UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the quarterly period ended September 30, 2008
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the transition period from ________ to _________
Commission
file number:
000-27927
Charter Communications,
Inc.
(Exact name of registrant as
specified in its charter)
Delaware
|
43-1857213
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S.
Employer Identification
Number)
|
12405
Powerscourt Drive
St. Louis, Missouri
63131
(Address of principal executive
offices including zip code)
(314)
965-0555
(Registrant's telephone number,
including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
þ
Accelerated
filer
o
Non-accelerated
filer
o
Smaller
reporting company
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
þ
Number of
shares of Class A common stock outstanding as of September 30, 2008:
412,140,525
Number of
shares of Class B common stock outstanding as of September 30, 2008:
50,000
Charter
Communications, Inc.
Quarterly
Report on Form 10-Q for the Period ended September 30, 2008
Table
of Contents
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
Item
1.Financial Statements - Charter Communications, Inc. and
Subsidiaries
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008
|
|
and
December 31, 2007
|
4
|
Condensed
Consolidated Statements of Operations for the three and
nine
|
|
months
ended September 30, 2008 and 2007
|
5
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
nine
months ended September 30, 2008 and 2007
|
6
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
21
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
32
|
|
|
Item
4. Controls and Procedures
|
34
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
35
|
|
|
Item
1A. Risk Factors
|
35
|
|
|
Item
5. Other Information
|
39
|
|
|
Item
6. Exhibits
|
39
|
|
|
SIGNATURES
|
S-1
|
|
|
EXHIBIT
INDEX
|
E-1
|
This
quarterly report on Form 10-Q is for the three and nine months ended
September 30, 2008. The Securities and Exchange Commission
("SEC") allows us to "incorporate by reference" information that we file
with the SEC, which means that we can disclose important information to you by
referring you directly to those documents. Information incorporated
by reference is considered to be part of this quarterly report. In
addition, information that we file with the SEC in the future will automatically
update and supersede information contained in this quarterly
report. In this quarterly report, "we," "us" and "our" refer to
Charter Communications, Inc., Charter Communications Holding Company, LLC and
their subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" in
this quarterly report. Although we believe that our plans, intentions
and expectations reflected in or suggested by these forward-looking statements
are reasonable, we cannot assure you that we will achieve or realize these
plans, intentions or expectations. Forward-looking statements are
inherently subject to risks, uncertainties and assumptions including, without
limitation, the factors described under "Risk Factors" under Part II, Item 1A
and the factors described under “Risk Factors” under Part I, Item 1A of our most
recent Form 10-K filed with the SEC. Many of the forward-looking
statements contained in this quarterly report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated," "aim," "on track," "target,"
"opportunity," and "potential," among others. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this quarterly report are set forth in this quarterly
report and in other reports or documents that we file from time to time with the
SEC, and include, but are not limited to:
|
·
|
the
availability, in general, of funds to meet interest payment obligations
under our debt and to fund our operations and necessary capital
expenditures, either through cash flows from operating activities, further
borrowings or other sources and, in particular, our ability to fund debt
obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
|
|
·
|
our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which, if not cured in a timely manner, could
trigger a default of our other obligations under cross-default
provisions;
|
|
·
|
our
ability to repay debt prior to or when it becomes due and/or successfully
access the capital or credit markets to refinance that debt through new
issuances, exchange offers or otherwise, including restructuring our
balance sheet and leverage position, especially given recent volatility
and disruption in the capital and credit markets;
|
|
·
|
the
impact of competition from other distributors, including incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers, and digital subscriber line (“DSL”)
providers;
|
|
·
|
difficulties
in growing, further introducing, and operating our telephone services,
while adequately meeting customer expectations for the reliability of
voice services;
|
|
·
|
our
ability to adequately meet demand for installations and customer
service;
|
|
·
|
our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and other
services, and to maintain and grow our customer base, particularly in the
face of increasingly aggressive
competition;
|
|
·
|
our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
|
|
·
|
general
business conditions, economic uncertainty or downturn, including the
recent volatility and disruption in the capital and credit markets and the
significant downturn in the housing sector and overall economy;
and
|
|
·
|
the
effects of governmental regulation on our
business.
|
All
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by this cautionary
statement. We are under no duty or obligation to update any of the
forward-looking statements after the date of this quarterly report.
PART
I. FINANCIAL INFORMATION.
Item
1.
|
Financial
Statements.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(
DOLLARS IN MILLIONS, EXCEPT PER SHARE
DATA
)
|
|
September
30
,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
569
|
|
|
$
|
75
|
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$20
and $18, respectively
|
|
|
246
|
|
|
|
225
|
|
Prepaid
expenses and other current assets
|
|
|
45
|
|
|
|
36
|
|
Total
current assets
|
|
|
860
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated depreciation
|
|
|
5,062
|
|
|
|
5,103
|
|
Franchises,
net
|
|
|
8,933
|
|
|
|
8,942
|
|
Total
investment in cable properties, net
|
|
|
13,995
|
|
|
|
14,045
|
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
302
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,157
|
|
|
$
|
14,666
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,465
|
|
|
$
|
1,332
|
|
Total
current liabilities
|
|
|
1,465
|
|
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
21,031
|
|
|
|
19,908
|
|
NOTE
PAYABLE – RELATED PARTY
|
|
|
72
|
|
|
|
65
|
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
|
|
14
|
|
|
|
14
|
|
OTHER
LONG-TERM LIABILITIES
|
|
|
1,205
|
|
|
|
1,035
|
|
MINORITY
INTEREST
|
|
|
204
|
|
|
|
199
|
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
|
shares
authorized; 0 and 36,713 shares issued and outstanding,
respectively
|
|
|
--
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
|
|
|
|
|
|
|
|
412,140,525
and 398,226,468 shares issued and outstanding,
respectively
|
|
|
--
|
|
|
|
--
|
|
Class
B Common stock; $.001 par value; 4.5 billion
|
|
|
|
|
|
|
|
|
shares
authorized; 50,000 shares issued and outstanding
|
|
|
--
|
|
|
|
--
|
|
Preferred
stock; $.001 par value; 250 million shares
|
|
|
|
|
|
|
|
|
authorized;
no non-redeemable shares issued and outstanding
|
|
|
--
|
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
5,342
|
|
|
|
5,327
|
|
Accumulated
deficit
|
|
|
(14,052
|
)
|
|
|
(13,096
|
)
|
Accumulated
other comprehensive loss
|
|
|
(124
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(8,834
|
)
|
|
|
(7,892
|
)
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$
|
15,157
|
|
|
$
|
14,666
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,636
|
|
|
$
|
1,525
|
|
|
$
|
4,823
|
|
|
$
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
710
|
|
|
|
679
|
|
|
|
2,089
|
|
|
|
1,957
|
|
Selling,
general and administrative
|
|
|
371
|
|
|
|
341
|
|
|
|
1,059
|
|
|
|
961
|
|
Depreciation
and amortization
|
|
|
332
|
|
|
|
334
|
|
|
|
981
|
|
|
|
999
|
|
Asset
impairment charges
|
|
|
--
|
|
|
|
56
|
|
|
|
--
|
|
|
|
56
|
|
Other
operating expenses, net
|
|
|
15
|
|
|
|
8
|
|
|
|
51
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,428
|
|
|
|
1,418
|
|
|
|
4,180
|
|
|
|
3,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
208
|
|
|
|
107
|
|
|
|
643
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(478
|
)
|
|
|
(459
|
)
|
|
|
(1,417
|
)
|
|
|
(1,385
|
)
|
Change
in value of derivatives
|
|
|
10
|
|
|
|
(14
|
)
|
|
|
(1
|
)
|
|
|
(18
|
)
|
Other
expense, net
|
|
|
(5
|
)
|
|
|
--
|
|
|
|
(7
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
|
|
(473
|
)
|
|
|
(1,425
|
)
|
|
|
(1,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(265
|
)
|
|
|
(366
|
)
|
|
|
(782
|
)
|
|
|
(979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(57
|
)
|
|
|
(41
|
)
|
|
|
(174
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(322
|
)
|
|
$
|
(407
|
)
|
|
$
|
(956
|
)
|
|
$
|
(1,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE:
|
|
$
|
(0.86
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(3.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
374,145,243
|
|
|
|
369,239,742
|
|
|
|
371,968,952
|
|
|
|
367,671,479
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(956
|
)
|
|
$
|
(1,148
|
)
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
981
|
|
|
|
999
|
|
Asset
impairment charges
|
|
|
--
|
|
|
|
56
|
|
Noncash
interest expense
|
|
|
43
|
|
|
|
31
|
|
Change
in value of derivatives
|
|
|
1
|
|
|
|
18
|
|
Deferred
income taxes
|
|
|
169
|
|
|
|
161
|
|
Other,
net
|
|
|
39
|
|
|
|
49
|
|
Changes
in operating assets and liabilities, net of effects from
dispositions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(21
|
)
|
|
|
(33
|
)
|
Prepaid
expenses and other assets
|
|
|
(9
|
)
|
|
|
21
|
|
Accounts
payable, accrued expenses and other
|
|
|
163
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
410
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(938
|
)
|
|
|
(890
|
)
|
Change
in accrued expenses related to capital expenditures
|
|
|
(41
|
)
|
|
|
(51
|
)
|
Other,
net
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(980
|
)
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
2,355
|
|
|
|
7,472
|
|
Repayments
of long-term debt
|
|
|
(1,238
|
)
|
|
|
(6,841
|
)
|
Payments
for debt issuance costs
|
|
|
(42
|
)
|
|
|
(33
|
)
|
Other,
net
|
|
|
(11
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
1,064
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
494
|
|
|
|
(1
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
75
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
569
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$
|
1,241
|
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Cumulative
adjustment to accumulated deficit for the adoption of FIN
48
|
|
$
|
--
|
|
|
$
|
56
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
1.
|
Organization
and Basis of Presentation
|
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets at
September 30, 2008 are the 55% controlling common equity interest (53% for
accounting purposes) in Charter Communications Holding Company, LLC ("Charter
Holdco") and "mirror" notes which are payable by Charter Holdco to Charter and
have the same principal amount and terms as those of Charter’s convertible
senior notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"),
which is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The consolidated financial statements include the
accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." Charter has 100% voting control
over Charter Holdco and consolidates Charter Holdco as a variable interest
entity under Financial Accounting Standards Board ("FASB") Interpretation
("FIN") 46(R)
Consolidation of
Variable Interest Entities
. Charter Holdco’s limited liability
company agreement provides that so long as Charter’s Class B common stock
retains its special voting rights, Charter will maintain a 100% voting interest
in Charter Holdco. Voting control gives Charter full authority and
control over the operations of Charter Holdco. All significant
intercompany accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (basic and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™ (“OnDemand”), and
digital video recorder (“DVR”) service. The Company sells its cable
video programming, high-speed Internet, telephone, and advanced broadband
services primarily on a subscription basis. The Company also sells
local advertising on cable networks.
The
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly,
certain information and footnote disclosures typically included in Charter’s
Annual Report on Form 10-K have been condensed or omitted for this quarterly
report. The accompanying condensed consolidated financial statements
are unaudited and are subject to review by regulatory
authorities. However, in the opinion of management, such financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results
for a full year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Areas involving significant judgments
and estimates include capitalization of labor and overhead costs; depreciation
and amortization costs; impairments of property, plant and equipment, franchises
and goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
Reclassifications.
Certain
prior year amounts have been reclassified to conform with the 2008
presentation.
2. Liquidity
and Capital Resources
The
Company incurred net losses of $322 million and $407 million for the three
months ended September 30, 2008 and 2007, respectively, and $956 million and
$1.1 billion for the nine months ended September 30, 2008 and 2007,
respectively. The Company’s net cash flows from operating activities
were $410 million and $327 million for the nine months ended September 30, 2008
and 2007, respectively.
The
Company has a significant amount of debt. The Company's long-term
debt as of September 30, 2008 totaled $21.0 billion, consisting of $7.9 billion
of credit facility debt, $12.8 billion accreted value of high-yield notes, and
$370 million accreted value of convertible senior notes. For the
remainder of 2008, $18 million of the Company’s debt matures. As of
September 30, 2008, the Company’s 2009 debt maturities totaled $238
million. In 2010 and
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
beyond,
significant additional amounts will become due under the Company’s remaining
long-term debt obligations including $1.9 billion of CCH II senior notes
maturing in September 2010.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically
funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, proceeds from sales of assets, issuances
of debt and equity securities, and cash on hand. However, the mix of
funding sources changes from period to period. For the nine months
ended September 30, 2008, the Company generated $410 million of net cash flows
from operating activities, after paying cash interest of $1.2
billion. In addition, the Company used $938 million for purchases of
property, plant and equipment. Finally, the Company generated net
cash flows from financing activities of $1.1 billion, as a result of financing
transactions and credit facility borrowings completed during the nine months
ended September 30, 2008. As of September 30, 2008, the Company had
cash on hand of $569 million.
The
Company expects that cash on hand, cash flows from operating activities, and the
amounts available under the Charter Communications Operating, LLC (“Charter
Operating”) credit
facilities
will be
adequate to fund its projected cash needs, including scheduled maturities,
through 2009. The Company believes that cash flows from operating
activities, cash on hand, and the amounts available under the Charter Operating
credit facilities will not be sufficient to fund projected cash needs in 2010
(primarily as a result of the maturity of $1.9 billion of CCH II, LLC (“CCH II”)
senior notes in September 2010) and thereafter. However, it is
uncertain whether the Company will be able, under applicable law, to make
distributions or otherwise move cash to the relevant entities for payment of
interest and principal. See “Limitations on Distributions” below. The
Company’s projected cash needs and projected sources of liquidity depend upon,
among other things, its actual results, the timing and amount of its capital
expenditures, and ongoing compliance with the Charter Operating credit
facilities, including obtaining an unqualified audit opinion from its
independent accountants. Although the Company has been able to
refinance or otherwise fund the repayment of debt in the past, it may not be
able to access additional sources of refinancing on similar terms or pricing as
those that are currently in place, or at all, or otherwise obtain other sources
of funding, especially given the recent volatility and disruption of the capital
and credit markets and the deterioration of general economic conditions in
recent months. A continuation of the recent turmoil in the capital
and credit markets and the general economic downturn could adversely impact the
availability, terms and/or pricing of financing when the Company needs to
raise additional liquidity. The Company would experience liquidity
problems if it is unable to obtain sufficient additional financing at the right
levels of the capital structure on a timely basis or at all as the Company’s
debt becomes due, or the Company otherwise needs additional
liquidity. Adverse economic conditions, increased competition, or
other unfavorable events also could affect the Company’s liquidity.
If, at
any time, additional capital or borrowing capacity is required beyond amounts
internally generated or available under the Company’s credit facilities, the
Company would consider issuing equity, issuing convertible debt or some other
securities, further reducing the Company’s expenses and capital expenditures,
selling assets, or requesting waivers or amendments with respect to the
Company’s credit facilities.
If the
above strategies were not successful, the Company could be forced to restructure
its obligations or seek protection under the bankruptcy laws. In
addition, if the Company were able to raise additional capital when needed
through the issuance of equity or finds it necessary to engage in a
recapitalization or other similar transaction, the Company’s shareholders could
suffer significant dilution, including potential loss of the entire value of
their investment, and in the case of a recapitalization or other similar
transaction, the Company’s noteholders might not receive principal and interest
payments to which they are contractually entitled.
Credit
Facility Availability
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with the
Company’s indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility,
contain certain restrictive covenants, some of which require the Company to
maintain specified leverage ratios, meet financial tests, and provide annual
audited financial statements with an unqualified opinion from the Company’s
independent accountants. As of September 30,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
2008,
the Company was in compliance with the covenants under its indentures and credit
facilities. As of September 30, 2008, the Company’s potential
availability under Charter Operating’s revolving credit facility totaled
approximately $780 million, none of which was limited by covenant
restrictions. Continued access to the Company’s revolving credit
facility is subject to the Company remaining in compliance with these covenants,
including covenants tied to Charter Operating’s leverage ratio and first lien
leverage ratio. If any event of non-compliance were to occur, funding
under the revolving credit facility may not be available and defaults on some or
potentially all of the Company’s debt obligations could occur. An
event of default under any of the Company’s debt instruments could result in the
acceleration of its payment obligations under that debt and, under certain
circumstances, in cross-defaults under its other debt obligations, which could
have a material adverse effect on the Company’s consolidated financial condition
and results of operations. In response to recent financial market
turmoil, including the failure of some financial institutions, the Company has
borrowed amounts under its revolving credit facility in excess of the Company’s
immediate needs. The Company intends to continue monitoring
counterparty risk in the financial markets and may from time to time increase or
decrease its borrowings under the revolving credit facility to balance various
factors including the liquidity needs of the Company, the leverage ratios of the
subsidiaries of the Company, and counterparty risk in the financial
markets.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. Charter’s
ability to make interest payments on its convertible senior notes, and to repay
the outstanding principal of its convertible senior notes, will depend on
its ability to raise additional capital and/or on receipt of payments or
distributions from Charter Holdco and its subsidiaries. As of September
30, 2008, Charter Holdco was owed $115 million in intercompany loans from
Charter Operating and had $2 million in cash, which amounts were available to
pay interest and principal on Charter's convertible senior notes to the extent
not otherwise used, for example, to satisfy maturities at Charter
Holdings. In connection with Charter Holdco’s tender offer in October 2008
for senior notes of Charter Holdings, Charter Operating repaid $97 million of
its intercompany note owed to Charter Holdco, reducing such intercompany note to
$18 million. In addition, as long as Charter Holdco continues to hold
the $35 million (plus $102 million acquired in the tender offer in October 2008)
of Charter Holdings’ notes due 2009 and 2010 (as discussed further below),
Charter Holdco will receive interest and principal payments from Charter
Holdings to the extent Charter Holdings is able to make such
payments. Such amounts may be available to pay interest and principal
on Charter’s convertible senior notes, although Charter Holdco may use those
amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II notes, CCO Holdings notes, Charter Operating notes, and under
the CCO Holdings credit facility, unless there is no default under the
applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended September 30, 2008, there was no
default under any of these indentures or credit facilities. However,
certain of the Company’s subsidiaries did not meet their applicable leverage
ratio tests based on September 30, 2008 financial results. As a
result, distributions from certain of the Company’s subsidiaries to their parent
companies would have been restricted at such time and will continue to be
restricted unless those tests are met. Distributions by Charter
Operating for payment of principal on parent company notes are further
restricted by the covenants in its credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended September
30, 2008, there was no
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
default under Charter
Holdings’ indentures and other specified tests were met. However,
Charter Holdings did not meet its leverage ratio test of 8.75 to 1.0 based on
September 30, 2008 financial results. As a result, distributions from
Charter Holdings to Charter or Charter Holdco would have been restricted at such
time and will continue to be restricted unless that test is
met.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by the Company’s subsidiaries may be limited by
applicable law. Under the Delaware Limited Liability Company Act, the
Company’s subsidiaries may only make distributions if they have “surplus” as
defined in the act. Under fraudulent transfer laws, the Company’s
subsidiaries may not pay dividends if they are insolvent or are rendered
insolvent thereby. The measures of insolvency for purposes of these
fraudulent transfer laws vary depending upon the law applied in any proceeding
to determine whether a fraudulent transfer has occurred. Generally, however, an
entity would be considered insolvent if:
·
|
the
sum of its debts, including contingent liabilities, was greater than the
fair saleable value of all its
assets;
|
·
|
the
present fair saleable value of its assets was less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature;
or
|
·
|
it
could not pay its debts as they became
due.
|
Primarily
in light of the economic environment, it is uncertain whether the Company will
have, at the relevant times, sufficient surplus at CIH and its parents, or
potentially its subsidiaries, to make distributions, including for payments of
interest and principal on the debts of the parents of such entities, and there
can otherwise be no assurance that the Company’s subsidiaries will not become
insolvent or will be permitted to make distributions in the future in compliance
with these restrictions in amounts needed to service the Company’s indebtedness.
Recent
Financing Transactions
In March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014 and borrowed $500 million principal amount of
incremental term loans under the Charter Operating credit facilities (see Note
5).
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions,
from a small number of institutional holders, a total of approximately $35
million principal amount of various Charter Holdings notes due 2009 and 2010 and
approximately $46 million principal amount of Charter’s 5.875% convertible
senior notes due 2009, for approximately $77 million of cash. Charter
Holdco continues to hold the Charter Holdings notes. The purchased
5.875% convertible senior notes were cancelled resulting in approximately $3
million principal amount of such notes remaining outstanding.
In July
2008, CCH II completed a tender offer, in which $338 million of CCH II’s 10.25%
senior notes due 2010 were accepted for $364 million of CCH II’s 10.25% senior
notes due 2013, which were issued as part of the same series of notes as CCH
II’s $250 million aggregate principal amount of 10.25% senior notes due 2013,
which were issued in September 2006.
In
October 2008, Charter Holdco completed a tender offer, in which a total of
approximately $102 million principal amount of various Charter Holdings notes
due 2009 and 2010 were accepted for approximately $99 million of
cash. Charter Holdco continues to hold the Charter Holdings
notes.
3. Franchises
and Goodwill
Franchise
rights represent the value attributed to agreements or authorizations with local
and state authorities that allow access to homes in cable service
areas. Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite life or an
indefinite life as defined by Statement of Financial Accounting Standards
(“SFAS”) No. 142,
Goodwill and
Other Intangible Assets
. Franchises that qualify for
indefinite-life treatment under SFAS No. 142 are tested for impairment
annually each October 1 based on valuations,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
or
more frequently as warranted by events or changes in
circumstances. The October 1, 2008 annual impairment test will be
finalized in the fourth quarter of 2008 and any impairment resulting from such
test will be recorded in the fourth quarter. Franchises are
aggregated into essentially inseparable asset groups to conduct the
valuations. The asset groups generally represent geographical
clustering of the Company’s cable systems into groups by which such systems are
managed. Management believes such grouping represents the highest and
best use of those assets.
As of
September 30, 2008 and December 31, 2007, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
|
September
30, 2008
|
|
|
December 31,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$
|
8,927
|
|
|
$
|
--
|
|
|
$
|
8,927
|
|
|
$
|
8,929
|
|
|
$
|
--
|
|
|
$
|
8,929
|
|
Goodwill
|
|
|
68
|
|
|
|
--
|
|
|
|
68
|
|
|
|
67
|
|
|
|
--
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,995
|
|
|
$
|
--
|
|
|
$
|
8,995
|
|
|
$
|
8,996
|
|
|
$
|
--
|
|
|
$
|
8,996
|
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$
|
15
|
|
|
$
|
9
|
|
|
$
|
6
|
|
|
$
|
23
|
|
|
$
|
10
|
|
|
$
|
13
|
|
Franchise
amortization expense represents the amortization relating to franchises that did
not qualify for indefinite-life treatment under SFAS No. 142, including costs
associated with franchise renewals. During the nine months ended
September 30, 2008, the net carrying amount of indefinite-lived franchises was
reduced by $3 million related to cable asset sales completed in 2008, and $4
million as a result of the finalization of purchase accounting related to cable
asset acquisitions. Additionally, during the nine months ended
September 30, 2008, approximately $5 million of franchises that were previously
classified as finite-lived were reclassified to indefinite-lived, based on
management’s assessment when these franchises migrated to state-wide
franchising. Franchise amortization expense for each of the three and
nine months ended September 30, 2008 was approximately $1 million and $2
million, respectively. The Company expects that amortization expense
on franchise assets will be approximately $2 million annually for each of the
next five years. Actual amortization expense in future periods could
differ from these estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives and other relevant factors.
4
.
Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses consist of the following as of September 30, 2008
and December 31, 2007:
|
|
September
30,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$
|
106
|
|
|
$
|
127
|
|
Accrued
capital expenditures
|
|
|
54
|
|
|
|
95
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
545
|
|
|
|
418
|
|
Programming
costs
|
|
|
292
|
|
|
|
273
|
|
Compensation
|
|
|
122
|
|
|
|
116
|
|
Franchise-related
fees
|
|
|
55
|
|
|
|
66
|
|
Other
|
|
|
291
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,465
|
|
|
$
|
1,332
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
5.
Long-Term
Debt
Long-term
debt consists of the following as of September 30, 2008 and December 31,
2007:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Principal
Amount
|
|
|
Accreted
Value
|
|
|
Principal
Amount
|
|
|
Accreted
Value
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due November 16, 2009
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
49
|
|
|
$
|
49
|
|
6.50%
convertible senior notes due October 1, 2027
|
|
|
479
|
|
|
|
367
|
|
|
|
479
|
|
|
|
353
|
|
Charter
Communications Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior notes due April 1, 2009
|
|
|
76
|
|
|
|
76
|
|
|
|
88
|
|
|
|
88
|
|
10.750%
senior notes due October 1, 2009
|
|
|
54
|
|
|
|
54
|
|
|
|
63
|
|
|
|
63
|
|
9.625%
senior notes due November 15, 2009
|
|
|
35
|
|
|
|
35
|
|
|
|
37
|
|
|
|
37
|
|
10.250%
senior notes due January 15, 2010
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
18
|
|
11.750%
senior discount notes due January 15, 2010
|
|
|
13
|
|
|
|
13
|
|
|
|
16
|
|
|
|
16
|
|
11.125%
senior notes due January 15, 2011
|
|
|
47
|
|
|
|
47
|
|
|
|
47
|
|
|
|
47
|
|
13.500%
senior discount notes due January 15, 2011
|
|
|
60
|
|
|
|
60
|
|
|
|
60
|
|
|
|
60
|
|
9.920%
senior discount notes due April 1, 2011
|
|
|
51
|
|
|
|
51
|
|
|
|
51
|
|
|
|
51
|
|
10.000%
senior notes due May 15, 2011
|
|
|
69
|
|
|
|
69
|
|
|
|
69
|
|
|
|
69
|
|
11.750%
senior discount notes due May 15, 2011
|
|
|
54
|
|
|
|
54
|
|
|
|
54
|
|
|
|
54
|
|
12.125%
senior discount notes due January 15, 2012
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
CCH
I Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due January 15, 2014
|
|
|
151
|
|
|
|
151
|
|
|
|
151
|
|
|
|
151
|
|
13.500%
senior discount notes due January 15, 2014
|
|
|
581
|
|
|
|
581
|
|
|
|
581
|
|
|
|
581
|
|
9.920%
senior discount notes due April 1, 2014
|
|
|
471
|
|
|
|
471
|
|
|
|
471
|
|
|
|
471
|
|
10.000%
senior notes due May 15, 2014
|
|
|
299
|
|
|
|
299
|
|
|
|
299
|
|
|
|
299
|
|
11.750%
senior discount notes due May 15, 2014
|
|
|
815
|
|
|
|
815
|
|
|
|
815
|
|
|
|
815
|
|
12.125%
senior discount notes due January 15, 2015
|
|
|
217
|
|
|
|
217
|
|
|
|
217
|
|
|
|
217
|
|
CCH
I, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.000%
senior notes due October 1, 2015
|
|
|
3,987
|
|
|
|
4,075
|
|
|
|
3,987
|
|
|
|
4,083
|
|
CCH
II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due September 15, 2010
|
|
|
1,860
|
|
|
|
1,857
|
|
|
|
2,198
|
|
|
|
2,192
|
|
10.250%
senior notes due October 1, 2013
|
|
|
614
|
|
|
|
597
|
|
|
|
250
|
|
|
|
260
|
|
CCO
Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
¾% senior notes due November 15, 2013
|
|
|
800
|
|
|
|
796
|
|
|
|
800
|
|
|
|
795
|
|
Credit
facility
|
|
|
350
|
|
|
|
350
|
|
|
|
350
|
|
|
|
350
|
|
Charter
Communications Operating, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.000%
senior second-lien notes due April 30, 2012
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,100
|
|
8
3/8% senior second-lien notes due April 30, 2014
|
|
|
770
|
|
|
|
770
|
|
|
|
770
|
|
|
|
770
|
|
10.875%
senior second-lien notes due September 15, 2014
|
|
|
546
|
|
|
|
526
|
|
|
|
--
|
|
|
|
--
|
|
Credit
facilities
|
|
|
7,513
|
|
|
|
7,513
|
|
|
|
6,844
|
|
|
|
6,844
|
|
|
|
$
|
21,099
|
|
|
$
|
21,031
|
|
|
$
|
19,939
|
|
|
$
|
19,908
|
|
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, the current accreted value for
legal purposes and notes indenture purposes (the amount that is currently
payable if the debt becomes immediately due) is equal to the principal amount of
notes.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
In March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014, guaranteed by CCO Holdings and certain other
subsidiaries of Charter Operating, in a private transaction. Net
proceeds from the senior second-lien notes were used to reduce borrowings, but
not commitments, under the revolving portion of the Charter Operating credit
facilities.
The
Charter Operating 10.875% senior second-lien notes may be redeemed at the option
of Charter Operating on or after varying dates, in each case at a premium, plus
the Make-Whole Premium. The Make-Whole Premium is an amount equal to the
excess of (a) the present value of the remaining interest and principal payments
due on a 10.875% senior second-lien note due 2014 to its final maturity date,
computed using a discount rate equal to the Treasury Rate on such date plus
0.50%, over (b) the outstanding principal amount of such note. The Charter
Operating 10.875% senior second-lien notes may be redeemed at any time on or
after March 15, 2012 at specified prices. In the event of specified change
of control events, Charter Operating must offer to purchase the Charter
Operating 10.875% senior second-lien notes at a purchase price equal to 101% of
the total principal amount of the Charter Operating notes repurchased plus any
accrued and unpaid interest thereon.
In
addition, Charter Operating borrowed $500 million principal amount of
incremental term loans (the “Incremental Term Loans”) under the Charter
Operating credit facilities. The Incremental Term Loans have a final maturity of
March 6, 2014 and prior to this date will amortize in quarterly principal
installments totaling 1% annually beginning on June 30, 2008. The
Incremental Term Loans bear interest at LIBOR plus 5.0%, with a LIBOR floor of
3.5%, and are otherwise governed by and subject to the existing terms of the
Charter Operating credit facilities. Net proceeds from the Incremental
Term Loans were used for general corporate purposes.
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions,
from a small number of institutional holders, a total of approximately $35
million principal amount of various Charter Holdings notes due 2009 and 2010 and
approximately $46 million principal amount of Charter’s 5.875% convertible
senior notes due 2009, for approximately $77 million of cash. Charter
Holdco continues to hold the Charter Holdings notes. The purchased
5.875% convertible senior notes were cancelled resulting in approximately $3
million principal amount of such notes remaining outstanding. The
transactions resulted in a gain on extinguishment of debt of approximately $4
million for the nine months ended September 30, 2008, included in other expense,
net on the Company’s condensed consolidated statements of
operations.
In July
2008, CCH II completed a tender offer, in which $338 million of CCH II’s 10.25%
senior notes due 2010 were accepted for $364 million of CCH II’s 10.25% senior
notes due 2013, which were issued as part of the same series of notes as CCH
II’s $250 million aggregate principal amount of 10.25% senior notes due 2013,
which were issued in September 2006. The transactions resulted in a
loss on extinguishment of debt of approximately $4 million for the three and
nine months ended September 30, 2008, included in other expense, net on the
Company’s condensed consolidated statements of operations.
6. Minority
Interest and Equity Interest of Charter Holdco
Charter
is a holding company whose primary assets are a controlling equity interest in
Charter Holdco, the indirect owner of the Company’s cable systems, and $482
million and $528 million at September 30, 2008 and December 31, 2007,
respectively, of mirror notes payable by Charter Holdco to Charter, and which
have the same principal amount and terms as those of Charter’s 5.875% and 6.50%
convertible senior notes. Minority interest on the Company’s
condensed consolidated balance sheets represents Mr. Paul G. Allen’s, Charter’s
chairman and controlling shareholder, 5.6% preferred membership interests in CC
VIII, LLC (“CC VIII”), an indirect subsidiary of Charter Holdco, of $204 million
and $199 million as of September 30, 2008 and December 31, 2007,
respectively.
7. Preferred
Stock – Redeemable
In August
2008, Charter entered into exchange agreements with each of the four holders
(the "Holders") of Charter’s Series A Convertible Redeemable Preferred Stock
("Preferred Stock"). Pursuant to the exchange agreements, the Holders
exchanged 36,713 shares of Preferred Stock having a liquidation preference of
approximately $5 million for
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
approximately 5 million
shares of Charter’s Class A Common Stock ("Common Stock") based on the closing
price of the Common Stock on August 25, 2008. The shares of Preferred
Stock were cancelled by Charter and no shares of Preferred Stock remain
outstanding.
8. Comprehensive
Loss
The
Company reports changes in the fair value of interest rate agreements designated
as hedging the variability of cash flows associated with floating-rate debt
obligations, that meet the effectiveness criteria of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, in accumulated other comprehensive
loss. Comprehensive loss was $341 million and $480 million for the
three months ended September 30, 2008 and 2007, respectively, and $957 million
and $1.2 billion for the nine months ended September 30, 2008 and 2007,
respectively.
9. Accounting
for Derivative Instruments and Hedging Activities
The
Company uses interest rate swap agreements to manage its interest costs and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, the Company
agrees to exchange, at specified intervals through 2013, the difference between
fixed and variable interest amounts calculated by reference to agreed-upon
notional principal amounts. At the banks’ option, certain interest
rate swap agreements may be extended through 2014.
The
Company’s hedging policy does not permit it to hold or issue derivative
instruments for speculative trading purposes. The Company does,
however, have certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments into
fixed payments. For qualifying hedges, SFAS No. 133 allows derivative
gains and losses to offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For each of the three and nine months ended
September 30, 2008 and
2007
, there was no cash flow hedge ineffectiveness on interest rate swap
agreements.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria specified by SFAS No. 133
are reported in accumulated other comprehensive loss. For the three
months ended September 30, 2008 and 2007, losses of $19 million and $73 million,
respectively, and for the nine months ended September 30, 2008 and 2007, losses
of $1 million and $25 million, respectively, related to derivative instruments
designated as cash flow hedges, were recorded in accumulated other comprehensive
loss. The amounts are subsequently reclassified as an increase or
decrease to interest expense in the same periods in which the related interest
on the floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as a change in value of derivatives in the Company’s consolidated
statements of operations. For the three months ended
September 30, 2008 and
2007
, change in value of derivatives includes losses of $7 million and
$21 million, respectively, and for the nine months ended September 30, 2008 and
2007, losses of $1 million and $16 million, respectively, resulting from
interest rate derivative instruments not designated as hedges.
As of
September 30,
2008
and December 31, 2007, the Company had $4.3 billion in notional
amounts of interest rate swaps outstanding. The notional amounts of
interest rate instruments do not represent amounts exchanged by the parties and,
thus, are not a measure of exposure to credit loss. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Certain
provisions of the Company’s 5.875% and 6.50% convertible senior notes issued in
November 2004 and October 2007, respectively, were considered embedded
derivatives for accounting purposes and were required to be accounted for
separately from the convertible senior notes. In accordance with SFAS
No. 133, these derivatives are marked to market with gains or losses recorded as
the change in value of derivatives on the Company’s consolidated statement of
operations. For the three months ended September 30, 2008 and 2007,
the Company recognized $17 million and $7 million in gains related to these
derivatives, respectively, and for the nine months ended September 30, 2008 and
2007, the Company recognized losses of $0 and $2 million,
respectively. At September 30, 2008 and December 31, 2007, $33
million is recorded on the Company’s balance sheets related to these
derivatives.
The Company adopted SFAS
No. 157,
Fair
Value
Measurements
, on its financial assets and liabilities effective January
1, 2008, and has an established process for determining fair
value. The Company has deferred adoption of SFAS No. 157 on its
nonfinancial assets and liabilities including fair value measurements under SFAS
No. 142 and SFAS No. 144 of franchises, goodwill, property, plant, and
equipment, and other long-term assets until January 1, 2009 as permitted by FASB
Staff Position (“FSP”) 157-2. Fair value is based upon quoted market
prices, where available. If such valuation methods are not available,
fair value is based on internally or externally developed models using
market-based or independently-sourced market parameters, where
available. Fair value may be subsequently adjusted to ensure that
those assets and liabilities are recorded at fair value. The
Company’s methodology may produce a fair value that may not be indicative of net
realizable value or reflective of future fair values, but the Company believes
its methods are appropriate and consistent with other market
peers. The use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different fair
value estimate as of the Company’s reporting date.
SFAS No.
157 establishes a three-level hierarchy for disclosure of fair value
measurements, based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date, as follows:
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Interest
rate derivatives are valued using a present value calculation based on an
implied forward LIBOR curve (adjusted for Charter Operating’s credit risk) and
are classified within level 2 of the valuation hierarchy. The fair
values of the embedded derivatives within Charter’s 5.875% and 6.50% convertible
senior notes issued in November 2004 and October 2007, respectively, are derived
from valuations using a simulation technique with market based inputs, including
Charter’s Class A common stock price, implied volatility of Charter’s Class A
common stock, Charter’s credit risk and costs to borrow Charter’s Class A common
stock. These valuations are classified within level 3 of the
valuation hierarchy.
The
Company’s financial liabilities that are accounted for at fair value on a
recurring basis are presented in the table below:
|
|
Fair
Value As of September 30, 2008
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
$
|
--
|
|
|
$
|
170
|
|
|
$
|
--
|
|
|
$
|
170
|
|
Embedded
derivatives
|
|
|
--
|
|
|
|
--
|
|
|
|
33
|
|
|
|
33
|
|
|
|
$
|
--
|
|
|
$
|
170
|
|
|
$
|
33
|
|
|
$
|
203
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
10. Other
Operating Expenses, Net
Other
operating expenses, net consist of the following for the three and nine months
ended September 30, 2008 and 2007:
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on sale of assets, net
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
5
|
|
Special
charges, net
|
|
|
12
|
|
|
|
6
|
|
|
|
44
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15
|
|
|
$
|
8
|
|
|
$
|
51
|
|
|
$
|
13
|
|
Special
charges, net for the three and nine months ended September 30, 2008 includes
severance charges and litigation related items including expected settlement
costs associated with the
Sjoblom
litigation (see Note
14), offset by favorable insurance settlements related to hurricane Katrina
claims. Special charges, net for the three and nine months ended
September 30, 2007 primarily represent severance charges.
11. Other
Expense, Net
Other
expense, net consists of the following for the three and nine months ended
September 30, 2008 and 2007:
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
|
$
|
(4
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(35
|
)
|
Minority
interest
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Gain
(loss) on investments
|
|
|
--
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
1
|
|
Other,
net
|
|
|
--
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
--
|
|
|
$
|
(7
|
)
|
|
$
|
(39
|
)
|
As part
of the refinancing in March 2007, the existing CCO Holdings $350 million
revolving/term credit facility was terminated, resulting in a loss on
extinguishment of debt for the nine months ended September 30, 2007 of
approximately $13 million. In April 2007, Charter Holdings completed
a tender offer resulting in a loss on extinguishment of debt for the nine months
ended September 30, 2007 of approximately $3 million and CCO Holdings redeemed
$550 million of senior floating rate notes resulting in a loss on extinguishment
of debt for the nine months ended September 30, 2007 of approximately $19
million.
12. Income
Taxes
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are
generally limited liability companies that are not subject to income
tax. However, certain of these limited liability companies are
subject to state income tax. In addition, the subsidiaries that are
corporations are subject to federal and state income tax. All of the
remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter,
Charter Investment, Inc.
(“CII”)
and Vulcan Cable III Inc. (“Vulcan Cable”). Charter is
responsible for its share of taxable income or loss of Charter Holdco allocated
to Charter in accordance with the Charter Holdco limited liability company
agreement (the “LLC Agreement”) and partnership tax rules and
regulations. Charter also records financial statement deferred tax
assets and liabilities related to its investment in Charter Holdco.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
For the
three month periods ended September 30, 2008 and 2007, the Company recorded $57
million and $41 million of income tax expense, and for the nine months ended
September 30, 2008 and 2007, the Company recorded $174 million and $169 million
of income tax expense, respectively.
Income tax expense was
recognized through increases in deferred tax liabilities related to Charter’s
investment in Charter Holdco, and certain of Charter’s subsidiaries, in addition
to current federal and state income tax expense.
As of
September 30, 2008 and December 31, 2007, the Company had net deferred income
tax liabilities of approximately $835 million and $665 million,
respectively. Included in these deferred tax liabilities is
approximately $210 million and $226 million of deferred tax liabilities at
September 30, 2008 and December 31, 2007, respectively, relating to certain
indirect subsidiaries of Charter Holdco that file separate income tax returns.
The remainder of the Company’s deferred tax liability arose from Charter’s
investment in Charter Holdco, and was largely attributable to the
characterization of franchises for financial reporting purposes as
indefinite-lived.
As of
September 30, 2008, the Company had deferred tax assets of $5.3 billion, which
included $2.0 billion of financial losses in excess of tax losses allocated to
Charter from Charter Holdco. The deferred tax assets also included
$3.3 billion of tax net operating loss carryforwards (generally expiring in
years 2008 through 2028) of Charter and its indirect
subsidiaries. Valuation allowances of $5.1 billion exist with respect
to these deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or
all of
the deferred tax assets will be realized. Because of the
uncertainties in projecting future taxable income of Charter Holdco, valuation
allowances have been established except for deferred benefits available to
offset certain deferred tax liabilities that will reverse over
time.
The
amount of any benefit from the Company’s tax net operating losses is dependent
on: (1) Charter and its subsidiaries’ ability to generate future taxable income
and (2) the unexpired amount of net operating loss carryforwards available to
offset amounts payable on such taxable income. Any future “ownership
changes” of Charter’s common stock, as defined in the applicable federal income
tax rules, would place significant limitations, on an annual basis, on the use
of such net operating losses to offset any future taxable income the Company may
generate. Such limitations, in conjunction with the net operating
loss expiration provisions, could effectively eliminate the Company’s ability to
use a substantial portion of its net operating losses to offset future taxable
income. Although the Company has adopted the Rights Plan as an
attempt to protect against an “ownership change,” certain transactions and the
timing of such transactions could cause such an ownership change including, but
not limited to, the following: t
he issuance of shares of
common stock upon future conversion of Charter’s convertible senior notes;
reacquisition of the shares borrowed under the share lending agreement by
Charter (of which 21.8 million were outstanding as of September 30, 2008); or
acquisitions or sales of shares by certain holders of Charter’s shares,
including persons who have held, currently hold, or accumulate in the future,
five percent or more of Charter’s outstanding stock (including upon an exchange
by Mr. Allen or his affiliates, directly or indirectly, of membership units of
Charter Holdco into CCI common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
The
deferred tax liability for Charter’s investment in Charter Holdco is largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite lived. If Mr. Allen were to exchange his
Charter Holdco units, as described above, Charter would likely record for
financial reporting purposes additional deferred tax liability related to its
increased interest in Charter Holdco and the related underlying indefinite lived
franchise assets.
Charter
and Charter Holdco received notification from the Internal Revenue Service
(“IRS”) examining agent that no changes to the 2004 and 2005 tax returns would
be required as a result of their examination. These findings were
approved by the IRS Area Director during the quarter ended September 30,
2008.
In
January 2007, the Company adopted FIN 48,
Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109
, which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. The adoption of FIN 48 resulted in a
deferred tax benefit
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
of $56 million related to
a settlement with Mr. Allen regarding ownership of the CC VIII preferred
membership interests, which was recognized as a cumulative adjustment to the
accumulated deficit in the first quarter of 2007. The Company does
not believe it has taken any significant positions that would not meet the “more
likely than not” criteria and require disclosure.
13.
Related
Party Transactions
The
following sets forth certain transactions in which the Company and the
directors, executive officers, and affiliates of the Company are
involved. Unless otherwise disclosed, management believes each of the
transactions described below was on terms no less favorable to the Company than
could have been obtained from independent third parties.
Digeo,
Inc.
Mr. Paul
G. Allen, the controlling shareholder of Charter, through his 100% ownership of
Vulcan Ventures Incorporated (“Vulcan Ventures”), owns a majority interest in
Digeo, Inc. on a fully-converted fully-diluted basis. Ms. Jo Allen
Patton is a director of the Company and a director and Vice President of Vulcan
Ventures. Mr. Lance Conn is a director of the Company and is
Executive Vice President of Vulcan Ventures. Currently, Charter
Operating owns 1.8% of Digeo, Inc.’s common stock.
In May
2008, Charter Operating entered into an agreement with Digeo Interactive, LLC, a
subsidiary of Digeo, Inc., for the minimum purchase of high-definition DVR units
for approximately $21 million. This minimum purchase commitment is
subject to reduction as a result of certain specified events such as the failure
to deliver units timely and catastrophic failure.
The software
for these units is being supplied under a software license agreement with Digeo
Interactive, LLC; the cost of which is expected to be approximately $2 million
for the initial licenses and on-going maintenance fees of approximately $0.3
million annually, subject to reduction to coincide with any reduction in the
minimum purchase commitment. For the three and nine months ended
September 30, 2008, Charter has purchased approximately $1 million of DVR units
from Digeo Interactive, LLC under these agreements.
14.
Contingencies
The
Company is a defendant or co-defendant in several unrelated lawsuits claiming
infringement of various patents relating to various aspects of its
businesses. Other industry participants are also defendants in
certain of these cases, and, in many cases, the Company expects that any
potential liability would be the responsibility of its equipment vendors
pursuant to applicable contractual indemnification provisions. In the event
that a court ultimately determines that the Company infringes on any
intellectual property rights, it may be subject to substantial damages and/or an
injunction that could require the Company or its vendors to modify certain
products and services the Company offers to its subscribers. While
the Company believes the lawsuits are without merit and intends to defend the
actions vigorously, the lawsuits could be material to the Company’s consolidated
results of operations of any one period, and no assurance can be given that any
adverse outcome would not be material to the Company’s consolidated financial
condition, results of operations or liquidity.
In the
ordinary course of business, the Company may face employment law claims,
including claims under the Fair Labor Standards Act and wage and hour laws of
the states in which we operate. On August 15, 2007, a complaint was
filed, on behalf of both nationwide and state of Wisconsin classes of certain
categories of current and former Charter technicians, against Charter in the
United States District Court for the Western District of Wisconsin (
Sjoblom v. Charter Communications,
LLC and Charter Communications, Inc.
), alleging that Charter violated the
Fair Labor Standards Act and Wisconsin wage and hour laws by failing to pay
technicians for certain hours claimed to have been worked. While the
Company believes it has substantial factual and legal defenses to the claims at
issue, in order to avoid the cost and distraction of continuing to litigate the
case, the Company has reached a settlement with the plaintiffs, which is subject
to the approval of the court. The Company has accrued expected
settlement costs associated with the
Sjoblom
case (see Note
10). The Company has been subjected, in the normal course of
business, to the assertion of other similar claims and could be subjected to
additional such claims. The Company can not predict the ultimate
outcome of any such proceedings or claims.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Charter
is a party to other lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal
matters pending against the Company or its subsidiaries cannot be
predicted. Although such lawsuits and claims, including the
employment law claims discussed above, are not expected individually to be
material to the Company’s consolidated financial condition, results of
operations or liquidity, such lawsuits and claims could be, in the aggregate,
material to the Company’s consolidated financial condition, results of
operations or liquidity.
15. Stock
Compensation Plans
The
Company has stock compensation plans (the “Plans”) which provide for the grant
of non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or shares of restricted stock (shares of restricted stock not to exceed 20.0
million shares of Charter Class A common stock), as each term is defined in the
Plans. Employees, officers, consultants and directors of the Company
and its subsidiaries and affiliates are eligible to receive grants under the
Plans. Options granted generally vest over four years from the grant
date, with 25% generally vesting on the first anniversary of the grant date and
ratably thereafter. Generally, options expire 10 years from the
grant date. Restricted stock vests annually over a one to three-year
period beginning from the date of grant. The 2001 Stock Incentive
Plan allows for the issuance of up to a total of 90.0 million shares of Charter
Class A common stock (or units convertible into Charter Class A common
stock). In
March 2008, the Company adopted an incentive program to allow for performance
cash. Under the incentive program, subject to meeting performance
criteria, performance units under the 2001 Stock Incentive Plan and performance
cash are deposited into a performance bank of which one-third of the balance is
paid out each year. During the three and nine months ended September
30, 2008, Charter granted 0.3 million and 10.7 million shares of restricted
stock, respectively, and 0.3 million and 11.8 million performance units,
respectively. During the nine months ended September 30, 2008,
Charter granted $8 million of performance cash under Charter’s 2008 incentive
program.
The
Company recorded $8 million and $5 million of stock compensation expense for the
three months ended September 30, 2008 and 2007, respectively, and $24 million
and $15 million for the nine months ended September 30, 2008 and 2007,
respectively, which is included in selling, general, and administrative
expense.
16. Recently
Issued Accounting Standards
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133
, which requires companies to disclose their objectives and strategies
for using derivative instruments, whether or not designated as hedging
instruments under SFAS No. 133. SFAS No. 161 is effective for interim
periods and fiscal years beginning after November 15, 2008. The
Company will adopt SFAS No. 161 effective January 1, 2009. The
Company is currently assessing the impact of SFAS No. 161 on its financial
statements.
In April
2008, the FASB issued FSP FAS 142-3,
Determination of the Useful Life of
Intangible Assets
, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. The Company will
adopt FSP FAS 142-3 effective January 1, 2009. The Company is
currently assessing the impact of FSP FAS 142-3 on its financial
statements.
In May
2008, the FASB issued FSP APB 14-1,
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)
, which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company will adopt FSP
APB 14-1 effective January 1, 2009. The Company is currently
assessing the impact of FSP APB 14-1 on its financial statements.
The
Company does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its
accompanying financial statements.
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
General
Charter
Communications, Inc. (“Charter”) is a holding company whose principal assets at
September 30, 2008 are the 55% controlling common equity interest (53% for
accounting purposes) in Charter Communications Holding Company, LLC (“Charter
Holdco”) and “mirror” notes that are payable by Charter Holdco to Charter and
have the same principal amount and terms as Charter’s convertible senior
notes.
We are a
broadband communications company operating in the United States with
approximately 5.5 million customers at September 30, 2008. Through
our hybrid fiber and coaxial cable network, we offer our customers traditional
cable video programming (basic and digital, which we refer to as “video”
service), high-speed Internet service, and telephone services, as well as
advanced broadband services (such as Charter OnDemand™ (“OnDemand”) high
definition television service, and digital video recorder (“DVR”)
service).
The
following table summarizes our customer statistics for basic video, digital
video, residential high-speed Internet, and telephone as of September 30, 2008
and 2007:
|
|
Approximate
as of
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
(a)
|
|
|
2007
(a)
|
|
|
|
|
|
|
|
|
Video
Cable Services:
|
|
|
|
|
|
|
Basic
Video:
|
|
|
|
|
|
|
Residential
(non-bulk) basic video customers (b)
|
|
|
4,860,100
|
|
|
|
5,073,900
|
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
276,000
|
|
|
|
273,900
|
|
Total
basic video customers (b)(c)
|
|
|
5,136,100
|
|
|
|
5,347,800
|
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
3,118,500
|
|
|
|
2,882,900
|
|
|
|
|
|
|
|
|
|
|
Non-Video
Cable Services:
|
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,858,200
|
|
|
|
2,639,200
|
|
Telephone
customers (f)
|
|
|
1,274,300
|
|
|
|
802,600
|
|
After
giving effect to sales and acquisitions of cable systems in 2007 and 2008, basic
video customers, digital video customers, high-speed Internet customers and
telephone customers would have been approximately 5,285,100, 2,860,500,
2,631,800, and 804,000, respectively, as of September 30, 2007.
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At September 30, 2008 and
2007, "customers" include approximately 42,100 and 33,800 persons whose
accounts were over 60 days past due in payment, approximately 7,700 and
5,700 persons whose accounts were over 90 days past due in payment, and
approximately 3,800 and 2,100 of which were over 120 days past due in
payment, respectively.
|
(b)
|
"Basic
video customers" include all residential customers who receive video cable
services.
|
(c)
|
Included
within "basic video customers" are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit ("EBU")
basis. EBU is calculated for a system by dividing the bulk
price charged to accounts in an area by the most prevalent price charged
to non-bulk residential customers in that market for the comparable tier
of service. The EBU method of estimating basic video customers
is consistent with the methodology used in determining costs paid to
programmers and has been used
consistently.
|
(d)
|
"Digital
video customers" include all basic video customers that have one or more
digital set-top boxes or cable cards
deployed.
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers who
subscribe to our high-speed Internet
service.
|
(f)
|
“Telephone
customers" include all customers receiving telephone
service.
|
Overview
For the
three months ended September 30, 2008 and 2007, our income from operations was
$208 million and $107 million, respectively, and for the nine months ended
September 30, 2008 and 2007, our income from operations was $643 million and
$463 million, respectively. We had operating margins of 13% and 7%
for the three months ended September 30, 2008 and 2007, respectively, and 13%
and 10% for the nine months ended September 30, 2008 and 2007,
respectively. The increase in income from operations and operating
margins for the three and nine months ended September 30, 2008 compared to the
three and nine months ended September 30, 2007 was principally due to increased
sales of our bundled services and improved cost efficiencies along with
impairment of $56 million recorded in the three and nine months ended September
30, 2007 that did not recur in 2008.
We have a
history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally
attributable to insufficient revenue to cover the combination of operating
expenses and interest expenses we incur because of our high amounts of debt, and
depreciation expenses resulting from the capital investments we have made and
continue to make in our cable properties. We expect that these
expenses will remain significant.
Critical
Accounting Policies and Estimates
For a
discussion of our critical accounting policies and the means by which we develop
estimates therefore, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in our 2007 Annual Report on Form
10-K.
RESULTS
OF OPERATIONS
The
following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted for the
periods presented (dollars in millions, except per share data):
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,636
|
|
100
|
%
|
|
$
|
1,525
|
|
|
100
|
%
|
|
$
|
4,823
|
|
|
100
|
%
|
|
$
|
4,449
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and
amortization)
|
|
|
710
|
|
43
|
%
|
|
|
679
|
|
|
45
|
%
|
|
|
2,089
|
|
|
43
|
%
|
|
|
1,957
|
|
|
44
|
%
|
Selling,
general and administrative
|
|
|
371
|
|
23
|
%
|
|
|
341
|
|
|
22
|
%
|
|
|
1,059
|
|
|
22
|
%
|
|
|
961
|
|
|
22
|
%
|
Depreciation
and amortization
|
|
|
332
|
|
20
|
%
|
|
|
334
|
|
|
22
|
%
|
|
|
981
|
|
|
21
|
%
|
|
|
999
|
|
|
23
|
%
|
Asset
impairment charges
|
|
|
--
|
|
--
|
|
|
|
56
|
|
|
4
|
%
|
|
|
--
|
|
|
--
|
|
|
|
56
|
|
|
1
|
%
|
Other
operating expenses, net
|
|
|
15
|
|
1
|
%
|
|
|
8
|
|
|
--
|
|
|
|
51
|
|
|
1
|
%
|
|
|
13
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,428
|
|
87
|
%
|
|
|
1,418
|
|
|
93
|
%
|
|
|
4,180
|
|
|
87
|
%
|
|
|
3,986
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from
operations
|
|
|
208
|
|
13
|
%
|
|
|
107
|
|
|
7
|
%
|
|
|
643
|
|
|
13
|
%
|
|
|
463
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME
(EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(478
|
)
|
|
|
|
|
(459
|
)
|
|
|
|
|
|
(1,417
|
)
|
|
|
|
|
|
(1,385
|
)
|
|
|
|
Change
in value of derivatives
|
|
|
10
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
(18
|
)
|
|
|
|
Other
expense, net
|
|
|
(5
|
)
|
|
|
|
|
--
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
|
|
|
|
(473
|
)
|
|
|
|
|
|
(1,425
|
)
|
|
|
|
|
|
(1,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(265
|
)
|
|
|
|
|
(366
|
)
|
|
|
|
|
|
(782
|
)
|
|
|
|
|
|
(979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(57
|
)
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(322
|
)
|
|
|
|
$
|
(407
|
)
|
|
|
|
|
$
|
(956
|
)
|
|
|
|
|
$
|
(1,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE
|
|
$
|
(0.86
|
)
|
|
|
|
$
|
(1.10
|
)
|
|
|
|
|
$
|
(2.57
|
)
|
|
|
|
|
$
|
(3.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
374,145,243
|
|
|
|
|
|
369,239,742
|
|
|
|
|
|
|
371,968,952
|
|
|
|
|
|
|
367,671,479
|
|
|
|
|
Revenues
. Average
monthly revenue per basic video customer increased to $106 for the three months
ended September 30, 2008 from $95 for the three months ended September 30, 2007
and increased to $104 for the nine months ended September 30, 2008 from $92 for
the nine months ended September 30, 2007. Average monthly revenue per
basic video customer represents total revenue, divided by the number of
respective months, divided by the average number of basic video customers during
the respective period. Revenue growth primarily reflects increases in
the number of telephone, high-speed Internet, and digital video customers, price
increases, and incremental video revenues from OnDemand, DVR, and
high-definition television services, offset by a decrease in basic video
customers. Cable system sales, net of acquisitions, in 2007 reduced
the increase in revenues for the three and nine months ended September 30, 2008
as compared to the three and nine months ended September 30, 2007 by
approximately $8 million and $26 million, respectively.
Revenues
by service offering were as follows (dollars in millions):
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
over 2007
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
867
|
|
|
|
53
|
%
|
|
$
|
845
|
|
|
|
55
|
%
|
|
$
|
22
|
|
|
|
3
|
%
|
High-speed
Internet
|
|
|
342
|
|
|
|
21
|
%
|
|
|
318
|
|
|
|
21
|
%
|
|
|
24
|
|
|
|
8
|
%
|
Telephone
|
|
|
144
|
|
|
|
9
|
%
|
|
|
94
|
|
|
|
6
|
%
|
|
|
50
|
|
|
|
53
|
%
|
Commercial
|
|
|
100
|
|
|
|
6
|
%
|
|
|
87
|
|
|
|
6
|
%
|
|
|
13
|
|
|
|
15
|
%
|
Advertising
sales
|
|
|
80
|
|
|
|
5
|
%
|
|
|
77
|
|
|
|
5
|
%
|
|
|
3
|
|
|
|
4
|
%
|
Other
|
|
|
103
|
|
|
|
6
|
%
|
|
|
104
|
|
|
|
7
|
%
|
|
|
(1
|
)
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,636
|
|
|
|
100
|
%
|
|
$
|
1,525
|
|
|
|
100
|
%
|
|
$
|
111
|
|
|
|
7
|
%
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
over 2007
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
2,599
|
|
|
|
54
|
%
|
|
$
|
2,542
|
|
|
|
57
|
%
|
|
$
|
57
|
|
|
|
2
|
%
|
High-speed
Internet
|
|
|
1,009
|
|
|
|
21
|
%
|
|
|
920
|
|
|
|
21
|
%
|
|
|
89
|
|
|
|
10
|
%
|
Telephone
|
|
|
399
|
|
|
|
8
|
%
|
|
|
236
|
|
|
|
5
|
%
|
|
|
163
|
|
|
|
69
|
%
|
Commercial
|
|
|
289
|
|
|
|
6
|
%
|
|
|
251
|
|
|
|
6
|
%
|
|
|
38
|
|
|
|
15
|
%
|
Advertising
sales
|
|
|
223
|
|
|
|
5
|
%
|
|
|
216
|
|
|
|
5
|
%
|
|
|
7
|
|
|
|
3
|
%
|
Other
|
|
|
304
|
|
|
|
6
|
%
|
|
|
284
|
|
|
|
6
|
%
|
|
|
20
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,823
|
|
|
|
100
|
%
|
|
$
|
4,449
|
|
|
|
100
|
%
|
|
$
|
374
|
|
|
|
8
|
%
|
Video
revenues consist primarily of revenues from basic and digital video services
provided to our non-commercial customers. Basic video customers
decreased by 211,700 customers from September 30, 2007, 62,700 of which was
related to asset sales, net of acquisitions, compared to September 30,
2008. Digital video customers increased by 235,600, reduced by the
sale, net of acquisitions, of 22,400 customers. The increases in
video revenues are attributable to the following (dollars in
millions):
|
|
Three
months ended
September
30, 2008
compared
to
three
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2008
compared
to
nine
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Incremental
video services and rate adjustments
|
|
$
|
24
|
|
|
$
|
72
|
|
Increase
in digital video customers
|
|
|
22
|
|
|
|
56
|
|
Decrease
in basic video customers
|
|
|
(19
|
)
|
|
|
(53
|
)
|
System
sales, net of acquisitions
|
|
|
(5
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22
|
|
|
$
|
57
|
|
High-speed
Internet customers grew by 219,000 customers, reduced by asset sales, net of
acquisitions, of 7,400 customers, from September 30, 2007 to September 30,
2008. The increase in high-speed Internet revenues from our
residential customers is attributable to the following (dollars in
millions):
|
|
Three
months ended
September
30, 2008
compared
to
three
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2008
compared
to
nine
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Increase
in high-speed Internet customers
|
|
$
|
27
|
|
|
$
|
88
|
|
Rate
adjustments and service upgrades
|
|
|
(1
|
)
|
|
|
5
|
|
System
sales, net of acquisitions
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
89
|
|
Revenues
from telephone services increased by $58 million and $181 million for the three
and nine months ended September 30, 2008, respectively, as a result of an
increase of 471,700 telephone customers from September 30, 2007 to September 30,
2008, offset by a decrease of $8 million and $18 million for the three and nine
months ended September 30, 2008, respectively, related to lower average
rates.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of
increased sales of the Charter Business Bundle® primarily to small and
medium-sized businesses, offset by decreases of $1 million and $2 million
related to asset sales, net of acquisitions, for the three and nine months ended
September 30, 2008, respectively.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers, and other vendors. Advertising sales revenues
for the three and nine months ended September 30, 2008 increased primarily as a
result of an increase in political advertising sales and advertising sales to
vendors offset by decreased revenues from the automotive and furniture sectors,
and decreases of $0 and $2 million related to asset sales, net of acquisitions,
for the three and nine months ended September 30, 2008,
respectively. For the three months ended September 30, 2008 and 2007,
we received $11 million and $2 million, respectively, and for the nine months
ended September 30, 2008 and 2007, we received $25 million and $10 million,
respectively, in advertising sales revenues from vendors.
Other
revenues consist of franchise fees, regulatory fees, customer installations,
home shopping, late payment fees, wire maintenance fees and other miscellaneous
revenues. For the three months ended September 30, 2008 and 2007,
franchise fees represented approximately 45% and 42%, respectively, of total
other revenues. For the nine months ended September 30, 2008 and
2007, franchise fees represented approximately 46% and 47%, respectively, of
total other revenues. The increase in other revenues for the nine
months ended September 30, 2008 was primarily the result of increases in
franchise and other regulatory fees and wire maintenance fees.
Operating
expenses
.
The increase in
operating expenses is attributable to the following (dollars in
millions):
|
|
Three
months ended
September
30, 2008
compared
to
three
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2008
compared
to
nine
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
$
|
20
|
|
|
$
|
63
|
|
Labor
costs
|
|
|
8
|
|
|
|
38
|
|
Maintenance
costs
|
|
|
5
|
|
|
|
14
|
|
Regulatory
taxes
|
|
|
(3
|
)
|
|
|
10
|
|
Franchise
costs
|
|
|
2
|
|
|
|
7
|
|
Other,
net
|
|
|
4
|
|
|
|
15
|
|
System
sales, net of acquisitions
|
|
|
(5
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31
|
|
|
$
|
132
|
|
Programming
costs were approximately $413 million and $396 million, representing 58% and 58%
of total operating expenses for the three months ended September 30, 2008 and
2007, respectively, and were approximately $1.2 billion for both periods,
representing 59% and 60% of total operating expenses for the nine months ended
September 30, 2008 and 2007, respectively. Programming costs consist
primarily of costs paid to programmers for basic, premium, digital, OnDemand,
and pay-per-view programming. The increase in programming costs is
primarily a result of annual contractual rate adjustments, offset in part by
system sales. Programming costs were also offset by the amortization
of payments received from programmers of $8 million for each of the three months
ended September 30, 2008 and 2007, and $25 million and $19 million for the nine
months ended September 30, 2008 and 2007, respectively. We expect
programming expenses to continue to increase due to a variety of factors,
including annual increases imposed by programmers, amounts paid for
retransmission consent, and additional programming, including high-definition,
OnDemand, and pay-per-view programming, being provided to our
customers.
Labor
costs increased primarily due to an increased headcount to support improved
service levels.
Selling, general
and administrative expenses.
The increase in
selling, general and administrative expenses is attributable to the following
(dollars in millions):
|
|
Three
months ended
September
30, 2008
compared
to
three
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2008
compared
to
nine
months ended
September
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Marketing
costs
|
|
$
|
17
|
|
|
$
|
33
|
|
Employee
costs
|
|
|
11
|
|
|
|
33
|
|
Bad
debt and collection costs
|
|
|
1
|
|
|
|
13
|
|
Stock
compensation costs
|
|
|
3
|
|
|
|
9
|
|
Other,
net
|
|
|
(1
|
)
|
|
|
13
|
|
System
sales, net of acquisitions
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30
|
|
|
$
|
98
|
|
Depreciation and
amortization.
Depreciation and
amortization expense decreased by $2 million and $18 million for the three and
nine months ended September 30, 2008 compared to September 30, 2007,
respectively, and was primarily the result of certain assets becoming fully
depreciated and the impact of changes in the useful lives of certain assets
during 2007, offset by depreciation on capital expenditures.
Asset impairment
charges.
Asset impairment charges for the three and nine
months ended September 30, 2007 represent the write-down of assets related to
cable asset sales to fair value less costs to sell
.
Other operating
expenses, net.
For the three months ended September 30, 2008
compared to September 30, 2007, the increase in other operating expenses, net
was primarily attributable to a $6 million increase in special
charges. For the nine months ended September 30, 2008 compared to
September 30, 2007, the increase in other operating expenses, net was primarily
attributable to a $36 million increase in special charges. For more
information, see Note 10 to the accompanying condensed consolidated financial
statements contained in “Item 1. Financial Statements.”
Interest expense,
net.
For
the three months ended September 30, 2008 compared to September 30, 2007, net
interest expense increased by $19 million, which was a result of average debt
outstanding increasing from $19.6 billion for the third quarter of 2007 to $20.8
billion for the third quarter of 2008, offset by a decrease in our average
borrowing rate from 9.2% in the third quarter of 2007 to 8.9% in the third
quarter of 2008. For the nine months ended September 30, 2008
compared to September 30, 2007, net interest expense increased by $32 million,
which was a result of average debt outstanding increasing from $19.5 billion for
the nine months ended September 30, 2007 to $20.5 billion for the nine months
ended September 30, 2008, offset by a decrease in our average borrowing rate
from 9.2% for the nine months ended September 30, 2007 to 8.9% for the nine
months ended September 30, 2008.
Change in value
of derivatives.
Interest rate swaps are
held to manage our interest costs and reduce our exposure to increases in
floating interest rates. We expense the change in fair value of
derivatives that do not qualify for hedge accounting and cash flow hedge
ineffectiveness on interest rate swap agreements. Additionally,
certain provisions of our 5.875% and 6.50% convertible senior notes issued in
November 2004 and October 2007, respectively, were considered embedded
derivatives for accounting purposes and were required to be accounted for
separately from the convertible senior notes and marked to fair value at the end
of each reporting period. Change in value of derivatives consists of
the following for the three and nine months ended September 30, 2008 and 2007
(dollars in millions):
|
|
Three
months
ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$
|
(7
|
)
|
|
$
|
(21
|
)
|
|
$
|
(1
|
)
|
|
$
|
(16
|
)
|
Embedded
derivatives from convertible senior notes
|
|
|
17
|
|
|
|
7
|
|
|
|
--
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10
|
|
|
$
|
(14
|
)
|
|
$
|
(1
|
)
|
|
$
|
(18
|
)
|
Other
expense, net.
The
(increase) decrease in other expense, net is attributable to the following
(dollars in millions):
|
|
Three
months ended
September
30, 2008
compared
to
three
months ended
September
30, 2007
|
|
|
Nine
months ended
September
30, 2008
compared
to
nine
months ended
September
30, 2007
|
|
|
|
|
|
|
|
|
(Increase)
decrease in loss on extinguishment of debt
|
|
$
|
(4
|
)
|
|
$
|
35
|
|
Increase
in minority interest
|
|
|
--
|
|
|
|
(1
|
)
|
Decrease
in gain on investments
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Other,
net
|
|
|
1
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
32
|
|
For more
information, see Note 11 to the accompanying condensed consolidated financial
statements contained in “Item 1. Financial Statements.”
Income tax
expense.
Income tax expense was
recognized for the three and nine months ended September 30, 2008 and 2007,
through increases in deferred tax liabilities related to our investment in
Charter Holdco and certain of our
subsidiaries,
in addition to current federal and state income tax expense. Income
tax expense included $0 and $14 million of deferred tax benefit related to asset
acquisitions and sales occurring in the three months ended September 30, 2008
and 2007, respectively, and $1 million of deferred tax benefit and $5 million of
deferred tax expense in the nine months ended September 30, 2008 and 2007,
respectively.
Net
loss.
Net
loss decreased by $85 million, or 21%, for the three months ended September 30,
2008 compared to the three months ended September 30, 2007 and by $192 million,
or 17%, for the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007 as a result of the factors described
above.
Loss per common
share.
During the three months
ended September 30, 2008 compared to the three months ended September 30, 2007,
net loss per common share decreased by $0.24, or 22%, and during the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007,
net loss per common share decreased by $0.55, or 18%, as a result of the factors
described above.
Liquidity and Capital
Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
We have
significant amounts of debt. Our long-term debt as of September 30,
2008 totaled $21.0 billion, consisting of $7.9 billion of credit facility debt,
$12.8 billion accreted value of high-yield notes, and $370 million accreted
value of convertible senior notes. For the remainder of 2008, $18
million of our debt matures. As of September 30, 2008, our 2009 debt
maturities totaled $238 million. In 2010 and beyond, significant
additional amounts will become due under our remaining long-term debt
obligations including $1.9 billion of CCH II senior notes maturing in September
2010.
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. We have historically funded
these requirements through cash flows from operating activities, borrowings
under our credit facilities, proceeds from sales of assets, issuances of debt
and equity securities, and cash on hand. However, the mix of funding
sources changes from period to period. For the nine months ended
September 30, 2008, we generated $410 million of net cash flows from operating
activities after paying cash interest of $1.2 billion. In addition,
we used $938 million for purchases of property, plant and
equipment. Finally, we generated net cash flows from financing
activities of $1.1 billion, as a result of financing transactions and credit
facility borrowings completed during the nine months ended September 30,
2008. As of September 30, 2008, we had cash on hand of $569
million. We expect that our mix of sources of funds will continue to
change in the future based on overall needs relative to our cash flow and on the
availability of funds under the credit facilities of our subsidiaries, our
access to the debt and equity markets, the timing of possible asset sales, and
based on our ability to generate cash flows from operating
activities.
We expect
that cash on hand, cash flows from operating activities, and the amounts
available under Charter Operating’s credit
facilities
will be adequate to fund our projected
cash needs, including scheduled maturities, through 2009. We believe
that cash on hand, cash flows from operating activities, and the amounts
available under Charter Operating’s credit facilities will not be sufficient to
fund projected cash needs in 2010 (primarily as a result of the maturity of $1.9
billion of CCH II, LLC (“CCH II”) senior notes in September 2010) and
thereafter. However, it is uncertain whether we will be able, under
applicable law, to make distributions or otherwise move cash to the relevant
entities for payment of interest and principal. See “Limitations on
Distributions” below and “Risk Factors – Because of our holding company
structure, our outstanding notes are structurally subordinated in right of
payment to all liabilities of our subsidiaries. Restrictions in our
subsidiaries’ debt instruments and under applicable law limit their ability to
provide funds to us or our various debt issuers.” Our projected cash needs and
projected sources of liquidity depend upon, among other things, our actual
results, the timing and amount of our capital expenditures, and ongoing
compliance with the Charter Operating credit facilities, including obtaining an
unqualified audit opinion from our independent accountants. Although
we have been able to refinance or otherwise fund the repayment of debt in the
past, we may not be able to access additional sources of refinancing on similar
terms or pricing as those that are currently in place, or at all, or otherwise
obtain other sources of funding, especially given the recent volatility and
disruption of the capital and credit markets and the deterioration of general
economic
conditions in
recent months. A continuation of the recent turmoil in the capital
and credit markets and the general economic downturn could adversely impact the
availability, terms and/or pricing of financing when we need to raise additional
liquidity.
Access
to Capital
Our
significant amount of debt could negatively affect our ability to access
additional capital in the future. Additionally, our ability to incur
additional debt may be limited by the restrictive covenants in our indentures
and credit facilities. We would experience liquidity problems if we
are unable to obtain sufficient additional financing at the right levels of the
capital structure on a timely basis or at all as our debt becomes due, or we
otherwise need additional liquidity. Adverse economic conditions,
increased competition or other unfavorable events also could affect our
liquidity. If, at any time, additional capital or borrowing capacity
is required beyond amounts internally generated or available under our credit
facilities, we would consider:
|
•
|
issuing
equity that would significantly dilute existing
shareholders;
|
|
•
|
issuing
convertible debt or some other securities that may have structural or
other priority over our existing notes and may also, in the case of
convertible debt, significantly dilute Charter’s existing
shareholders;
|
|
•
|
further
reducing our expenses and capital expenditures, which may impair our
ability to increase revenue and grow operating cash
flows;
|
|
•
|
selling
assets; or
|
|
•
|
requesting
waivers or amendments with respect to our credit facilities, which may not
be available on acceptable terms, and cannot be
assured.
|
If the
above strategies were not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. In
addition, if we were able to raise additional capital when needed through the
issuance of equity or find it necessary to engage in a recapitalization or other
similar transaction, our shareholders could suffer significant dilution,
including potential loss of the entire value of their investment, and in the
case of a recapitalization or other similar transaction, our noteholders might
not receive the full principal and interest payments to which they are
contractually entitled.
Credit
Facility Availability
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with our
indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility, contain
certain restrictive covenants, some of which require us to maintain specified
leverage ratios and meet financial tests, and provide annual audited financial
statements with an unqualified opinion from our independent
accountants. See “Risk Factors- We may not be able to access funds
under the Charter Operating revolving credit facility if we fail to satisfy the
covenant restrictions, which could adversely affect our financial condition and
our ability to conduct our business.”
As
of September 30, 2008, we were in compliance with the covenants under our
indentures and credit facilities. As of September 30, 2008, our potential
availability under Charter Operating’s revolving credit facility totaled
approximately $780 million, none of which was limited by covenant
restrictions. Continued access to our revolving credit facility is
subject to our remaining in compliance with these covenants, including covenants
tied to Charter Operating’s leverage ratio and first lien leverage
ratio. If any event of non-compliance were to occur, funding under
the revolving credit facility may not be available and defaults on some or
potentially all of our debt obligations could occur. An event of
default under any of our debt instruments could result in the acceleration of
our payment obligations under that debt and, under certain circumstances, in
cross-defaults under our other debt obligations, which could have a material
adverse effect on our consolidated financial condition and results of
operations. In response to recent financial market turmoil, including
the failure of some financial institutions, we have borrowed amounts under
Charter Operating’s revolving credit facility in excess of our immediate
needs. We intend to continue monitoring counterparty risk in the
financial markets and may from time to time increase or decrease our borrowings
under Charter Operating’s revolving credit facility to balance various factors
including our liquidity needs, the leverage ratios of our subsidiaries, and
counterparty risk in the financial markets.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. Charter’s
ability to make interest
payments on its convertible senior notes and to repay the outstanding principal
of its convertible senior notes, will depend on its ability to raise additional
capital and/or on receipt of payments or distributions from Charter Holdco and
its subsidiaries. As of September 30, 2008, Charter Holdco was owed $115
million in intercompany loans from Charter Operating and had $2 million in cash,
which amounts were available to pay interest and principal on Charter's
convertible senior notes to the extent not otherwise used, for example, to
satisfy maturities at Charter Holdings. In connection with Charter
Holdco’s tender offer in October 2008 for senior notes of Charter Holdings,
Charter Operating repaid $97 million of its intercompany note owed to Charter
Holdco, reducing such intercompany note to $18 million. In addition,
as long as Charter Holdco continues to hold the $35 million (plus $102 million
acquired in the tender offer in October 2008) of Charter Holdings’ notes due
2009 and 2010 (as discussed further below), Charter Holdco will receive interest
and principal payments from Charter Holdings to the extent Charter Holdings is
able to make such payments. Such amounts may be available to pay interest
and principal on Charter’s convertible senior notes, although Charter Holdco may
use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC, LLC (“CCHC”)) for payment of principal on parent company notes, are
restricted under the indentures governing the CCH I Holdings, LLC (“CIH”) notes,
CCH I, LLC (“CCH I”) notes, CCH II notes, CCO Holdings notes, Charter Operating
notes, and under the CCO Holdings credit facility, unless there is no default
under the applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended September 30, 2008, there was no
default under any of these indentures or credit facilities. However,
certain of our subsidiaries did not meet their applicable leverage ratio tests
based on September 30, 2008 financial results. As a result,
distributions from certain of our subsidiaries to their parent companies would
have been restricted at such time and will continue to be restricted unless
those tests are met. Distributions by Charter Operating for payment
of principal on parent company notes are further restricted by the covenants in
its credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended September
30, 2008, there was no default under Charter Holdings’ indentures and other
specified tests were met. However, Charter Holdings did not meet its
leverage ratio test of 8.75 to 1.0 based on September 30, 2008 financial
results. As a result, distributions from Charter Holdings to Charter or
Charter Holdco would have been restricted at such time and will continue to be
restricted unless that test is met.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by our subsidiaries may be limited by applicable
law, including the Delaware Limited Liability Company Act, under which our
subsidiaries may only make distributions if they have “surplus” as defined in
the act. It is uncertain whether we will have sufficient surplus at
CIH and its parents, or potentially its subsidiaries, to make distributions,
including for payment of interest and principal on the debts of the parents of
such entities. See “Risk Factors — Because of our holding
company structure, our outstanding notes are structurally subordinated in right
of payment to all liabilities of our subsidiaries. Restrictions in
our subsidiaries’ debt instruments and under applicable law limit their ability
to provide funds to us or our various debt issuers.”
Recent Financing
Transactions
In March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014 (the “Notes"), guaranteed by CCO Holdings and certain
other subsidiaries of Charter Operating, in a private transaction. The net
proceeds of this issuance were used to repay, but not permanently reduce, the
outstanding debt balances under the existing revolving credit facility of
Charter Operating. The Notes were sold to qualified institutional buyers
in reliance on Rule 144A and outside the United States to non-U.S. persons in
reliance on Regulation S.
In March
2008, Charter Operating borrowed $500 million principal amount of incremental
term loans (the "Incremental Term Loans") under the Charter Operating credit
facilities. The net proceeds were used for general corporate purposes.
The Incremental Term Loans have a final maturity of March 6, 2014 and
prior to this date will amortize in quarterly principal installments totaling 1%
annually beginning on June 30, 2008. The Incremental Term Loans bear
interest at LIBOR plus 5.0%, with a LIBOR floor of 3.5%, and are otherwise
governed by and subject to the existing terms of the Charter Operating credit
facilities.
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions,
from a small number of institutional holders, a total of approximately $35
million principal amount of various Charter Holdings notes due 2009 and 2010 and
approximately $46 million principal amount of Charter’s 5.875% convertible
senior notes due 2009, for approximately $77 million of cash. Charter
Holdco continues to hold the Charter Holdings notes. The
purchased
5.875% convertible senior notes were cancelled resulting in approximately $3
million principal amount of such notes remaining outstanding.
In July
2008, CCH II completed a tender offer, in which $338 million of CCH II’s 10.25%
senior notes due 2010 were accepted for $364 million of CCH II’s 10.25% senior
notes due 2013, which were issued as part of the same series of notes as CCH
II’s $250 million aggregate principal amount of 10.25% senior notes due 2013,
which were issued in September 2006.
In
October 2008, Charter Holdco completed a tender offer, in which a total of
approximately $102 million principal amount of various Charter Holdings notes
due 2009 and 2010 were accepted for approximately $99 million of
cash. Charter Holdco continues to hold the Charter Holdings
notes.
Historical
Operating, Investing and Financing Activities
Cash and Cash
Equivalents.
We held $569 million in cash and cash equivalents
as of September 30, 2008 compared to $75 million as of December 31,
2007. The increase in cash was the result of a draw-down on our
revolving credit facility.
Operating
Activities.
Net cash provided by
operating activities increased $83 million, or 25%, from $327 million for the
nine months ended September 30, 2007 to $410 million for the nine months ended
September 30, 2008, primarily as a result of revenues increasing at a faster
rate than cash expenses offset by changes in operating assets and liabilities
that provided $28 million less cash during the nine months ended September 30,
2008 than the corresponding period in 2007.
Investing
Activities.
Net cash used in
investing activities was $980 million and $935 million for the nine months ended
September 30, 2008 and 2007, respectively. The increase is primarily
due to an increase of $38 million in cash used for the purchase of property,
plant, and equipment.
Financing
Activities.
Net cash provided by
financing activities was $1.1 billion and $607 million for the nine months ended
September 30, 2008 and 2007, respectively. The increase in cash
provided during the nine months ended September 30, 2008 as compared to the
corresponding period in 2007, was primarily the result of an increase in the
amount by which borrowings exceeded repayments of long-term debt.
Capital
Expenditures
We have
significant ongoing capital expenditure requirements. Capital
expenditures were $938 million and $890 million for the nine months ended
September 30, 2008 and 2007, respectively. Capital expenditures
increased as a result of spending on customer premise equipment and scalable
infrastructure to meet increased digital, high-speed Internet, and telephone
customer growth and increased demand for advanced services. See the
table below for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt, and
borrowings under our credit
facilities. In addition, during the nine months ended September 30,
2008 and 2007, our liabilities related to capital expenditures decreased $41
million and $51 million, respectively.
During
2008, we expect capital expenditures to be approximately $1.2
billion. We expect the nature of these expenditures will continue to
be composed primarily of purchases of customer premise equipment related to
telephone
and other advanced services, support capital, and scalable
infrastructure. We have funded and expect to continue to fund capital
expenditures for 2008 primarily from cash flows from operating activities and
borrowings under our credit facilities. The actual amount of our capital
expenditures depends on the deployment of advanced broadband services and
offerings. We may need additional capital if there is accelerated
growth in high-speed Internet, telephone or digital customers or there is an
increased need to respond to competitive pressures by expanding the delivery of
other advanced services.
We have
adopted capital expenditure disclosure guidance, which was developed by eleven
then publicly traded cable system operators, including Charter, with the support
of the National Cable & Telecommunications Association
("NCTA"). The disclosure is intended to provide more consistency in
the reporting of capital
expenditures
among peer companies in the cable industry. These disclosure
guidelines are not required disclosures under GAAP, nor do they impact our
accounting for capital expenditures under GAAP.
The
following table presents our major capital expenditures categories in accordance
with NCTA disclosure guidelines for the three and nine months ended September
30, 2008 and 2007 (dollars in millions):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
premise equipment (a)
|
|
$
|
157
|
|
|
$
|
139
|
|
|
$
|
480
|
|
|
$
|
428
|
|
Scalable
infrastructure (b)
|
|
|
52
|
|
|
|
64
|
|
|
|
185
|
|
|
|
164
|
|
Line
extensions (c)
|
|
|
19
|
|
|
|
27
|
|
|
|
63
|
|
|
|
76
|
|
Upgrade/Rebuild
(d)
|
|
|
8
|
|
|
|
11
|
|
|
|
37
|
|
|
|
35
|
|
Support
capital (e)
|
|
|
52
|
|
|
|
70
|
|
|
|
173
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$
|
288
|
|
|
$
|
311
|
|
|
$
|
938
|
|
|
$
|
890
|
|
(a)
|
Customer
premise equipment includes costs incurred at the customer residence to
secure new customers, revenue units and additional bandwidth
revenues. It also includes customer installation costs in
accordance with SFAS No. 51,
Financial Reporting by Cable
Television Companies,
and customer premise equipment (e.g., set-top
boxes and cable modems, etc.).
|
(b)
|
Scalable
infrastructure includes costs, not related to customer premise equipment
or our network, to secure growth of new customers, revenue units and
additional bandwidth revenues or provide service enhancements (e.g.,
headend equipment).
|
(c)
|
Line
extensions include network costs associated with entering new service
areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment,
make-ready and design engineering).
|
(d)
|
Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable networks,
including betterments.
|
(e)
|
Support
capital includes costs associated with the replacement or enhancement of
non-network assets due to technological and physical obsolescence (e.g.,
non-network equipment, land, buildings and
vehicles).
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate
Risk
We are
exposed to various market risks, including fluctuations in interest
rates. We use interest rate swap agreements
to manage
our interest costs and reduce our exposure to increases in floating interest
rates
. Our policy is to manage our exposure to fluctuations in
interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, we agree to
exchange, at specified intervals through 2013, the difference between fixed and
variable interest amounts calculated by reference to agreed-upon notional
principal amounts. At the banks’ option, certain interest rate swap
agreements may be extended through 2014.
As of September 30, 2008
and December 31, 2007, our long-term debt totaled approximately $21.0 billion
and $19.9 billion, respectively. As of September 30, 2008 and
December 31, 2007, the weighted average interest rate on the credit facility
debt was approximately 6.7% and 6.8%, respectively; the weighted average
interest rate on the high-yield notes was approximately 10.4% and 10.3%,
respectively; and the weighted average interest rate on the
convertible
senior notes was approximately 6.2% and 6.4%, respectively, resulting in a
blended weighted average interest rate of 9.0% and 9.0%,
respectively. The interest rate on approximately 83% and 85% of the
total principal amount of our debt was effectively fixed, including the effects
of our interest rate swap agreements, as of September 30, 2008 and December 31,
2007, respectively. The fair value of our high-yield notes was $9.1
billion and $10.3 billion at September 30, 2008 and December 31, 2007,
respectively. The fair value of our convertible senior notes was $144
million and $332 million at September 30, 2008 and December 31, 2007,
respectively. The fair value of our credit facilities was $6.3
billion and $6.7 billion at September 30, 2008 and December 31, 2007,
respectively. The fair value of high-yield and convertible notes was
based on quoted market prices, and the fair value of the credit facilities was
based on dealer quotations.
We do not
hold or issue derivative instruments for trading purposes. We do,
however, have certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments into
fixed payments. For qualifying hedges, SFAS No. 133 allows derivative
gains and losses to offset related results on hedged items in the consolidated
statement of operations. We have formally documented, designated and
assessed the effectiveness of transactions that receive hedge
accounting. For each of the three and nine months ended September 30,
2008 and 2007, there was no cash flow hedge ineffectiveness on interest rate
swap agreements.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive loss.
For the three months ended
September 30, 2008
and 2007, losses of $19
million and $73 million, respectively, and for the nine months ended September
30, 2008 and 2007, losses of $1 million and $25 million, respectively, related
to derivative instruments designated as cash flow hedges, were recorded in
accumulated other comprehensive loss.
The amounts are subsequently
reclassified as an increase or decrease to interest expense in the same periods
in which the related interest on the floating-rate debt obligations affects
earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as a change in value of derivatives in our statements of
operations. For the three months ended
September 30, 2008 and
2007
, change in value of derivatives included losses of $7 million and
$21 million, respectively, and for the nine months ended September 30, 2008 and
2007, losses of $1 million and $16 million, respectively, resulting from
interest rate derivative instruments not designated as hedges.
The table
set forth below summarizes the fair values and contract terms of financial
instruments subject to interest rate risk maintained by us as of September 30,
2008 (dollars in millions):
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
Fair
Value at September 30, 2008
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
$
|
--
|
|
$
|
168
|
|
$
|
1,882
|
|
$
|
281
|
|
$
|
1,654
|
|
$
|
1,414
|
|
$
|
7,837
|
|
$
|
13,236
|
|
$
|
9,200
|
|
|
|
|
Average
Interest Rate
|
|
--
|
|
|
10.09%
|
|
|
10.26%
|
|
|
11.25%
|
|
|
7.75%
|
|
|
9.40%
|
|
|
10.93%
|
|
|
10.27%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
$
|
18
|
|
$
|
70
|
|
$
|
70
|
|
$
|
70
|
|
$
|
70
|
|
$
|
635
|
|
$
|
6,930
|
|
$
|
7,863
|
|
$
|
6,333
|
|
|
|
|
Average Interest
Rate
|
|
5.84%
|
|
|
5.79%
|
|
|
5.41%
|
|
|
6.54%
|
|
|
6.70%
|
|
|
6.59%
|
|
|
6.61%
|
|
|
6.59%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to Fixed Swaps
|
$
|
--
|
|
$
|
--
|
|
$
|
500
|
|
$
|
300
|
|
$
|
2,500
|
|
$
|
1,000
|
|
$
|
--
|
|
$
|
4,300
|
|
$
|
(170)
|
|
|
|
|
Average Pay
Rate
|
|
--
|
|
|
--
|
|
|
7.01%
|
|
|
7.18%
|
|
|
7.14%
|
|
|
7.14%
|
|
|
--
|
|
|
7.13%
|
|
|
|
|
|
|
|
Average Receive
Rate
|
|
--
|
|
|
--
|
|
|
5.31%
|
|
|
6.25%
|
|
|
6.77%
|
|
|
6.69%
|
|
|
--
|
|
|
6.54%
|
|
|
|
|
|
|
|
The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of our exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts. The estimated
fair value approximates the costs (proceeds) to settle the outstanding
contracts. Interest rates on variable debt are estimated using the
average implied forward LIBOR for the year of maturity based on the yield
curve in effect at September 30, 2008 including applicable bank
spread.
At
September 30, 2008 and December 31, 2007, we had $4.3 billion in notional
amounts of interest rate swaps outstanding. The notional amounts of
interest rate instruments do not represent amounts exchanged by the parties and,
thus, are not a measure of exposure to credit loss. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
Item
4. Controls
and Procedures.
As of the
end of the period covered by this report, management, including our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures with respect
to the information generated for use in this quarterly report. The
evaluation was based in part upon
reports
and certifications provided by a number of executives. Based upon,
and as of the date of that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective to provide reasonable assurances that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon the above evaluation, we believe that our
controls provide such reasonable assurances.
There was
no change in our internal control over financial reporting during the quarter
ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION.
See Note
14 to our consolidated financial statements of this Quarterly Report on Form
10-Q for a discussion concerning our legal proceedings.
Our
Annual Report on Form 10-K for the year ended December 31, 2007 includes “Risk
Factors” under Item 1A of Part I. Except for the updated risk factors
described below, there have been no material changes from the risk factors
described in our Form 10-K. The information below updates, and should
be read in conjunction with, the risk factors and information disclosed in our
Form 10-K.
Risks Related to Significant
Indebtedness of Us and Our Subsidiaries
We
and our subsidiaries have a significant amount of debt and may incur significant
additional debt, including secured debt, in the future, which could adversely
affect our financial health and our ability to react to changes in our
business.
We and
our subsidiaries have a significant amount of debt and may (subject to
applicable restrictions in our debt instruments) incur additional debt in the
future. As of September 30, 2008, our total long-term debt was
approximately $21.0 billion, our shareholders’ deficit was approximately $8.8
billion and the deficiency of earnings to cover fixed charges for the three and
nine months ended September 30, 2008 was $264 million and $777 million,
respectively.
Because
of our significant indebtedness and adverse changes in the capital markets, our
ability to raise additional capital at reasonable rates or at all is uncertain,
and the ability of our subsidiaries to make distributions or payments to their
parent companies is subject to availability of funds and restrictions under our
subsidiaries’ applicable debt instruments and under applicable
law. If we were able to raise additional capital when needed through
the issuance of equity or find it necessary to engage in a recapitalization or
other similar transaction, our shareholders could suffer significant dilution,
including potential loss of the entire value of their investment, and in the
case of a recapitalization or other similar transaction, our noteholders might
not receive principal and interest payments to which they are contractually
entitled.
Our
significant amount of debt could have other important
consequences. For example, the debt will or could:
|
·
|
require
us to dedicate a significant portion of our cash flow from operating
activities to make payments on our debt, reducing our funds available for
working capital, capital expenditures, and other general corporate
expenses;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business,
the cable and telecommunications industries, and the economy at
large;
|
|
·
|
place
us at a disadvantage compared to our competitors that have proportionately
less debt;
|
|
·
|
make
us vulnerable to interest rate increases, because net of hedging
transactions approximately 17% of our borrowings are, and will continue to
be, subject to variable rates of
interest;
|
|
·
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expose
us to increased interest expense to the extent we refinance existing debt
with higher cost debt;
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·
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adversely
affect our relationship with customers and
suppliers;
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·
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limit
our ability to borrow additional funds in the future, or to access
financing at the necessary level of the capital structure, due to
applicable financial and restrictive covenants in our
debt;
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|
·
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make
it more difficult for us to obtain financing given the current volatility
and disruption in the capital and credit markets and the deterioration of
general economic conditions;
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·
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make
it more difficult for us to satisfy our obligations to the holders of our
notes and for our subsidiaries to satisfy their obligations to the lenders
under their credit facilities and to their noteholders;
and
|
|
·
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limit
future increases in the value, or cause a decline in the value of our
equity, which could limit our ability to raise additional capital by
issuing equity.
|
A default
by one of our subsidiaries under its debt obligations could result in the
acceleration of those obligations, which in turn could trigger cross-defaults
under other agreements governing our long-term indebtedness. In
addition, the secured lenders under the Charter Operating credit facilities, the
holders of the Charter Operating senior second-lien notes, the secured lenders
under the CCO Holdings credit facility, and the holders of the CCH I notes could
foreclose on the collateral, which includes equity interests in certain of our
subsidiaries, and exercise other rights of secured creditors. Any
default under our debt could adversely affect our growth, our financial
condition, our results of operations, the value of our equity and our ability to
make payments on our debt, and could force us to seek the protection of the
bankruptcy laws. We and our subsidiaries may incur significant
additional debt in the future. If current debt amounts increase, the
related risks that we now face will intensify.
We
depend on generating (and having available to the applicable obligor) sufficient
cash flow and having access to additional liquidity sources to fund our debt
obligations, capital expenditures, and ongoing operations.
Our
ability to service our debt and to fund our planned capital expenditures and
ongoing operations will depend on both our ability to generate and grow cash
flow and our access (by dividend or otherwise) to additional liquidity sources.
Our ability to generate and grow cash flow is dependent on many factors,
including:
·
|
the
impact of competition from other distributors, including incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers and DSL
providers;
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·
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difficulties
in growing, further introducing, and operating our telephone services,
while adequately meeting customer expectations for the reliability of
voice services;
|
·
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our
ability to adequately meet demand for installations and customer
service;
|
·
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our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and other
services, and to maintain and grow our customer base, particularly in the
face of increasingly aggressive
competition;
|
·
|
our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
|
·
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general
business conditions, economic uncertainty or downturn, including the
recent volatility and disruption in the capital and credit markets and the
significant downturn in the housing sector and overall economy;
and
|
·
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the
effects of governmental regulation on our
business.
|
Some of
these factors are beyond our control. It is also difficult to assess
the impact that the general economic downturn and recent turmoil in the credit
markets will have on future operations and financial
results. However, we believe that the general economic downturn could
result in reduced spending by customers and advertisers, which could reduce our
revenues and our cash flows from operating activities from those that otherwise
would have been generated. If we are unable to generate sufficient
cash flow or we are unable to access additional liquidity sources, we may
not be able to service and repay our debt, operate our business, respond to
competitive challenges, or fund our other liquidity and capital
needs. We expect that cash on hand, cash flows from operating
activities, and the amounts available under Charter Operating’s credit
facilities
will be adequate to fund our projected
cash needs, including scheduled maturities, through 2009. We believe
that cash on hand, cash flows from operating activities, and the amounts
available under the Charter Operating credit facilities will not be sufficient
to fund projected cash needs in 2010 (primarily as a result of the maturity of
$1.9 billion of CCH II senior notes in September 2010) and
thereafter. However, it is uncertain whether we will be able, under
applicable law, to make distributions or otherwise move cash to the relevant
entities for payment of interest and principal. See “Part I. Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Limitations on
Distributions” and “–Because of our holding company structure, our outstanding
notes are structurally subordinated in right of payment to all liabilities of
our subsidiaries. Restrictions in our subsidiaries’ debt instruments
and under applicable law limit their ability to provide funds to us or our
various debt issuers.”
Our
projected cash needs and projected sources of liquidity depend upon, among other
things, our actual results, the timing and amount of our capital expenditures,
and ongoing compliance with the Charter Operating credit facilities, including
obtaining an unqualified audit opinion from our independent
accountants. Although we have been able to refinance or otherwise
fund the repayment of debt in the past, we may not be able to access additional
sources of refinancing on similar terms or pricing as those that are currently
in place, or at all, or otherwise obtain other sources of funding, especially
given the recent volatility and disruption in the capital and credit markets and
the deterioration of the general economic conditions in recent
months. An inability to access additional sources of liquidity to
fund our cash needs in 2010 or thereafter or to refinance or otherwise fund the
repayment of the CCH II senior notes
could adversely affect our
growth, our financial condition, our results of operations, and our ability to
make payments on our debt, and could force us to seek the protection of the
bankruptcy laws, which could materially adversely impact our ability to operate
our business and to make payments under our debt instruments. See
“Part I. Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital
Resources.”
We
may not be able to access funds under the Charter Operating revolving credit
facility if we fail to satisfy the covenant restrictions, which could adversely
affect our financial condition and our ability to conduct our
business.
Our
subsidiaries have historically relied on access to credit facilities to fund
operations, capital expenditures, and to service parent company debt, and we
expect such reliance to continue in the future. Our total potential
borrowing availability under our revolving credit facility was approximately
$780 million as of September 30, 2008, none of which was limited by covenant
restrictions. There can be no assurance that actual availability
under our revolving credit facility will not be limited by covenant restrictions
in the future.
One of
the conditions to the availability of funding under the Charter Operating
revolving credit facility is the absence of a default under such facility,
including as a result of any failure to comply with the covenants under the
facilities. Among other covenants, the Charter Operating credit
facility requires us to maintain specified leverage ratios. The
Charter Operating revolving credit facility also provides that Charter Operating
obtain an unqualified audit opinion from its independent accountants for each
fiscal year, which, among other things, requires Charter to demonstrate its
ability to fund, at all relevant subsidiaries, its projected liquidity needs for
a reasonable period of time following the balance sheet date of the financial
statements being audited. There can be no assurance that Charter
Operating will be able to continue to comply with these or any other of the
covenants under the credit facilities. See “—We and our subsidiaries
have a significant amount of debt and may incur significant additional debt,
including secured debt, in the future, which could adversely affect our
financial health and our ability to react to changes in our business” for a
discussion of the consequences of a default under our debt obligations and
“- Because of our holding company structure, our outstanding notes are
structurally subordinated in right of payment to all liabilities of our
subsidiaries. Restrictions in our subsidiaries’ debt instruments and
under applicable law limit their ability to provide funds to us our our various
debt issuers” for a discussion of the limits on our ability to access financing
at the relevant levels of our capital structure.
The
soundness of financial institutions could adversely affect us.
Our
ability to borrow under our revolving credit facility and to engage in other
routine funding transactions could be adversely affected by the actions and
commercial soundness of financial services institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We have exposure to different counterparties and we execute
transactions with counterparties in the financial services industry, including
commercial banks, investment banks and other financial institutions. Defaults
by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, have led to
market-wide liquidity problems and could affect our liquidity or lead to losses
or defaults by us.
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our
subsidiaries. Restrictions in our subsidiaries’ debt instruments and
under applicable law limit their ability to provide funds to us or our various
debt issuers.
Charter’s
primary assets are our equity interests in our subsidiaries. Our
operating subsidiaries are separate and distinct legal entities and are not
obligated to make funds available to us for payments on our notes or other
obligations in the form of loans, distributions or otherwise. Our
subsidiaries’ ability to make distributions to us or the applicable debt issuers
to service debt obligations is subject to their compliance with the terms of
their credit facilities and indentures and restrictions under applicable
law. See “Part I. Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Liquidity and Capital
Resources — Limitations on Distributions.” Under the Delaware Limited
Liability Company Act, our subsidiaries may only make distributions if they have
“surplus” as defined in the act. Under fraudulent transfer laws, our
subsidiaries may not pay dividends if they are insolvent or are rendered
insolvent thereby. The measures of insolvency for purposes of these
fraudulent transfer laws vary depending upon the law applied in any proceeding
to determine whether a fraudulent transfer has occurred. Generally, however, an
entity would be considered insolvent if:
·
|
the
sum of its debts, including contingent liabilities, was greater than the
fair saleable value of all its
assets;
|
·
|
the
present fair saleable value of its assets was less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature;
or
|
·
|
it
could not pay its debts as they became
due.
|
Primarily
in light of the economic environment, it is uncertain whether we will have, at
the relevant times, sufficient surplus at CIH and its parents, or potentially
its subsidiaries, to make distributions, including for payments of interest and
principal on the debts of the parents of such entities, and there can otherwise
be no assurance that our subsidiaries will not become insolvent or will be
permitted to make distributions in the future in compliance with these
restrictions in amounts needed to service our indebtedness. Our
direct or indirect subsidiaries include the borrowers and guarantors under the
Charter Operating and CCO Holdings credit facilities. Several of our
subsidiaries are also obligors and guarantors under senior high yield
notes. Our convertible senior notes are structurally subordinated in
right of payment to all of the debt and other liabilities of our
subsidiaries. As of September 30, 2008, our total long-term debt was
approximately $21.0 billion, of which approximately $20.7 billion was
structurally senior to our convertible senior notes.
In the
event of bankruptcy, liquidation or dissolution of one or more of our
subsidiaries, that subsidiary’s assets would first be applied to satisfy its own
obligations, and following such payments, such subsidiary may not have
sufficient assets remaining to make payments to its parent company as an equity
holder or otherwise. In that event:
|
·
|
the
lenders under Charter Operating’s credit facilities whose interests are
secured by substantially all of our operating assets, and all holders of
other debt of our subsidiaries, will have the right to be paid in full
before us from any of our subsidiaries’ assets;
and
|
|
·
|
the
holders of preferred membership interests in our subsidiary, CC VIII,
would have a claim on a portion of its assets that may reduce the amounts
available for repayment to holders of our outstanding
notes.
|
Risks Related to Our
Business
Our
exposure to the credit risks of our customers, vendors and third parties could
adversely affect our cash flow, results of operations and financial
condition.
We are
exposed to risks associated with the potential financial instability of our
customers, many of whom may be adversely affected by the general economic
downturn. Dramatic declines in the housing market over the past year,
including falling home prices and increasing foreclosures, together with
significant increases in unemployment, have severely affected consumer
confidence and may cause increased delinquencies or cancellations by our
customers or lead to unfavorable changes in the mix of products
purchased. The general economic downturn also may affect advertising
sales, as companies seek to reduce expenditures and conserve cash. Any of these
events may adversely affect our cash flow, results of operations and financial
condition.
In
addition, we are susceptible to risks associated with the potential financial
instability of the vendors and third parties on which we rely to provide
products and services or to which we delegate certain functions. The
same economic conditions that may affect our customers, as well as volatility
and disruption in the capital and credit markets, also could adversely affect
vendors and third parties and lead to significant increases in prices, reduction
in output or the bankruptcy of our vendors or third parties upon which we
rely. Any interruption in the services provided by our vendors or by
third parties could adversely affect our cash flow, results of operation and
financial condition.
The
failure to maintain a minimum closing share price of $1.00 per share of
Class A common stock could result in the delisting of our shares on the
NASDAQ Global Select Market, which would harm the market price of Charter’s
Class A common stock.
In order
to retain our listing on the NASDAQ Global Select Market we are required by
NASDAQ to maintain a minimum bid price of $1.00 per share. However,
on October 16, 2008, NASDAQ suspended enforcement of the rules requiring a
minimum $1.00 per share closing share price until January 19,
2009. As of October 24, 2008, our Class A common stock had closed
below the minimum bid price of $1.00 per share for 30 consecutive business days
and, therefore, would not have been in compliance with the minimum bid price
rule. A new compliance period will begin on January 19,
2009. In the event that our stock does close below the minimum bid
price of $1.00 per share
for any 30 consecutive
business days, following the reinstatement of the rules on January 19, 2009, we
can regain compliance if our Class A common stock closes at or above $1.00 per
share for 10 consecutive days during the 180 days immediately following.
If
we are unable to take action to increase the bid price per share (either by
reverse stock split or otherwise), we could be subject to delisting from the
NASDAQ Global Select Market.
The
failure to maintain our listing on the NASDAQ Global Select Market would harm
the liquidity of Charter’s Class A common stock and would have adverse
effect on the market price of our common stock. If the stock were to trade it
would likely trade on the OTC “pink sheets,” which provide significantly less
liquidity than does the NASDAQ Global Select Market. As a result, the liquidity
of our common stock would be impaired, not only in the number of shares which
could be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts’ and news media’s coverage, and lower prices for
our common stock than might otherwise be attained. In addition, our common stock
would become subject to the low-priced security or so-called “penny stock” rules
that impose additional sales practice requirements on broker-dealers who sell
such securities.
Item
5. Other Information
In
October 2008, the Board of Directors eliminated the vacancy on the Board by
reducing the number of members of the Board of Directors to
eleven. The vacancy had been created by the resignation of a director
in September 2008.
The index
to the exhibits begins on page E-1 of this quarterly report.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, Charter
Communications, Inc. has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHARTER COMMUNICATIONS,
INC.,
Registrant
Dated: November
6, 2008
|
By:
/s/ Kevin D.
Howard
|
|
Name:
|
Kevin
D. Howard
|
|
Title:
|
Vice
President, Controller and
|
|
|
Chief
Accounting Officer
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
|
|
10.1+
|
|
Amended
and Restated Employment Agreement between Neil Smit and Charter
Communications, Inc., dated as of July 1, 2008 (incorporated by reference
to Exhibit 10.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on September 30, 2008 (File
No. 000-27927)).
|
|
12.1*
|
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
31.1*
|
|
Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under
the Securities Exchange Act of 1934.
|
|
31.2*
|
|
Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under
the Securities Exchange Act of 1934.
|
|
32.1*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
|
|
32.2*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
|
|
+
Management compensatory plan or arrangement
*
Document attached
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