into
shares of our Class A common stock or preferred stock. Senior debt securities
will be issued under a senior indenture and senior subordinated debt securities
will be issued under a senior subordinated indenture. Convertible debt
securities will be issued under a senior convertible indenture or a senior
subordinated convertible indenture. Together, the senior indenture, the senior
subordinated indenture, the senior convertible indenture and the senior
subordinated convertible indenture are called indentures. In order to issue
certain types of debt securities it may be necessary to obtain the consent of
the lenders under our subsidiaries' credit facilities.
We have summarized selected provisions of the indentures below. The summary
is not complete. We have also filed the forms of the indentures as exhibits to
the registration statement of which this prospectus forms a part. You should
read the indentures for provisions that may be important to you before you buy
any debt securities.
GENERAL TERMS OF DEBT SECURITIES
The debt securities will be our direct unsecured general obligations and
may include debentures, notes, bonds and/or other evidences of indebtedness. The
debt securities will be structurally subordinated in the right of payment to all
liabilities (including trade payables) of our subsidiaries. Our subsidiaries
have a substantial amount of existing debt and will incur substantial additional
amounts of debt in the future. The debt securities issued under any indenture
may be issued in one or more series. Each indenture may provide that there may
be more than one trustee under the indenture, each with respect to one or more
series of debt securities. The indentures may provide that any trustee under any
indenture may resign or be removed with respect to one or more series of debt
securities issued under that indenture, and a successor trustee may be appointed
to act with respect to that series.
If two or more persons are acting as trustee with respect to different
series of debt securities issued under the same indenture, each of those
trustees will be a trustee of a trust under that indenture separate and apart
from the trust administered by any other trustee. In that case, except as may
otherwise be indicated in an applicable prospectus supplement, any action
described in the applicable prospectus supplement to be taken by the trustee may
be taken by each of those trustees only with respect to the one or more series
of debt securities for which it is trustee.
A prospectus supplement relating to a series of debt securities being
offered will include specific terms relating to the offering and that series.
The specific terms relating to the offering and the series will be established
in an officer's certificate or a supplemental indenture which will be signed at
the time of issuance and will contain important information. The officer's
certificate or supplemental indenture will be filed as an exhibit to a Current
Report on Form 8-K of Charter Communications, Inc. The Current Report on Form
8-K will be publicly available. The terms established in an officer's
certificate or a supplemental indenture will contain some or all of the
following and may include other terms:
- the title of the debt securities;
- any limit on the aggregate principal amount, or, in the case of original
issue discount notes, aggregate principal amount at maturity, of the debt
securities;
- with respect to any original issue discount notes, the rate of accretion
and the method of calculating, on any date of determination, the accreted
value of such notes;
- the date or dates on which the principal of and any premium on the debt
securities will be payable;
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- if the debt securities will bear interest, the interest rate or rates or
the method by which the rate or rates will be determined;
- if the debt securities will bear interest, the date or dates from which
any interest will accrue, the interest payment dates on which any
interest will be payable, the record dates for the interest payment dates
and the basis upon which interest will be calculated;
- the place or places where payments on the debt securities will be made
and the debt securities may be surrendered for registration of transfer
or exchange;
- if we will have the right to defer any payment of principal of, any
premium or interest on the debt securities, the number of times we may
invoke such right and the maximum length of the deferral period;
- if we will have the option to redeem all or any portion of the debt
securities, the terms and conditions upon which the debt securities may
be redeemed;
- the terms and conditions of any provisions obligating us or permitting a
holder to require us to redeem or purchase all or any portion of the debt
securities prior to final maturity;
- the currency or currencies in which the debt securities are denominated
and payable if other than U.S. dollars;
- whether the amount of any payments on the debt securities may be
determined with reference to an index, formula or other method and the
manner in which such amounts are to be determined;
- any additions or changes to the events of default in the respective
indentures;
- the percentage of the principal amount of debt held by the holders
necessary to require the trustee to take action;
- in the case of the senior indenture or senior subordinated indenture, any
terms, conditions or restrictions upon the issuance of additional debt;
- in the case of the senior indenture or senior subordinated indenture, any
terms, conditions or restrictions on investments, dividends or
distribution on any capital stock;
- any additions, deletions or changes with respect to the other covenants
in the respective indentures;
- any additions, deletions or changes with respect to the default
provisions in the respective indentures;
- the terms and conditions, if any, upon which the debt securities may be
convertible into Class A common stock or preferred stock;
- the denominations of the debt securities if other than $1,000 and
multiples of $1,000;
- the applicability of the legal defeasance and covenant defeasance
provisions of the applicable indenture;
- provisions relating to the modification of the terms of the indentures;
- any subordination provisions; and
- any other terms of the debt securities consistent with the provisions of
the applicable indenture.
Debt securities may be issued under the indentures as original issue
discount securities to be offered and sold at a substantial discount from their
stated principal amount. Special federal income tax, accounting and other
considerations applicable to original issue discount securities will be
described in the applicable prospectus supplement.
Unless otherwise provided with respect to a series of debt securities, the
debt securities will be issued only in registered form, without coupons, in
denominations of $1,000 and multiples of $1,000.
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FORM, EXCHANGE AND TRANSFER
Unless we designate otherwise, we will pay principal, interest and any
premium on fully registered securities in New York, New York. Unless otherwise
provided in a prospectus supplement, we will make interest payments by check
mailed or wire transfer to the persons in whose names the debt securities are
registered on days specified in the indentures or any prospectus supplement. We
will make debt securities payments in other forms at a place we designate and
specify in a prospectus supplement. You may transfer or exchange fully
registered debt securities at the corporate trust office of the trustee or at
any other office or agency maintained by us for these purposes, without having
to pay any service charge except for any tax or governmental charge.
GLOBAL CERTIFICATES
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depository
identified in a prospectus supplement.
The specific terms of the depository arrangements with respect to any debt
securities of a series will be described in a prospectus supplement.
Unless otherwise specified in a prospectus supplement, debt securities
issued in the form of a global certificate to be deposited with a depository
will be represented by a global certificate registered in the name of the
depository or its nominee. Upon the issuance of a global certificate in
registered form, the depository for the global certificate will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the debt securities represented by the global certificate to the accounts of
institutions that have accounts with the depository or its nominee. The
depository or its nominee are referred to in this prospectus as participants.
The accounts to be credited shall be designated by the underwriters or agents of
the debt securities, or by us if the debt securities are offered and sold
directly by us. Ownership of beneficial interests in a global certificate will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a global
certificate will be shown on, and the transfer of that ownership interest will
be effected only through, records maintained by the depository or its nominee
for the global certificate. Ownership of beneficial interests in a global
certificate by persons that hold through participants will be shown on, and the
transfer of that ownership interest within a participant will be effected only
through, records maintained by that participant. The laws of some jurisdictions
require that some purchasers of securities take physical delivery of their
securities in definitive form. These limits and laws may impair your ability to
transfer beneficial interests in a global certificate.
So long as the depository for a global certificate in registered form, or
its nominee, is the registered owner of the global certificate, the depository
or its nominee, as the case may be, will be considered the sole owner or holder
of the debt securities of the series represented by the global certificate for
all purposes under the indentures. Except as set forth below, owners of
beneficial interests in a global certificate will not be entitled to have debt
securities of the series represented by the global certificate registered in
their names, will not receive or be entitled to receive physical delivery of
debt securities in definitive form, and will not be considered the owners or
holders of the global certificate under the applicable indenture.
Payment of principal of, premium, if any, and any interest on debt
securities of a series registered in the name of or held by a depository or its
nominee will be made to the depository or its nominee, as the case may be, as
the registered owner or the holder of a global certificate representing the debt
securities. None of us, the trustee, any paying agent, any conversion agent, or
the applicable registrar for the debt securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a global certificate for debt securities or
for maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
We expect that the depository for debt securities of a series, upon receipt
of any payment of principal, premium or interest in respect of a permanent
global certificate, will credit immediately participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the global certificate as shown on the records of the
depository. We also expect that payments by participants to
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owners of beneficial interests in a global certificate held through those
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in street name, and those payments will be the responsibility
of the participants. However, we have no control over the practices of the
depository and/or the participants, and there can be no assurance that these
practices will not be changed or that our expectations will be fulfilled.
Unless it is exchanged in whole or in part for debt securities in
definitive form, a global certificate may generally not be transferred as a
whole unless it is being transferred to particular nominees of the depository.
Unless otherwise stated in any prospectus supplement, an institution to be
named in the applicable prospectus supplement will act as depository. Beneficial
interests in global certificates will be shown on, and transfers of global
certificates will be effected only through, records maintained by the depository
and its participants.
CERTAIN COVENANTS
Under the indentures, we will be required to:
- pay the principal, interest and any premium on the debt securities when
due;
- maintain a place where you can surrender debt securities and serve us
notices and demands;
- deliver to the trustee at the end of each fiscal year a report reviewing
our obligations under the indentures;
- deposit sufficient funds with any paying agent on or before the due date
for any payment of principal, interest or any premium; and
- unless otherwise provided in a prospectus supplement, repurchase the debt
securities upon a change of control (as defined in the indentures) on the
terms and conditions set forth therein.
As will be described in the applicable prospectus supplement, the senior
indenture and the subordinated indenture may provide that we and our
subsidiaries will be restricted from taking certain action with respect to:
- asset sales;
- making distribution, dividends and certain other payments;
- making certain investments;
- incurring certain indebtedness and issuing certain preferred stock;
- incurring or creating certain liens;
- permitting certain restrictions on the ability of our subsidiaries to
make dividend payments, loans or advances or transfer properties or
assets to us or any of our subsidiaries;
- transactions with affiliates;
- sale and leaseback transactions; and
- issuances of guarantees of indebtedness.
An indenture may or may not include other covenants which will be described
in the applicable prospectus supplement.
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EVENTS OF DEFAULT
Under the indentures, unless a prospectus supplement provides otherwise,
each of the following is an event of default:
- failure to pay the principal or any premium on any debt security when
due;
- failure to pay interest on any debt security for 30 days;
- failure to perform certain covenants related to a change of control,
merger, consolidation or sale of assets;
- failure to perform any other covenant in the indenture that continues for
30 days after being given written notice as provided in the indenture;
- a default by us or any of our significant subsidiaries under any
mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any indebtedness for money
borrowed by us or any of our significant subsidiaries (or the payment of
which is guaranteed by us or any of our significant subsidiaries) whether
such indebtedness or guarantee now exists, or is created after the issue
date, if that default:
(A) is caused by a failure to pay at final stated maturity the principal
amount on such indebtedness prior to the expiration of the grace
period provided in such indebtedness on the date of such default, a
"payment default"; or
(B) results in the acceleration of such indebtedness prior to its
express maturity
and, in each case, the principal amount or accreted value of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a payment default or the maturity
of which has been so accelerated, aggregates $100 million or more;
- certain events of bankruptcy, insolvency or reorganization involving us
or a significant subsidiary; or
- any other event of default included in any indenture or supplemental
indenture.
As used above, the term "significant subsidiary" has the meaning ascribed
to it in Regulation S-X under the Exchange Act.
An event of default for a particular series of debt securities will not
necessarily constitute an event of default for any other series of debt
securities issued under an indenture.
Unless a prospectus supplement provides otherwise, in the case of an event
of default arising from events of bankruptcy, insolvency or reorganization with
respect to us, all outstanding debt securities of a series will become due and
payable immediately without future action or notice. If any other event of
default for any series of debt securities occurs and is continuing, the trustee
or the holders of at least 25% of the aggregate principal amount or, as the case
may be accreted value, of the outstanding debt securities of the series may
declare the entire principal amount or, as the case may be accreted value, of
that series due and payable immediately. If this happens, the holders of a
majority of the aggregate principal amount or, as the case may be, accreted
value, of the outstanding debt securities of each series by notice to the
applicable trustee, or of 66 2/3% of the aggregate principal amount or, as the
case may be, accreted value of the outstanding debt securities of the series
present at a meeting of holders held in accordance with the applicable
indentures, may on behalf of the holders of all of the debt securities of such
series rescind such declaration and its consequences if the rescission does not
conflict with any judgement or decree and all events of default with respect to
the debt securities of such series have been cured or waived.
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Holders of debt securities may not enforce the indentures except as
provided in the indentures. A holder of the debt securities will only have the
right to institute a proceeding under the indentures or to see other remedies
if:
- the holder has given written notice to the trustee of a continuing event
of default;
- the holders of at least 25% of the aggregate principal amount or, as the
case may be, accreted value, of the outstanding debt securities of that
series have made a written request to the trustee;
- these holders have offered reasonable indemnity to the trustee to
institute proceedings as trustee;
- the trustee has not received written directions inconsistent with the
request from the holders of a majority in principal amount, or, as the
case may be, accreted value, of the outstanding debt securities of that
series; and
- the trustee does not institute a proceeding within 60 days.
The applicable trustee will generally give the holders of debt securities
notice within 90 days of the occurrence of an event of default known to the
trustee. However, the trustee may withhold from holders of the debt securities
of the applicable series notice of any continuing default or event of default
(except a default or event of default relating to the payment of principal,
interest or any premium) if it determines that withholding notice is in such
holders' interest.
We will be required to deliver to each trustee annually a statement
regarding our compliance with the indentures.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The indentures may limit or restrict our ability to consolidate or merge
with or into any other entity or sell all or substantially all of our assets.
These limitations or restrictions, if any, will be described in the applicable
prospectus supplement, and we expect that they generally will include that we
may not, directly or indirectly, (1) consolidate or merge with or into another
person (whether or not we are the surviving corporation) or (2) sell, assign,
transfer, convey or otherwise dispose of all or substantially all of our
properties or assets, in one or more related transactions, to another person;
unless:
(A) either:
(i) we are the surviving corporation; or
(ii) the person formed by or surviving any such consolidation or merger
(if other than us) or to which such sale, assignment, transfer,
conveyance or other disposition will have been made is a person
organized or existing under the laws of the United States, any
state thereof or the District of Columbia, provided that if the
person formed by or surviving any such consolidation or merger with
us is not a corporation, a corporate co-issuer will also be an
obligor with respect to the debt securities;
(B) the person formed by or surviving any such consolidation or merger (if
other than us) or the person to which such sale, assignment, transfer,
conveyance or other disposition will have been made assumes all of our
obligations under the debt securities and the indentures pursuant to
agreements reasonably satisfactory to the trustees;
(C) immediately after such transaction no default or event of default
exists; and
(D) with respect to certain indentures only, that we or the person formed
by or surviving any such consolidation or merger (if other than us)
will, on the date of such transaction after giving pro forma effect
thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, either
be able to incur certain levels of indebtedness under the leverage
ratio requirements set forth in the applicable indenture or not exceed
our leverage ratio at the time immediately preceding such consolidation
or merger.
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DEFEASANCE
As set forth in the applicable prospectus supplement, certain indentures
may provide that we may elect either:
- legal defeasance, whereby we are deemed to have paid the entire
indebtedness with respect to the debt securities and are discharged from
any and all obligations with respect to the debt securities, except as is
otherwise provided in the applicable indenture; or
- covenant defeasance, whereby we are released from our obligations with
respect to certain of our obligations with respect to the debt securities
issued under the senior indenture and the subordinated indenture
described under "-- Certain Covenants."
We may defease the debt securities of any series by depositing with the
applicable trustee sufficient cash or government securities to pay the
principal, interest, any premium and any other sums due to the stated maturity
date or a redemption date of the debt securities of the applicable series. If
this happens, the holders of the debt securities of the series will not be
entitled to the benefits of the indenture except for registration of transfer
and exchange of debt securities and replacement of destroyed, lost, stolen or
mutilated debt securities.
We may only effect such legal defeasance or a covenant defeasance if, among
other things, we have delivered to the trustee an opinion of counsel confirming
that the holders of the debt securities will not recognize income, gain or loss
for Federal income tax purposes as a result of the defeasance and will be
subject to Federal income tax on the same amounts and in the same manner and at
the same times as would have been the case if the defeasance had not occurred.
In the case of a legal defeasance such legal opinion must be based on receipt of
or publication of a ruling from the Internal Revenue Service or a change in
applicable federal income tax law to such effect.
The prospectus supplement may further describe the provisions if any,
permitting this type of legal defeasance or covenant defeasance with respect to
debt securities of a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which a series of debt securities
are convertible into Class A common stock, preferred stock or other capital
stock will be set forth in the applicable prospectus supplement relating
thereto. Such terms will include:
- whether such debt securities are convertible into shares of our Class A
common stock or preferred stock;
- the conversion price (or manner of calculation thereof);
- the conversion period;
- provisions as to whether conversion will be at the option of the holders
or at our option;
- the events requiring an adjustment of the conversion price;
- provisions affecting conversion in the event of the redemption of such
debt securities; and
- any restrictions on conversion.
SENIOR DEBT SECURITIES
Senior debt securities will be issued under a senior indenture or a senior
convertible indenture. Generally, our senior debt securities will rank equally
with all of our unsecured and unsubordinated debt. All of the series of senior
debt securities will rank equally in right of payment with each other, but will
be effectively subordinated to our subsidiaries' indebtedness and other
liabilities.
SENIOR SUBORDINATED DEBT SECURITIES
Subordinated debt securities will be issued under the senior subordinated
indenture or the senior subordinated convertible indenture and will be
subordinate in right of payment to the extent set forth in the applicable
indenture to all existing and future Senior Indebtedness as defined below. In
the event of any distribution of our assets in any dissolution, winding down,
liquidation or reorganization, payment in full must
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be made on the Senior Indebtedness before any payment is made on the
subordinated debt securities. No payment of principal of, any premium, or
interest on the subordinated debt securities will be permitted upon the default
in payment of any principal, sinking fund installments, interest due or any
other applicable payment obligations on any Senior Indebtedness past any
applicable grace period until such default has been remedied. We will also be
restricted from making any payment on subordinated debt securities for a period
of up to 179 days upon the occurrence of certain other defaults under the Senior
Indebtedness.
"Senior Indebtedness" means the principal of and premium, if any, rent and
interest, whether accruing before or after filing of any petition in bankruptcy
or any similar proceeding by or against us, on any of our Indebtedness, whether
outstanding on the date of issuance of the applicable series of subordinated
debt securities or thereafter incurred, assumed or guaranteed; excluding,
however:
- the subordinated debt securities, and
- any of our Indebtedness which, by its terms or the terms of the
instrument creating or evidencing it, is subordinate or equal in right of
payment to the subordinated debt securities.
"Indebtedness", as used in the preceding paragraph means:
(A) any liability of any person:
(i) for borrowed money,
(ii) evidenced by a note, debenture or similar instrument, or letters
of credit;
(iii) for the payment of money relating to a capital lease obligation,
as defined in the applicable subordinated indenture;
(iv) for certain unpaid and deferred balances of the purchase price of
property;
(v) under bankers acceptances;
(vi) representing the notional amount of obligations under any
agreement or arrangement designed to protect against fluctuations
in interest and currency exchange rates.
(B) any liability of others described in clause (A) which the person has
guaranteed or which is otherwise its legal liability, or which is
secured by a lien on the assets of the person;
(C) any amendment, renewal, extension or refunding of any of this type of
liability.
The subordinated indentures will not limit the amount of additional
Indebtedness, including Senior Indebtedness or Indebtedness ranking equally with
the subordinated debt securities, which we or any subsidiary can create, incur,
assume or guarantee. As a result of these subordination provisions and the
requirement that certain payments be paid over to holders of Senior Indebtedness
in the event of our insolvency, holders of the subordinated debt securities may
recover less ratably than our general creditors.
WAIVER, MODIFICATION AND AMENDMENT OF THE INDENTURES
Unless otherwise provided in a prospectus supplement, the following is a
summary of the waiver, modification and amendment provisions with respect to the
indentures.
Under each indenture, holders of a majority in aggregate principal amount
or, as the case may be, accreted value, or the holders of at least 66 2/3% of
the principal amount or, as the case may be, accreted value of the outstanding
debt securities of that series present at a meeting of the holders held in
accordance with the applicable indenture, of the outstanding debt securities of
any particular series may waive past defaults with respect to that particular
series, except a default in payment of principal, premium or interest or with
respect to any indenture provision that cannot be modified without the consent
of each holder of the debt securities of the series.
We may modify certain of our rights and obligations and the rights of the
holders with the consent of holders of a majority in aggregate principal amount
or, as the case may be, accreted value, or the holders of at
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least 66 2/3% of the principal amount or, as the case may be, accreted value of
the outstanding debt securities of that series present at a meeting of the
holders held in accordance with the applicable indenture, of the outstanding
debt securities of each series affected by the modification. Additionally,
certain limited modifications of the indentures may be made without the
necessity of obtaining the consent of the holders of the debt securities.
However, a modification or amendment will require the consent of each holder of
an outstanding debt security affected if it would:
- change the stated maturity or principal or interest of a debt security;
- reduce the principal amount or accreted value of, or any premium or
interest on any debt security or reduce the principal amount on any
original issue discount;
- reduce the amount payable upon redemption or mandatory repurchase; except
in certain limited circumstances;
- change the currency of payment on a debt security;
- make any change that adversely affects the right to convert a debt
security;
- modify the subordination provisions of the subordinated indenture to
adversely affect the holders of the subordinated debt securities;
- reduce the percentage of debt securities referred to above, the holders
of which are required to consent to any waiver or amendment; or
- modify any of the above requirements.
Certain of the indentures may provide that the consent of each holder of an
outstanding debt is securities affected is required for other modifications and
amendments.
Certain of the indentures may provide for convening meetings of the holders
of the debt securities to consider matters affecting their interests.
GOVERNING LAW
The indenture and the debt securities will be governed by and construed in
accordance with the laws of the State of New York.
CONCERNING THE TRUSTEE
A prospectus supplement will name the trustee under the indentures. If any
trustee becomes a creditor of Charter Communications, Inc., the indentures will
limit its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
A trustee will be permitted to engage in other transactions. However, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the SEC for permission to continue as trustee or resign. Any
resignation will require the appointment of a successor trustee under the
applicable indenture in accordance with the terms and conditions of such
indenture.
A trustee may resign or be removed by us upon the occurrence of certain
events with respect to one or more series of debt securities and a successor
trustee may be appointed to act with respect to any series. The holders of a
majority in aggregate principal amount of the debt securities of any series may
remove the trustee with respect to the debt securities of that series.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
applicable trustee, subject to certain exceptions. The indentures will provide
that in case an event of default has occurred and is continuing, the applicable
trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, a trustee will be under no obligation to exercise any of its rights
or powers under the applicable
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indentures at the request of any holder of debt securities, unless such holder
shall have offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of Charter
Communications, Inc. as such shall have any liability for any obligations of
Charter Communications, Inc. under the debt securities or the indentures, or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of debt securities by accepting a debt security will waive
and release all such liability. The waiver and release will be part of the
consideration for issuance of the debt securities at the time of issuance. The
waiver may not be effective to waive liabilities under the federal securities
laws.
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DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS
GENERAL
Our capital stock and the provisions of our restated certificate of
incorporation and bylaws are as described below. These summaries are qualified
by reference to the restated certificate of incorporation and the bylaws, copies
of which have been filed with the SEC and are incorporated by reference hereto.
Our authorized capital stock consists of 1.750 billion shares of Class A
common stock, par value $.001 per share, 750 million shares of Class B common
stock, par value $.001 per share, and 250 million shares of preferred stock, par
value $.001 per share.
Our restated certificate of incorporation and Charter Communications
Holding Company's amended and restated limited liability company agreement
contain provisions that are designed to cause the number of shares of our common
stock that are outstanding to equal the number of common membership units of
Charter Communications Holding Company owned by Charter Communications, Inc. and
to cause the value of a share of common stock to be equal to the value of a
common membership unit. These provisions are meant to allow a holder of our
common stock to easily understand the economic interest that such holder's
common shares represent of Charter Communications Holding Company's business.
In particular, provisions in our restated certificate of incorporation
provide that:
(1) at all times the number of shares of our common stock outstanding will
be equal to the number of Charter Communications Holding Company common
membership units owned by Charter Communications, Inc.;
(2) Charter Communications, Inc. will not hold any assets other than, among
other allowable assets:
- working capital and cash held for the payment of current obligations
and receivables from Charter Communications Holding Company;
- common membership units of Charter Communications Holding Company;
and
- obligations and equity interests of Charter Communications Holding
Company that correspond to obligations and equity interests issued
by Charter Communications, Inc.;
(3) Charter Communications, Inc. will not borrow any money or enter into
any capital lease unless Charter Communications Holding Company enters
into the same arrangements with Charter Communications, Inc. so that
Charter Communications, Inc.'s liability flows through to Charter
Communications Holding Company.
Provisions in Charter Communications Holding Company's amended and restated
limited liability company agreement provide that upon the contribution by
Charter Communications, Inc. of assets acquired through the issuance of common
stock by Charter Communications, Inc., Charter Communications Holding Company
will issue to Charter Communications, Inc. an equal number of common membership
units as Charter Communications, Inc. issued shares of common stock. In the
event of the contribution by Charter Communications, Inc. of assets acquired
through the issuance of indebtedness or preferred interests of Charter
Communications, Inc., Charter Communications Holding Company will issue to
Charter Communications, Inc. a corresponding obligation to allow Charter
Communications, Inc. to pass through to Charter Communications Holding Company
these liabilities or preferred interests.
COMMON STOCK
As of January 31, 2001, there were 233,768,422 shares of Class A common
stock issued and outstanding and 50,000 shares of Class B common stock issued
and outstanding. If, as described below, all shares of Class B common stock
convert to shares of Class A common stock as a result of dispositions by Mr.
Allen and his
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affiliates, the holders of Class A common stock will be entitled to elect all
members of the board of directors, other than any members elected separately by
the holders of any preferred shares.
VOTING RIGHTS. The holders of Class A common stock and Class B common
stock generally have identical rights, except:
- each Class A common shareholder is entitled to one vote per share; and
- each Class B common shareholder is entitled to a number of votes based on
the number of outstanding Class B common stock and Charter Communications
Holding Company membership units exchangeable for Class B common stock.
For example, Mr. Allen is entitled to ten votes for each share of Class B
common stock held by him or his affiliates and ten votes for each
membership unit held by him or his affiliates; and
- the Class B common shareholders have the sole power to vote to amend or
repeal the provisions of our restated certificate of incorporation
relating to:
(1) the activities in which Charter Communications, Inc. may engage;
(2) the required ratio of outstanding shares of common stock to
outstanding membership units owned by Charter Communications, Inc.;
and
(3) the restrictions on the assets and liabilities that Charter
Communications, Inc. may hold.
The effect of the provisions described in the final bullet point is that
holders of Class A common stock have no right to vote on these matters. These
provisions allow Mr. Allen, for example, to amend the restated certificate of
incorporation to permit Charter Communications, Inc. to engage in currently
prohibited business activities without having to seek the approval of holders of
Class A common stock.
The voting rights relating to the election of Charter Communications,
Inc.'s board of directors are as follows:
- The Class B common shareholders, voting separately as a class, are
entitled to elect all but one member of our board of directors.
- Class A and Class B common shareholders, voting together as one class,
are entitled to elect the remaining member of our board of directors who
is not elected by the Class B common shareholders.
- Class A common shareholders and Class B common shareholders are not
entitled to cumulate their votes in the election of directors.
- In addition, Charter Communications, Inc. may issue one or more series of
preferred stock that entitle the holders of such preferred stock to elect
directors.
Other than the election of directors and any matters where Delaware law or
Charter Communications, Inc.'s restated certificate of incorporation or bylaws
requires otherwise, all matters to be voted on by shareholders must be approved
by a majority of the votes cast by the holders of shares of Class A common stock
and Class B common stock present in person or represented by proxy, voting
together as a single class, subject to any voting rights granted to holders of
any preferred stock.
Amendments to Charter Communications, Inc.'s restated certificate of
incorporation that would adversely alter or change the powers, preferences or
special rights of the Class A common stock or the Class B common stock must be
approved by a majority of the votes entitled to be cast by the holders of the
outstanding shares of the affected class, voting as a separate class. In
addition, the following actions by Charter
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Communications, Inc. must be approved by the affirmative vote of the holders of
at least a majority of the voting power of the outstanding Class B common stock,
voting as a separate class:
- the issuance of any Class B common stock other than to Mr. Allen and his
affiliates and other than pursuant to specified stock splits and
dividends;
- the issuance of any stock other than Class A common stock (and other than
Class B common stock as described above); and
- the amendment, modification or repeal of any provision of its restated
certificate of incorporation relating to capital stock or the removal of
directors.
Charter Communications, Inc. will lose its rights to manage the business of
Charter Communications Holding Company and Charter Investment will become the
sole manager of Charter Communications Holding Company if at any time a court
holds that the holders of the Class B common stock no longer:
- have the number of votes per share of Class B common stock described
above;
- have the right to elect, voting separately as a class, all but one member
of Charter Communications Inc.'s board of directors, except for any
directors elected separately by the holders of preferred stock; or
- have the right to vote as a separate class on matters that adversely
affect the Class B common stock with respect to:
(1) the issuance of equity securities of Charter Communications, Inc.
other than the Class A common stock; or
(2) the voting power of the Class B common stock.
These provisions are contained in the amended and restated limited
liability company agreement of Charter Communications Holding Company. The Class
B common stock could lose these rights if a holder of Class A common stock
successfully challenges in a court proceeding the voting rights of the Class B
common stock. In any of these circumstances, Charter Communications, Inc. would
also lose its 100% voting control of Charter Communications Holding Company as
provided in Charter Communications Holding Company's amended and restated
limited liability company agreement. These provisions exist to assure Mr. Allen
that he will be able to control Charter Communications Holding Company in the
event he was no longer able to control Charter Communications, Inc. through his
ownership of Class B common stock. These events could have a material adverse
impact on our business and the market price of the Class A common stock and the
notes.
DIVIDENDS. Holders of Class A common stock and Class B common stock will
share ratably (based on the number of shares of common stock held) in any
dividend declared by our board of directors, subject to any preferential rights
of any outstanding preferred stock. Dividends consisting of shares of Class A
common stock and Class B common stock may be paid only as follows:
- shares of Class A common stock may be paid only to holders of Class A
common stock;
- shares of Class B common stock may be paid only to holders of Class B
common stock; and
- the number of shares of each class of common stock payable per share of
such class of common stock shall be equal in number.
Our restated certificate of incorporation provides that we may not pay a
stock dividend unless the number of outstanding Charter Communications Holding
Company common membership units are adjusted accordingly. This provision is
designed to maintain the equal value between shares of common stock and
membership units and the one-to-one exchange ratio.
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CONVERSION OF CLASS B COMMON STOCK. Each share of outstanding Class B
common stock will automatically convert into one share of Class A common stock
if, at any time, Mr. Allen or any of his affiliates sells any shares of common
stock of Charter Communications, Inc. or membership units of Charter
Communications Holding Company and as a result of such sale, Mr. Allen and his
affiliates no longer own directly and indirectly common stock and other equity
interests in Charter Communications, Inc. and membership units in Charter
Communications Holding Company that in total represent at least:
- 20% of the sum of the values, calculated as of November 12, 1999, of the
shares of Class B common stock directly or indirectly owned by Mr. Allen
and his affiliates and the shares of Class B common stock for which
outstanding Charter Communications Holding Company membership units
directly or indirectly owned by Mr. Allen and his affiliates were
exchangeable on that date, and
- 5% of the sum of the values, calculated as of the measuring date, of
shares of outstanding common stock and other equity interests in Charter
Communications, Inc. and the shares of Charter Communications, Inc.
common stock for which outstanding Charter Communications Holding Company
membership units are exchangeable on such date.
These provisions exist to assure that Mr. Allen will no longer be able to
control Charter Communications, Inc. if after sales of his equity interests he
owns an insignificant economic interest in our business. The conversion of all
Class B common stock in accordance with these provisions would not trigger
Charter Communications Holding Company's limited liability company agreement
provisions described above whereby Charter Communications, Inc. would lose its
management rights and special voting rights relating to Charter Communications
Holding Company in the event of an adverse determination of a court affecting
the rights of the Class B common stock.
Each holder of a share of Class B common stock has the right to convert
such share into one share of Class A common stock at any time on a one-for-one
basis. If a Class B common shareholder transfers any shares of Class B common
stock to a person other than an authorized Class B common shareholder, these
shares of Class B common stock will automatically convert into shares of Class A
common stock. Authorized Class B common shareholders are Paul G. Allen, entities
controlled by Mr. Allen, Mr. Allen's estate, any organization qualified under
Section 501(c)(3) of the Internal Revenue Code that is Mr. Allen's beneficiary
upon his death and certain trusts established by or for the benefit of Mr.
Allen. In this context, "controlled" means the ownership of more than 50% of the
voting power and economic interest of an entity and "transfer" means the
transfer of record or beneficial ownership of any such share of Class B common
stock.
OTHER RIGHTS. Shares of Class A common stock and Class B common stock will
be treated equally in the event of any merger or consolidation of Charter
Communications, Inc. so that:
- each class of common shareholders will receive per share the same kind
and amount of capital stock, securities, cash and/or other property
received by any other class of common shareholders, provided that any
shares of capital stock so received may differ in a manner similar to the
manner in which the shares of Class A common stock and Class B common
stock differ; or
- each class of common shareholders, to the extent they receive a different
kind (other than as described above) or different amount of capital
stock, securities, cash and/or other property than that received by any
other class of common shareholders, will receive for each share of common
stock they hold, stock, securities, cash and/or other property having a
value substantially equivalent to that received by such other class of
common shareholders.
Upon Charter Communications, Inc.'s liquidation, dissolution or winding up,
after payment in full of the amounts required to be paid to preferred
shareholders, if any, all common shareholders, regardless of class, are entitled
to share ratably in any assets and funds available for distribution to common
shareholders.
No shares of any class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of common stock.
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PREFERRED STOCK
General
Charter Communications, Inc.'s board of directors is authorized, subject to
the approval of the holders of the Class B common stock, to issue from time to
time up to an aggregate of 250 million shares of preferred stock in one or more
series and to fix the numbers, powers, designations, preferences, and any
special rights of the shares of each such series thereof, including:
- dividend rights and rates;
- conversion rights;
- voting rights;
- terms of redemption (including any sinking fund provisions) and
redemption price or prices;
- liquidation preferences;
- the number of shares constituting and the designation of such series; and
- convertibility or exchangeability for other debt or equity securities.
There are no shares of preferred stock outstanding. Charter Communications,
Inc. has no present plans to issue any shares of preferred stock.
Charter Communications, Inc. may issue, from time to time, shares of one or
more series of preferred stock. The following description sets forth certain
general terms and provisions of the preferred stock to which any prospectus
supplement may relate. The particular terms of any series of preferred stock and
the extent, if any, to which such general provisions may apply to the series of
preferred stock so offered will be described in the prospectus supplement
relating to such preferred stock. The following summary of certain provisions of
the preferred stock does not purport to be complete and is subject to, and is
qualified in its entirety by express reference to, the provisions of Charter
Communications, Inc.'s certificate of incorporation.
DIVIDENDS. Holders of shares of preferred stock shall be entitled to
receive, when, as and if declared by the board of directors out of funds of
Charter Communications, Inc. legally available therefor, dividends payable in
cash or such other property and at such dates and such rates, if any, as may be
set forth in the applicable prospectus supplement.
Unless otherwise set forth in the applicable prospectus supplement, each
series of preferred stock will rank junior as to dividends to any preferred
stock that may be issued in the future that is expressly senior as to dividends
to such preferred stock. Unless otherwise set forth in the applicable prospectus
supplement, no dividends (other than in common stock or other capital stock
ranking junior to the preferred stock of any series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment, nor shall any
other distribution be declared or made upon the common stock, or any other
capital stock of Charter Communications, Inc. ranking junior to or on a parity
with the preferred stock of such series as to dividends, nor shall any common
stock or any other capital stock of the Company ranking junior to or on a parity
with the preferred stock of such series as to dividends be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by Charter Communications, Inc. (except by conversion into or exchange for other
capital stock of Charter Communications, Inc. ranking junior to the preferred
stock of such series as to dividends) unless
(1) if such series of preferred stock has a cumulative dividend, full
cumulative dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for all past dividend periods and the then current
dividend period, and
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(2) if such series of preferred stock does not have a cumulative dividend,
full dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend period;
provided, however, that any monies theretofore deposited in any sinking fund
with respect to any preferred stock in compliance with the provisions of such
sinking fund may thereafter be applied to the purchase or redemption of such
preferred stock in accordance with the terms of such sinking fund, regardless of
whether at the time of such application full cumulative dividends upon shares of
the preferred stock outstanding on the last dividend payment date shall have
been paid or declared and set apart for payment; and provided, further, that any
such junior or parity preferred stock or common stock may be converted into or
exchanged for stock of Charter Communications, Inc. ranking junior to the
preferred stock as to dividends.
The amount of dividends payable for the initial dividend period or any
period shorter than a full dividend period shall be computed on the basis of a
360-day year of twelve 30-day months. Accrued but unpaid dividends will not bear
interest.
CONVERTIBILITY. No series of preferred stock will be convertible into, or
exchangeable for, other securities or property, except as set forth in the
applicable prospectus supplement.
REDEMPTION AND SINKING FUND. No series of preferred stock will be
redeemable or receive the benefit of a sinking fund, except as set forth in the
applicable prospectus supplement.
LIQUIDATION RIGHTS. Unless otherwise set forth in the applicable
prospectus supplement, in the event of any liquidation, dissolution or
winding-up of Charter Communications, Inc., the holders of shares of each series
of preferred stock will be entitled to receive out of assets of the company
available for distribution to stockholders, before any distribution of assets is
made to holders of (i) any other shares of preferred stock ranking junior to
such series of preferred stock as to rights upon liquidation, dissolution or
winding-up and (ii) shares of common stock, liquidating distributions per share
in the amount of the liquidation preference specified in the applicable
prospectus supplement for such series of preferred stock plus any dividends
accrued and accumulated but unpaid to the date of final distribution; but the
holders of each series of preferred stock will not be entitled to receive the
liquidating distribution of, plus such dividends on, such shares until the
liquidation preference of any shares of the company's capital stock ranking
senior to such series of preferred stock as to the rights upon liquidation,
dissolution or winding-up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. If upon any liquidation, dissolution
or winding-up of the company, the amounts payable with respect to the preferred
stock, and any other preferred stock ranking as to any such distribution on a
parity with the preferred stock will share ratably in any such distribution of
assets in proportion to the full respective preferential amount to which they
are entitled. Unless otherwise specified in a prospectus supplement for a series
of preferred stock, after payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of preferred
stock will not be entitled to any further participation in any distribution of
assets by the company. Unless otherwise specified in a prospectus supplement for
a series of preferred stock, neither a consolidation or merger of Charter
Communications, Inc. with another corporation nor a sale of securities by
Charter Communications, Inc. shall be considered a liquidation, dissolution or
winding-up of Charter Communications, Inc.
VOTING RIGHTS. Holders of preferred stock will not have any voting rights,
except as set forth below or in the applicable prospectus supplement to which
such preferred stock relates or as otherwise from time to time required by law.
Unless otherwise set forth in the applicable prospectus supplement, holders of
shares of preferred stock will have one vote for each share held.
MISCELLANEOUS. The holders of preferred stock will have no preemptive
rights. The preferred stock, upon issuance against full payment of the purchase
price therefor, will be fully paid and nonassessable. Shares of preferred stock
redeemed or otherwise reacquired by Charter Communications, Inc. shall resume
the status of authorized and unissued shares of preferred stock undesignated as
to series, and shall be available for subsequent issuance. There are no
restrictions on repurchase or redemption of the preferred stock while there is
any arrearage on sinking fund installments, except as may be set forth in an
applicable prospectus
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supplement. Payment of dividends on any series of preferred stock may be
restricted by loan agreements, indentures and other transactions entered into by
Charter Communications, Inc. Any material contractual restrictions on dividend
payments will be described or incorporated by reference in the applicable
prospectus supplement.
NO OTHER RIGHTS. The shares of a series of preferred stock will not have
any preferences, voting powers or relative, participating, optional or other
special rights except as set forth above or in the applicable prospectus
supplement, the Charter Communications, Inc. certificate of incorporation or as
otherwise required by law.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for each
series of preferred stock will be designated in the applicable prospectus
supplement.
OPTIONS
As of May 10, 2001, options to purchase a total of 20,599,026 membership
units in Charter Communications Holding Company are outstanding pursuant to the
1999 Charter Communications Option Plan. Of these options, 5,254,083 have
vested. In addition, an option to purchase 7,044,127 membership units in Charter
Communications Holding Company is outstanding pursuant to an employment
agreement and a related agreement with Mr. Kent, Charter Communications, Inc.'s
chief executive officer. Of Mr. Kent's options, 4,549,332 have vested as of May
10, 2001. The membership units received upon exercise of any of the options
described in this paragraph are automatically exchanged for shares of our Class
A common stock on a one-for-one basis. In addition, a portion of the unvested
options will vest each month.
In February 2001, our Board of Directors approved the adoption of the
Charter Communications, Inc. 2001 Stock Incentive Plan that would provide for
grants of options and other stock-based benefits and performance awards to the
current and prospective employees, non-employee directors, and consultants of us
and our subsidiaries and affiliates. To date, options to purchase a total of
8,060,630 shares of our Class A common stock are outstanding pursuant to the
2001 Incentive Plan. Of these options, 60,000 have vested. The exercise of
vested options and all grants under the 2001 Incentive Plan are subject to the
approval of the plan by our shareholders at the 2001 annual meeting of
shareholders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER COMMUNICATIONS, INC.'S RESTATED
CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of Charter Communications, Inc.'s restated certificate of
incorporation and bylaws may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider in its best interest, including those attempts that might result
in a premium over the market price for the shares held by shareholders.
SPECIAL MEETING OF SHAREHOLDERS. Our bylaws provide that, subject to the
rights of holders of any series of preferred stock, special meetings of our
shareholders may be called only by the chairman of our board of directors, our
chief executive officer or a majority of our board of directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws provide that shareholders seeking to bring business
before an annual meeting of shareholders, or to nominate candidates for election
as directors at an annual meeting of shareholders, must provide timely prior
written notice of their proposals. To be timely, a shareholder's notice must be
received at our principal executive offices not less than 45 days nor more than
70 days prior to the first anniversary of the date on which we first mailed our
proxy statement for the prior year's annual meeting. If, however, the date of
the annual meeting is more than 30 days before or after the anniversary date of
the prior year's annual meeting, notice by the shareholder must be received not
less than 90 days prior to the annual meeting or by the 10th day following the
public announcement of the date of the meeting, whichever occurs later, and not
more than 120 days prior to the annual meeting. Our bylaws specify requirements
as to the form and content of a shareholder's notice.
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These provisions may limit shareholders in bringing matters before an annual
meeting of shareholders or in making nominations for directors at an annual
meeting of shareholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
Class A common stock are available for future issuance without shareholder
approval and, subject to approval by the holders of the Class B common stock,
the authorized but unissued shares of Class B common stock and preferred stock
are available for future issuance. These additional shares may be utilized for a
variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares of common stock and preferred stock
could render more difficult or discourage an attempt to obtain control of us by
means of a proxy contest, tender offer, merger or otherwise.
MEMBERSHIP UNITS
The Charter Communications Holding Company limited liability company
agreement provides for three separate classes of common membership units
designated Class A, Class B and Class C and one class of preferred membership
units designated Class A. As of January 31, 2001, there were 572,864,896 Charter
Communications Holding Company common membership units issued and outstanding
and 3,006,202 preferred membership units issued and outstanding as described
below.
CLASS A COMMON MEMBERSHIP UNITS. As of January 31, 2001, there were a
total of 324,300,479 issued and outstanding Class A common membership units
consisting of 217,585,246 units owned by Charter Investment and 106,715,233
units owned by Vulcan Cable III, Inc.
CLASS B COMMON MEMBERSHIP UNITS. As of January 31, 2001, there were a
total of 233,768,422 issued and outstanding Class B common membership units all
of which are owned by Charter Communications, Inc. In addition, as of January
31, 2001, there were 28,286,670 Class B common membership units underlying
options issued and outstanding under the 1999 Charter Communications Option Plan
and under agreements with Mr. Kent. 7,286,670 of these units are subject to
options that vested as of that date.
CLASS C COMMON MEMBERSHIP UNITS. As of January 31, 2001, there were a
total of 14,795,995 issued and outstanding Class C common membership units.
These units are owned by some of the sellers in the Bresnan acquisition.
CLASS A PREFERRED MEMBERSHIP UNITS. As of January 31, 2001, there were a
total of 3,006,202 issued and outstanding Class A preferred membership units.
These units are owned by some of the sellers in the Rifkin acquisition.
Any matter requiring a vote of the members of Charter Communications
Holding Company requires the affirmative vote of a majority of the Class B
common membership units. Charter Communications, Inc. owns all Class B common
membership units and therefore controls Charter Communications Holding Company.
Because Mr. Allen owns high vote Class B common stock of Charter Communications,
Inc. that entitles him to approximately 93.5% of the voting power of the
outstanding common stock of Charter Communications, Inc., Mr. Allen controls
Charter Communications, Inc. and through this company has voting control of
Charter Communications Holding Company.
The net cash proceeds that Charter Communications, Inc. receives from any
issuance of shares of common stock will be immediately transferred to Charter
Communications Holding Company in exchange for membership units equal in number
to the number of shares of common stock issued by Charter Communications, Inc.
EXCHANGE AGREEMENTS
Charter Communications, Inc. is a party to an agreement permitting Vulcan
Cable III Inc., Charter Investment and any other affiliate of Mr. Allen to
exchange at any time on a one-for-one basis any or all of
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their Charter Communications Holding Company common membership units for shares
of Class B common stock. This exchange may occur directly or, at the election of
the exchanging holder, indirectly through a tax-free reorganization such as a
share exchange or a statutory merger of any Allen-controlled entity with and
into Charter Communications, Inc. or a wholly owned subsidiary of Charter
Communications, Inc. In the case of an exchange in connection with a tax-free
share exchange or a statutory merger, shares of Class A common stock held by Mr.
Allen or the Allen-controlled entity will also be exchanged for Class B common
stock. Mr. Allen currently owns shares of Class A common stock as a result of
the exercise of put rights granted to sellers in the Falcon acquisition and the
Rifkin acquisition. Mr. Allen or his affiliates may in the future own additional
shares of Class A common stock, for example, if they were required to purchase
shares of Class A common stock as a result of the exercise of put rights granted
to the Rifkin, Falcon and Bresnan sellers in respect of their shares of Class A
common stock.
Similar exchange agreements also permit all other holders of Charter
Communications Holding Company common membership units, other than Charter
Communications, Inc., to exchange at any time on a one-for-one basis any or all
of their common membership units for shares of Class A common stock. These other
holders include those sellers under the Bresnan acquisition that received common
membership units of Charter Communications Holding Company in connection with
that acquisition.
Charter Communications Holding Company common membership units are
exchangeable at any time for shares of our Class A common stock or, in the case
of Mr. Allen and his affiliates, Class B common stock which is then convertible
into shares of Class A common stock. The exchange agreements, Mr. Kent's option
agreement and the Charter Communications Option Plan state that common
membership units are exchangeable for shares of common stock at a value equal to
the fair market value of the common membership units. The exchange ratio of
common membership units to shares of Class A common stock will be one to one
because Charter Communications, Inc. and Charter Communications Holding Company
have been structured so that the fair market value of a share of the Class A
common stock equals the fair market value of a common membership unit owned by
Charter Communications, Inc.
Our organizational documents achieve this result by:
- limiting the assets and liabilities that Charter Communications, Inc. may
hold; and
- requiring the number of shares of our common stock outstanding at any
time to equal the number of common membership units owned by Charter
Communications, Inc.
If we fail to comply with these provisions or they are changed, the
exchange ratio may vary from one to one and will then be based on a
pre-determined formula contained in the exchange agreements, Mr. Kent's option
agreement and the 1999 Charter Communications Option Plan. This formula will be
based on the then current relative fair market values of common membership units
and common stock.
SPECIAL TAX ALLOCATION PROVISIONS
OVERVIEW. Charter Communications Holding Company's amended and restated
limited liability company agreement contains a number of provisions affecting
allocation of tax losses and tax profits to its members. In some situations,
these provisions could result in Charter Communications, Inc. having to pay
income taxes in an amount that is more than it would have had to pay if these
provisions did not exist. The purpose of these provisions is to allow Mr. Allen
to take advantage for tax purposes of the losses expected to be generated by
Charter Communications Holding Company. We do not expect that these special tax
allocation provisions will materially affect our results of operations or
financial condition.
SPECIAL LOSS ALLOCATION PROVISIONS. The Charter Communications Holding
Company amended and restated limited liability company agreement provides that,
through the end of 2003, tax losses of Charter Communications Holding Company
that would otherwise have been allocated to us based generally on the percentage
of outstanding membership units will be allocated instead to the membership
units held by Vulcan Cable III Inc. and Charter Investment, Inc. We expect that
the effect of these special loss allocation
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provisions will be that Mr. Allen, through his investment in Vulcan Cable III
Inc. and Charter Investment, Inc., will receive tax savings.
Except as described below, the special loss allocation provisions should
not adversely affect Charter Communications, Inc. or its shareholders. This is
because Charter Communications, Inc. would not be in a position to benefit from
tax losses until Charter Communications Holding Company generates allocable tax
profits, and we do not expect Charter Communications Holding Company to generate
tax profits for the foreseeable future.
The special loss allocation provisions will reduce Mr. Allen's rights to
receive distributions upon a liquidation of Charter Communications Holding
Company if over time there are insufficient allocations to be made under the
special profit allocation provisions described below to restore these
distribution rights.
SPECIAL PROFIT ALLOCATION PROVISIONS. The amended and restated limited
liability company agreement further provides that, beginning at the time Charter
Communications Holding Company first becomes profitable (as determined under the
applicable federal income tax rules for determining book profits), tax profits
that would otherwise have been allocated to Charter Communications, Inc. based
generally on its percentage of outstanding membership units will instead be
allocated to Mr. Allen, through the membership units held by Vulcan Cable III
Inc. and Charter Investment. We expect that these special profit allocation
provisions will provide tax savings to Charter Communications, Inc. and result
in additional tax costs for Mr. Allen. The special profit allocations will also
have the effect of restoring over time Mr. Allen's rights to receive
distributions upon a liquidation of Charter Communications Holding Company.
These special profit allocations generally will continue until such time as Mr.
Allen's rights to receive distributions upon a liquidation of Charter
Communications Holding Company that had been reduced as a result of the special
loss allocations have been fully restored. We cannot assure you that Charter
Communications Holding Company will become profitable.
POSSIBLE ADVERSE IMPACT FROM THE SPECIAL ALLOCATION PROVISIONS. In a
number of situations, these special tax allocations could result in our having
to pay more taxes than if the special tax allocation provisions had not been
adopted.
For example, the special profit allocation provisions may result in an
allocation of tax profits to the membership units held by Vulcan Cable III Inc.
and Charter Investment that is less than the amount of the tax losses previously
allocated to these units pursuant to the special loss allocation provisions
described above. In this case, we could be required to pay higher taxes but only
commencing at the time when Mr. Allen's rights to receive distributions upon a
liquidation of Charter Communications Holding Company have been fully restored
as described above. These tax payments could reduce our reported net income for
the relevant period.
As another example, under their exchange agreement with Charter
Communications, Inc., Vulcan Cable III Inc. and Charter Investment may exchange
some or all of their membership units for Class B common stock prior to the date
that the special profit allocation provisions have had the effect of fully
restoring Mr. Allen's rights to receive distributions upon a liquidation of
Charter Communications Holding Company. Charter Communications, Inc. will then
be allocated tax profits attributable to the membership units it receives in
such exchange pursuant to the special profit allocation provisions. As a result,
Charter Communications, Inc. could be required to pay higher taxes in years
following such an exchange of common stock for membership units than if the
special tax allocation provisions had not been adopted. These tax payments could
reduce our reported net income for the relevant period.
However, we do not anticipate that the special tax allocations will result
in Charter Communications, Inc. having to pay taxes in an amount that is
materially different on a present value basis than the taxes that would be
payable had the special tax allocation provisions not been adopted, although
there is no assurance that a material difference will not result.
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IMPACT OF MERGER AND OTHER NON-TAXABLE TRANSACTIONS; MR. ALLEN'S
REIMBURSEMENT OBLIGATIONS. Mr. Allen, through Vulcan Cable III Inc. and Charter
Investment, has the right to transfer his Charter Communications Holding Company
membership units in a non-taxable transaction, including a merger, to Charter
Communications, Inc. for common stock. Such a transaction may occur prior to the
date that the special profit allocation provisions have had the effect of fully
restoring Mr. Allen's rights to receive distributions upon a liquidation of
Charter Communications Holding Company. In this case, the following will apply.
Vulcan Cable III Inc. or Charter Investment may elect to cause Charter
Communications Holding Company to make additional special allocations in order
to restore Mr. Allen's rights to receive distributions upon a liquidation of
Charter Communications Holding Company. If this election is not made, or if an
election is made but these additional special allocations are insufficient to
restore these rights to Mr. Allen, Mr. Allen, Vulcan Cable III Inc. or Charter
Investment, whichever person or entity receives the Class B common stock, will
agree to make specified payments to Charter Communications, Inc. in respect of
the common stock received. The payments will equal the amount that Charter
Communications, Inc. actually pays in income taxes solely as a result of the
allocation to it of tax profits because of the losses previously allocated to
membership units transferred to it. Any of these payments would be made at the
time Charter Communications, Inc. actually pays these income taxes.
BRESNAN SPECIAL ALLOCATION PROVISIONS. Charter Communications Holding
Company's amended and restated limited liability company agreement contains
provisions for special allocations of tax losses and tax profits between the
Bresnan sellers receiving membership units on the one hand and Mr. Allen,
through Vulcan Cable III Inc. and Charter Investment, Inc., on the other.
Because of these provisions, Charter Communications, Inc. could under some
circumstances be required to pay higher taxes in years following an exchange by
the Bresnan sellers of membership units for shares of Class A common stock.
However, we do not anticipate that any such exchange for Class A common stock
will result in our having to pay taxes in an amount that is materially different
on a present value basis than the taxes that would have been payable had the
special allocations not been adopted, although there is no assurance that a
material difference will not result.
The effect of the special loss allocations discussed above is that Mr.
Allen and some of the sellers in the Bresnan transaction receive tax savings
while at the same time reducing their rights to receive distributions upon a
liquidation of Charter Communications Holding Company. If and when special
profit allocations occur, their rights to receive distributions upon a
liquidation of Charter Communications Holding Company will be restored over
time, and they will likely incur some additional tax costs.
OTHER MATERIAL TERMS OF THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY
AGREEMENT OF CHARTER COMMUNICATIONS HOLDING COMPANY
GENERAL. Charter Communications Holding Company's amended and restated
limited liability company agreement contains provisions that permit each member
(and its officers, directors, agents, shareholders, members, partners or
affiliates) to engage in businesses that may compete with the businesses of
Charter Communications Holding Company or any subsidiary. However, the directors
of Charter Communications, Inc., including Mr. Allen and Mr. Kent, are subject
to fiduciary duties under Delaware corporate law that generally require them to
present business opportunities in the cable transmission business to Charter
Communications, Inc.
The amended and restated limited liability company agreement restricts the
business activities that Charter Communications Holding Company may engage in.
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TRANSFER RESTRICTIONS. The amended and restated limited liability company
agreement restricts the ability of each member to transfer its membership
interest unless specified conditions have been met. These conditions include:
- the transfer will not result in the loss of any license or regulatory
approval or exemption that has been obtained by Charter Communications
Holding Company and is materially useful in its business as then
conducted or proposed to be conducted;
- the transfer will not result in a material and adverse limitation or
restriction on the operations of Charter Communications Holding Company
and its subsidiaries taken as a whole;
- the proposed transferee agrees in writing to be bound by the limited
liability company agreement; and
- except for a limited number of permitted transfers under the limited
liability company agreement, the transfer has been approved by the
manager in its sole discretion.
SPECIAL REDEMPTION RIGHTS RELATING TO CLASS A PREFERRED MEMBERSHIP
UNITS. The holders of Class A preferred membership units have the right under a
separate redemption and put agreement to cause Charter Communications Holding
Company to redeem their preferred membership units at specified redemption
prices.
SPECIAL RIGHTS GRANTED FORMER OWNERS OF BRESNAN. The amended and restated
limited liability company agreement provides that Charter Communications, Inc.
must provide the Bresnan sellers that are affiliates of Blackstone Group L.P.
consultative rights reasonably acceptable to Charter Communications, Inc. so
that, as long as these Bresnan sellers hold Class C common membership units,
they may preserve their status and benefits they get from being a venture
capital operating company.
AMENDMENTS TO THE LIMITED LIABILITY COMPANY AGREEMENT. Any amendment to
the limited liability company agreement generally may be adopted only upon the
approval of a majority of the Class B common membership units. The agreement may
not be amended in a manner that adversely affects the rights of any class of
common membership units without the consent of holders holding a majority of the
membership units of that class.
REGISTRATION RIGHTS
HOLDERS OF CLASS B COMMON STOCK. Charter Communications, Inc., Mr. Allen,
Charter Investment, Vulcan Cable III Inc., Mr. Kent, Mr. Babcock and Mr. Wood
are parties to a registration rights agreement. The agreement gives Mr. Allen
and his affiliates the right to cause us to register the shares of Class A
common stock issued to them upon conversion of any shares of Class B common
stock that they may hold. The agreement gives Messrs. Kent, Babcock and Wood the
right to cause us to register the shares of Class A common stock issuable to
them upon exchange of Charter Communications Holding Company membership units.
This registration rights agreement provides that each eligible holder is
entitled to unlimited "piggyback" registration rights permitting them to include
their shares of Class A common stock in registration statements filed by us.
These holders may also exercise their demand rights causing us, subject to
specified limitations, to register their Class A shares, provided that the
amount of shares subject to each demand has a market value at least equal to $50
million or, if the market value is less than $50 million, all of the Class A
shares of the holders participating in the offering are included in such
registration. We are obligated to pay the costs associated with all such
registrations.
Holders may elect to have their shares registered pursuant to a shelf
registration statement if at the time of the election, Charter Communications,
Inc. is eligible to file a registration statement on Form S-3 and the amount of
shares to be registered has a market value equal to at least $100.0 million on
the date of the election.
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Mr. Allen also has the right to cause Charter Communications, Inc. to file
a shelf registration statement in connection with the resale of shares of Class
A common stock then held by or issuable to specified sellers under the Falcon
and Bresnan acquisitions that have the right to cause Mr. Allen to purchase
equity interests issued to them as a result of these acquisitions.
All shares of Class A common stock issuable to the registration rights
holders in exchange for Charter Communications Holding Company membership units
and upon conversion of outstanding Class B common stock and conversion of Class
B common stock issuable to the registration rights holders upon exchange of
Charter Communications Holding Company membership units are subject to the
registration rights described above.
RIFKIN SELLERS. In connection with the Rifkin acquisition, Charter
Communications, Inc. registered the resale of the Class A common stock issued in
exchange for the Charter Communications Holding Company Class A preferred
membership units by specified Rifkin sellers on a shelf registration statement
on Form S-1 in September 2000. The shelf registration will remain in effect
until the earlier of September 26, 2002 or the sale of all of the shares of
common stock as contemplated by the registration statement on Form S-1 or such
shares are no longer restricted securities under certain provisions of the
Securities Act. The Rifkin sellers have the right to have Mr. Allen purchase the
shares of Class A common stock at a price equal to $19.00 per share plus 4.5%
per year accruing from November 12, 1999. They have this right until November
12, 2001, or such earlier date as of which the closing price of the Class A
common stock is at least $21.85 for ninety of one hundred consecutive trading
days, provided that at such time the shares are eligible for resale under Rule
144 of the Securities Act or are otherwise registered for resale.
FALCON SELLERS. The Falcon sellers are entitled to registration rights
with respect to the shares of Class A common stock issued in exchange for
Charter Communications Holding Company membership units received by them in
connection with the Falcon acquisition.
These Falcon sellers or their permitted transferees have "piggyback"
registration rights and up to four "demand" registration rights with respect to
these shares of Class A common stock. 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. A majority of the holders of Class A common stock making
a demand may also require us, on a one-time basis, to file a shelf registration
statement for shares worth a total of at least $100 million. Holders of 122,668
shares of Class A common stock issued to Falcon sellers exercised their
"piggyback" registration rights and registered such shares on the registration
statement filed as described under "-- Rifkin Sellers" above.
The Falcon sellers have the right to have Mr. Allen purchase the shares of
Class A common stock at a price equal to $25.85 per share plus 4.5% accruing
from November 12, 1999. They have this right until November 12, 2001 or such
earlier date as of which the closing price of the Class A common stock is $21.85
for ninety of one hundred consecutive trading days, provided that at such time
the shares are eligible for resale under Rule 144 of the Securities Act or are
otherwise registered for resale.
BRESNAN SELLERS. The Bresnan sellers are entitled to registration rights
with respect to the shares of Class A common stock issuable upon exchange of the
Charter Communications Holding Company membership units and Class A Preferred
Units in CC VIII, LLC held by them.
We may register the shares of our Class A common stock issuable to the
Bresnan sellers in exchange for these units for resale pursuant to a shelf
registration statement on Form S-1 or Form S-3.
The Bresnan sellers collectively have unlimited "piggyback" registration
rights and up to four "demand" registration rights with respect to the Class A
common stock issuable upon exchange for the membership units in Charter
Communications Holding Company and Class A Preferred Units in 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. Holders of 24,215,749
shares of our Class A common stock issuable upon exchange of the CC VIII, LLC
Class A
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Preferred Units to the Bresnan sellers have exercised their "piggyback"
registration rights and registered such shares on the registration statement
filed to register the convertible senior notes and shares of our Class A common
stock into which such notes may be converted.
The Bresnan sellers have the right, for a 60-day period commencing February
14, 2002, to have Mr. Allen purchase the shares of Class A common stock issuable
to them at a price of $28.34 per share.
KALAMAZOO SELLER. The seller in the Kalamazoo acquisition and its
permitted transferees were entitled to registration rights for the 11,173,376
shares of Class A common stock issued in that transaction. The Kalamazoo seller
was granted unlimited "piggyback" registration rights and up to two "demand"
registration rights shares of Class A common stock. The demand registration
rights must be exercised for tranches of Class A common stock worth at least $25
million at the time of the notice of demand. A majority of the holders of Class
A common stock making a demand may also require us, on a one-time basis, to file
a shelf registration for shares worth a total of at least $50 million. Holders
of 7,448,918 shares of our Class A common stock issued to the Kalamazoo seller
exercised their "piggyback" registration rights and registered those shares on
the registration statement declared effective in February 2001.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Class A common stock is Mellon
Shareholder Services, LLC.
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PLAN OF DISTRIBUTION
The distribution of the securities covered by this prospectus may be
effected from time to time:
- in one or more transactions at a fixed price or prices, which may be
changed,
- at market prices prevailing at the time of sale or at prices related to
such prevailing market prices, or
- at negotiated prices.
The securities covered by this prospectus may also be offered or sold through
depositary receipts issued by a depositary institution.
AGENTS
Offers to purchase securities may be solicited by agents designated by us
from time to time. Any agent involved in the offer or sale of the securities
under this prospectus will be named, and any commissions payable by us to these
agents will be set forth, in a related prospectus supplement. Unless otherwise
indicated in a prospectus supplement, any agent will be acting on a reasonable
best efforts basis for the period of its appointment. Any agent may be deemed to
be an underwriter, as that term is defined in the Securities Act of the
securities so offered and sold.
UNDERWRITERS
If securities are sold by us by means of an underwritten offering, we will
execute an underwriting agreement with an underwriter or underwriters at the
time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, the
respective amounts underwritten and the terms of the transaction, including
commissions, discounts and any other compensation of the underwriters and
dealers, if any, will be set forth in a related prospectus supplement. That
prospectus supplement and this prospectus will be used by the underwriters to
make resales of the securities. If underwriters are used in the sale of any
securities in connection with this prospectus, those securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices determined by the underwriters and us at
the time of sale. The securities covered by this prospectus may be offered to
the public either through underwriting syndicates represented by managing
underwriters or directly by one or more underwriters. If any underwriter or
underwriters are used in the sale of securities, unless otherwise indicated in a
related prospectus supplement, the underwriting agreement will provide that the
obligations of the underwriters are subject to some conditions precedent and
that with respect to a sale of these securities the underwriters will be
obligated to purchase all such securities if any are purchased.
We may grant to the underwriters options to purchase additional securities
to cover over-allotments, if any, at the initial public offering price, with
additional underwriting commissions or discounts, as may be set forth in a
related prospectus supplement. The terms of any over-allotment option will be
set forth in the prospectus supplement for those securities.
DEALERS
If a dealer is utilized by us in the sale of the securities in respect of
which this prospectus is delivered, we will sell these securities to the dealer
as principal. The dealer may then resell such securities to the public at
varying prices to be determined by such dealer at the time of resale. Any such
dealer may be deemed to be an underwriter, as such term is defined in the
Securities Act, of the securities so offered and sold. The name of the dealer
and the terms of the transaction will be set forth in the prospectus supplement
relating to those offers and sales.
DIRECT SALES
We may also sell offered securities directly to institutional investors or
others, who may be deemed to be underwriters within the meaning of the
Securities Act with respect to any resale of those securities. The terms of any
sales of this type will be described in the prospectus supplement.
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The securities covered by this prospectus may also be offered and sold, if
so indicated in the related prospectus supplement, in connection with a
remarketing upon their purchase, in accordance with a redemption or repayment in
connection with their terms, or otherwise, by one or more firms "remarketing
firms," acting as principals for their own accounts or as agents for us. Any
remarketing firm will be identified and the terms of its agreement, if any, with
and its compensation will be described in a related prospectus supplement.
Remarketing firms may be deemed to be underwriters, as that term is defined in
the Securities Act, in connection with the securities remarketed by them.
DELAYED DELIVERY CONTRACTS
If so indicated in a related prospectus supplement, we may authorize agents
and underwriters to solicit offers by certain institutions to purchase
securities from us at the public offering price set forth in a related
prospectus supplement as part of delayed delivery contracts providing for
payment and delivery on the date or dates stated in a related prospectus
supplement. Such delayed delivery contracts will be subject to only those
conditions set forth in a related prospectus supplement. A commission indicated
in a related prospectus supplement will be paid to underwriters and agents
soliciting purchases of securities pursuant to delayed delivery contracts
accepted by us.
GENERAL INFORMATION
We may have agreements with the agents, underwriters, dealers and
remarketing firms to indemnify them against certain civil liabilities, including
liabilities under the Securities Act, or to contribute with respect to payments
that the agents, underwriters, dealers and remarketing firms may be required to
make.
Each series of securities will be a new issue (other than treasury shares
sold by us) and, other than the Class A common stock, which is quoted on the
Nasdaq National Market, may have no established trading market. Unless otherwise
specified in a related prospectus supplement, we will not be obligated to list
any series of securities on an exchange or otherwise. We cannot assure you that
there will be any liquidity in the trading market for any of the securities
covered by this prospectus.
Agents, underwriters, dealers and remarketing firms may be customers of,
engage in transactions with, or perform services for, us, our subsidiaries
and/or any selling shareholders in the ordinary course of their businesses.
The place, time of delivery and other terms of the sale of the offered
securities will be described in the applicable prospectus supplement. In order
to comply with the securities laws of some states, if applicable, the securities
offered hereby will be sold in those jurisdictions only through registered or
licensed brokers or dealers.
In addition, in some states securities may not be sold unless they have
been registered or qualified for sale in the applicable state or an exemption
from the registration or qualification requirement is available and complied
with.
The maximum underwriting compensation in connection with any shelf
take-down will not exceed 8% of the offering proceeds from such take-down.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Charter Communications, Inc.'s certificate of incorporation provides that a
director of Charter Communications, Inc. shall not be personally liable to
Charter Communications, Inc. or its shareholders for monetary damages for breach
of fiduciary duty as a director, except for liability: (i) for any breach of the
directors' duty of loyalty to Charter Communications, Inc. or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under Section 174 of the
Delaware General Corporation law; or (iv) for any transaction from which the
director derived an improper personal benefit. Charter Communications, Inc.'s
bylaws require Charter Communications, Inc., to the fullest extent authorized by
the Delaware General Corporation Law, to indemnify any person who was or is made
a party or is threatened to be made a party or is otherwise involved in any
action, suit or proceeding by reason of the fact that he is or was a director or
officer of Charter Communications, Inc. or is or was serving at the request of
Charter Communications, Inc. as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity or enterprise, in each case, against all expense, liability and
loss (including attorneys' fees, judgments, amounts paid in settlement, fines,
ERISA excise taxes or penalties) reasonably incurred or suffered by such person
in connection therewith.
INDEMNIFICATION UNDER THE DELAWARE GENERAL CORPORATION LAW.
Section 145 of the Delaware General Corporation Law, authorizes a
corporation to indemnify any person who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person in connection with such action, suit or proceeding, if the person
acted in good faith and in a manner the person reasonably believed to be in, or
not opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. In addition, the Delaware General Corporation Law does not
permit indemnification in any threatened, pending or completed action or suit by
or in the right of the corporation in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses, which such court
shall deem proper. To the extent that a present or former director or officer of
a corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Delaware General Corporation Law also allows a corporation to provide for
the elimination or limit of the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director
(i) for any breach of the director's duty of loyalty to the corporation
or its shareholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or
(iv) for any transaction from which the director derived an improper
personal benefit. These provisions will not limit the liability of
directors or officers under the federal securities laws of the United
States.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
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LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for Charter Communications, Inc. by Paul, Hastings, Janofsky & Walker LLP,
New York, New York.
EXPERTS
The consolidated financial statements of Charter Communications, Inc. and
subsidiaries and Charter Communications Properties Holdings, LLC and
subsidiaries included in Charter Communications, Inc.'s Annual Reports on Form
10-K for the years ended December 31, 2000 and 1999, and the financial
statements of CCA Group, CharterComm Holdings, L.P. and subsidiaries, Marcus
Cable Holdings, LLC and subsidiaries, the Greater Media Cablevision Systems,
Helicon Partners I, L.P., and affiliates, the Sonic Communications Cable
Television Systems, Long Beach Acquisition Corp., and CC V Holdings, LLC and
subsidiaries, all included in Amendment No. 1 to the Charter Communications,
Inc. Registration Statement on Form S-1 filed September 22, 2000 (File No.
333-41486) and incorporated by reference in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, to the
extent and for the periods indicated in their reports. In the reports for
Charter Communications, Inc., that firm states that with respect to certain
subsidiaries its opinions are based on the reports of other independent public
accountants, namely Ernst & Young LLP. The consolidated financial statements
referred to above have been included herein in reliance upon the authority of
those firms as experts in giving said reports.
The combined financial statements of Helicon Partners I, L.P. and
affiliates as of December 31, 1997 and 1998 and for each of the years in the
three-year period ended December 31, 1998, the combined financial statements of
TCI Falcon Systems as of September 30, 1998 and December 31, 1997 and for the
nine-month period ended September 30, 1998, and for each of the years in the
two-year period ended December 31, 1997, the consolidated financial statements
of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998, and
the consolidated financial statements of Bresnan Communications Group LLC as of
December 31, 1998 and 1999 and February 14, 2000, and for each of the years in
the three year period ended December 31, 1999, and the period from January 1,
2000 to February 14, 2000, have been incorporated by reference herein in
reliance upon the reports of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements of Renaissance Media Group LLC and
the combined financial statements of the Picayune, MS, LaFourche, LA, St.
Tammany, LA, St. Landry, LA, Pointe Coupee, LA, and Jackson, TN cable systems,
incorporated by reference in this registration statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon,
and are incorporated by reference herein in reliance upon such reports given on
the authority of such firm as experts in accounting and auditing.
The combined financial statements of InterMedia Cable Systems incorporated
in this prospectus by reference to Amendment No. 1 to the Registration Statement
on Form S-1 dated September 22, 2000 and to the Annual Report on Form 10-K for
the year ended December 31, 1999 of Charter Communications, Inc. have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Rifkin Acquisition Partners, L.L.L.P. and
Rifkin Cable Income Partners LP for the year ended December 31, 1998 and Rifkin
Acquisition Partners, L.L.L.P., Rifkin Cable Income Partners LP, Indiana Cable
Associates, Ltd and R/N South Florida Cable Management Limited Partnership for
the period ended September 13, 1999 incorporated in this prospectus by reference
to Amendment No. 1 to the Registration Statement on Form S-1 dated September 22,
2000 of Charter Communications, Inc. and Charter Communications, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999 have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Avalon Cable of Michigan Holdings,
Inc. and subsidiaries, the consolidated financial statements of Cable Michigan,
Inc. and subsidiaries, the consolidated financial
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statements of Avalon Cable LLC and subsidiaries, the financial statements of
Amrac Clear View, a Limited Partnership, the combined financial statements of
The Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the
Massachusetts Operations of Pegasus Cable Television, Inc., incorporated in this
prospectus by reference to Amendment No. 1 to the Registration Statement on Form
S-1 dated September 22, 2000 of Charter Communications, Inc. have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of R/N South Florida Cable Management
Limited Partnership and Indiana Cable Associates, Ltd. and the combined
financial statements of Fanch Cable Systems Sold to Charter Communications, Inc.
(comprised of Components of TWFanch-one Co., Components of TWFanch-two Co., Mark
Twain Cablevision, North Texas Cablevision LTD., Post Cablevision of Texas L.P.,
Spring Green Communications L.P., Fanch Narragansett CSI L.P., Cable Systems
Inc., ARH, and Tioga) appearing in Charter Communications, Inc.'s Annual Report
(Form 10-K) for the year ended December 31, 1999 and in Amendment No. 1 to the
Registration Statement on Form S-1 and related Prospectus of Charter
Communications, Inc. dated September 22, 2000, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The combined financial statements of Charter Communications VI Operating
Company LLC not separately presented in Charter Communications, Inc.'s Annual
Reports (Form 10-K) for the years ended December 31, 2000 and 1999 and not
separately presented in Amendment No. 1 to the Registration Statement on Form
S-1 and related Prospectus of Charter Communications, Inc. dated September 22,
2000, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such combined financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
The financial statements of Amrac Clear View, a Limited Partnership as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, incorporated in this prospectus by reference to Amendment No.
1 to the Registration Statement on Form S-1 dated September 22, 2000 of Charter
Communications, Inc. have been so incorporated in reliance on the report of
Greenfield, Altman, Brown, Berger, & Katz, P.C., independent accountants, given
on the authority of said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Falcon Communications, L.P. at December 31, 1998 and
November 12, 1999 and for each of the two years in the period ended December 31,
1998 and for the period from January 1, 1999 to November 12, 1999 (date of
disposition), as set forth in their report. These financial statements are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the combined
financial statements of CC VII Holdings, LLC -- Falcon Systems at December 31,
1999, and for the period from November 13, 1999 (commencement date) to December
31, 1999, not separately presented herein, as set forth in their report. These
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
The financial statements of Cable Systems, Inc. and Fanch Narragan
Settlement CSI Limited Partnership, the consolidated financial statements of
North Texas Cablevision, Ltd. and the financial statements of Spring Green
Communications, L.P., incorporated by reference in this registration statement,
have been audited by Shields & Co., independent auditors, as set forth in their
reports thereon and incorporated herein by reference in reliance on the
authority of such firm as experts in accounting and auditing.
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