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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-27927
CHARTER COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1857213
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
12444 POWERSCOURT DRIVE -- SUITE 100
ST. LOUIS, MISSOURI
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(Address of principal executive offices) ---------------------------
(Zip Code)
(314) 965-0555
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.001 PAR VALUE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of outstanding Class A Common Stock held by
non-affiliates of the registrant at March 28, 2000 was $189.3 million based on
the prices as computed by the NASDAQ National Market system as of that date. For
purposes of this calculation only, affiliates are deemed to be directors and
executive officers of the registrant and entities they control.
There were 222,039,746 shares of Class A Common Stock outstanding as of March
28, 2000. There were 50,000 shares of Class B Common Stock outstanding as of the
same date.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the
2000 Annual Meeting of Stockholders are incorporated by reference into Part III.
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CHARTER COMMUNICATIONS, INC.
FORM 10-K -- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 36
Item 3. Legal Proceedings........................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......... 36
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 37
Item 6. Selected Consolidated Financial Data........................ 38
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 39
Item 7a Quantitative and Qualitative Disclosure about Market Risk... 61
Item 8. Consolidated Financial Statements and Supplementary Data.... 61
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 61
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 62
Item 11. Executive Compensation...................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 63
Item 13. Certain Relationships and Related Transactions.............. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 64
SIGNATURES................................................................ 65
This Annual Report on Form 10-K is for the year ended December 31, 1999.
This Annual Report modifies and supersedes documents filed prior to this Annual
Report. The 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 Annual Report. In addition, information that we
file with the SEC in the future will automatically update and supersede
information contained in this Annual Report. In this Annual Report, "we," "us"
and "our" refer to Charter Communications, Inc., Charter Communications Holding
Company, LLC and its subsidiaries.
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FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements regarding, among
other things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Many of the forward-looking statements contained in this Annual
Report may be identified by the use of forward-looking words such as "believe,"
"expect," "anticipate," "should," "planned," "estimated" and "potential," among
others. Important factors that could cause actual results to differ materially
from the forward-looking statements we make in this Annual Report are set forth
in this Annual Report and in other reports or documents that we file from time
to time with the SEC and include, but are not limited to:
- Our plans to achieve growth by offering new products and services and
through acquisitions and swaps;
- Our anticipated capital expenditures for our planned upgrades and the
ability to fund these expenditures;
- Our beliefs regarding the effects of governmental regulation on our
business; and
- Our ability to effectively compete in a highly competitive environment.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by those cautionary statements.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
We are the fourth largest operator of cable systems in the United States,
serving approximately 6.2 million customers, after giving effect to our pending
acquisition.
Charter Communications, Inc. is a holding company whose principal asset is
an approximate 40% equity interest, pro forma for the Bresnan acquisition, and a
100% voting interest in Charter Communications Holding Company, LLC. Charter
Communications, Inc.'s only business is to act as the sole manager of Charter
Communications Holding Company and its subsidiaries. As sole manager, Charter
Communications, Inc. controls the affairs of Charter Communications Holding
Company and its subsidiaries.
INITIAL PUBLIC OFFERING OF COMMON STOCK
In November 1999, Charter Communications, Inc. completed an initial public
offering of 195,500,000 shares of its Class A common stock for total net
proceeds of $3.57 billion. At that time, Paul G. Allen purchased 50,000 shares
of high vote Class B common stock of Charter Communications, Inc. at the initial
public offering price. In addition, at the closing of the initial public
offering, Mr. Allen, through Vulcan Cable III Inc. invested $750 million in cash
to purchase membership units from Charter Communications Holding Company at the
initial public offering price, net of underwriters' discounts. These membership
units are exchangeable at any time for shares of our Class A common stock. All
of the proceeds from the public offering were used to purchase membership units
in Charter Communications Holding Company, which used a portion of the funds
received from us, along with funds received from Vulcan Cable III Inc. to pay a
portion of the purchase prices of our Fanch, Falcon, Avalon and Bresnan
acquisitions.
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OUTSTANDING EQUITY INTERESTS OF CHARTER COMMUNICATIONS, INC. AND CHARTER
COMMUNICATIONS HOLDING COMPANY
The following table sets forth information as of March 28, 1999 with
respect to the outstanding shares of common stock of Charter Communications,
Inc. and membership units in Charter Communications Holding Company as of the
same date and pro forma for the exchange by certain sellers in the Bresnan
acquisition of preferred membership units in an indirect subsidiary of Charter
Communications Holding Company for common membership units in Charter
Communications Holding Company on a one-for-one basis. All of the membership
units in Charter Communications Holding Company are exchangeable for shares of
Charter Communications, Inc. Class A common stock on a one-for-one basis at any
time.
COMMON SHARES IN MEMBERSHIP UNITS IN
CHARTER COMMUNICATIONS, INC. CHARTER COMMUNICATIONS HOLDING COMPANY
---------------------------- ---------------------------------------------------
OUTSTANDING PRO FORMA
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NUMBER PERCENTAGE NUMBER PERCENTAGE
OF OF OF OF
UNITS TOTAL UNITS TOTAL
----------- ---------- ----------- ----------
Class A....................... 222,039,746
Class B....................... 50,000
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Total.................... 222,089,746
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Charter Communications,
Inc......................... 222,089,746 39.6% 222,089,746 37.9%
Charter Investment, Inc....... 217,585,246 38.8 217,585,246 37.2
Vulcan Cable III Inc.......... 106,715,233 19.0 106,715,233 18.2
Bresnan sellers............... 14,795,995 2.6 39,011,744 6.7
----------- ---- ----------- -----
Total.................... 561,186,220 100% 585,401,969 100.0%
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CHARTER ORGANIZATIONAL STRUCTURE
Our organizational structure is complex. Consistent with the table above,
the equity ownership percentages in Charter Communications Holding Company
assume the exchange by certain sellers in the Bresnan acquisition of preferred
membership units in an indirect subsidiary of Charter Communications Holding
Company for common membership units in Charter Communications Holding Company on
a one-for-one basis.
OWNERSHIP OF CHARTER COMMUNICATIONS, INC. Mr. Allen owns less than 1% of
the outstanding capital stock of Charter Communications, Inc. and controls
approximately 93.6% of the voting power of Charter Communications, Inc.'s
capital stock. The remaining equity interest and voting control are held by the
public. Mr. Allen's voting control arises from his ownership of Charter
Communications, Inc.'s high vote Class B common stock, plus his ownership of
Vulcan Cable III Inc., which owns membership units in Charter Communications
Holding Company that are exchangeable for shares of high vote Class B common
stock of Charter Communications, Inc.
VULCAN CABLE III INC. Mr. Allen owns 100% of the equity of Vulcan Cable
III. Vulcan Cable III has a 18.2% equity interest and no voting rights in
Charter Communications Holding Company. In August 1999, Mr. Allen, through
Vulcan Cable III, contributed to Charter Communications Holding Company $500
million in cash. In September 1999, he contributed an additional $825 million
through Vulcan Cable III of which approximately $644.3 million was in cash and
approximately $180.7 million was in the form of equity interests Vulcan Cable
III acquired in connection with the Rifkin acquisition. Upon each of these
contributions, Vulcan Cable III received Charter Communications Holding Company
membership units at a price per membership unit of $20.73. In addition, in
November 1999, Mr. Allen, through Vulcan Cable III, made a $750 million cash
equity contribution to Charter Communications Holding Company for which Vulcan
Cable III received additional membership units at a price per membership unit of
$18.24.
CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 37.2% equity
interest and no voting rights in Charter Communications Holding Company. Mr.
Allen owns approximately 96.8% of the outstanding stock of
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Charter Investment, Inc. The remaining 3.2% equity is beneficially owned by our
founders, Jerald L. Kent, Barry L. Babcock and Howard L. Wood.
BRESNAN SELLERS. Under the terms of the Bresnan acquisition, some of the
sellers received a portion of their purchase price in Charter Communications
Holding Company common membership units rather than in cash. These common
membership units are exchangeable for shares of Charter Communications, Inc.
Class A common stock on a one-for-one basis. In addition, certain other Bresnan
sellers received a portion of the purchase price in preferred membership units
in an indirect subsidiary of Charter Communications, Inc. The preferred
membership units are exchangeable for common Charter Communications Holding
Company at any time on a one-for-one basis. These equity holders as a group have
a 6.7% equity interest and no voting rights in Charter Communications Holding
Company.
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications
Holding Company is the direct 100% parent of Charter Communications Holdings.
Charter Communications Holding Company is owned 37.9% by Charter Communications,
Inc., 18.2% by Vulcan Cable III Inc., 37.2% by Charter Investment, Inc. and 6.7%
by certain sellers in our Bresnan acquisition. All of the outstanding units in
Charter Communications Holding Company are exchangeable for shares of Class A
common stock of Charter Communications, Inc. on a one-for-one basis at any time.
Charter Communications, Inc. has 100% of the voting power of Charter
Communications Holding Company.
CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of
$3.575 billion aggregate principal of notes issued in March 1999 (referred to as
the March 1999 Charter Holdings notes) and $1.532 billion aggregate principal
amount of notes issued in January 2000 (referred to as the January 2000 Charter
Holdings notes). Charter Holdings owns 100% of Charter Capital, the co-issuer of
the notes. Charter Holdings also owns the various subsidiaries that conduct all
of our cable operations, including the Charter, Falcon, Fanch, Avalon and
Bresnan companies described below.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Capital is a
wholly owned subsidiary of Charter Holdings and a co-issuer of the notes
described in the preceding paragraph.
CHARTER COMPANIES. These companies are subsidiaries of Charter Holdings
and own or operate all of the cable systems originally managed by Charter
Investment, Inc. (namely Charter Communications Properties Holdings, LLC, CCA
Group and CharterComm Holdings, LLC), the cable systems obtained through the
merger of Marcus Cable Holdings, LLC with Charter Holdings and the cable systems
we acquired in 1999 and 2000, other than the Falcon, Fanch, Avalon, and Bresnan
systems described below. Charter Operating, a direct subsidiary of Charter
Holdings, owns all of the Charter companies' operating subsidiaries and is the
borrower under the Charter Operating credit facilities. The Charter Companies
also include the issuers of the outstanding publicly held notes of Renaissance.
FALCON COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Falcon acquisition and
Falcon Cable Communications, which is the borrower under the Falcon credit
facilities.
FANCH COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Fanch acquisition and CC
VI Operating, LLC, which is the borrower under the Fanch credit facilities.
AVALON COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Avalon acquisition,
including CC Michigan, LLC and CC New England, LLC, which are the borrowers
under the Avalon credit facilities. CC V Holdings, LLC (formerly Avalon Cable
LLC) and CC V Holdings Finance, Inc. (formerly Avalon Cable Finance Holdings,
Inc.) are co-issuers of the outstanding publicly held Avalon notes.
BRESNAN COMPANIES. These companies are subsidiaries of Charter Holdings
and own or operate all of the cable systems acquired in the Bresnan acquisition
and CC VIII Operating, LLC, which is the borrower under the Bresnan credit
facilities.
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OUR BUSINESS
We offer a full range of traditional cable television services. Our service
offerings include the following programming packages:
- basic programming;
- expanded basic programming;
- premium service; and
- pay-per-view television programming.
We have begun to offer digital cable television services to customers in
some of our systems. Digital technology enables cable operators to increase the
number of channels a cable system can carry by permitting a significantly
increased number of video signals to be transmitted over a cable system's
existing bandwidth. Bandwidth is a measure of the information-carrying capacity.
It is the range of usable frequencies that can be carried by a cable system.
We have also started to introduce a number of other new products and
services, including interactive video programming, which allows information to
flow in both directions, and high-speed Internet access to the World Wide Web.
We are also exploring opportunities in telephony, which will integrate telephone
services with the Internet through the use of cable. The introduction of these
new services represents an important step toward the realization of our Wired
World(TM) vision, where cable's ability to transmit voice, video and data at
high speeds will enable it to serve as the primary platform for the delivery of
new services to the home and workplace. We are accelerating the upgrade of our
systems to more quickly provide these new services.
We have grown rapidly over the past five years. During this period, our
management team has successfully completed 32 acquisitions, including twelve
acquisitions since January 1, 1999, and a merger with Marcus Holdings in April
1999. In addition, we have expanded our customer base through significant
internal growth. In 1999, our internal customer growth, without giving effect to
the cable systems we acquired during that period, was 3.1%, compared to the
national industry average of 1.8%. In 1998, our internal customer growth,
without giving effect to the cable systems we acquired in that year, was 4.8%,
more than twice the national industry average of 1.7%.
BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate
acquired cable systems and apply our core operating strategies to raise the
financial and operating performance of these acquired systems. Our integration
process occurs in three stages:
System Evaluation. We conduct an extensive evaluation of each system
we acquire. This process begins prior to reaching an agreement to purchase
the system and focuses on the system's:
- demographic profile of the market as well as the number of homes
passed and customers;
- business plan;
- customer service standards;
- management capabilities; and
- technological capacity and compatibility.
We also evaluate opportunities to consolidate headends and billing and
other administrative functions. Based upon this evaluation, we formulate plans
for customer service centers, plant upgrades, market positioning, new product
and service launches and human resource requirements.
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Implementation of Our Core Operating Strategies. To achieve our high
standards for customer satisfaction and financial and operating
performance, we:
- attract and retain high quality local management;
- empower local managers with a high degree of day-to-day operational
autonomy;
- set key financial and operating benchmarks for management to meet,
such as revenue and cash flow per subscriber, subscriber growth,
customer service and technical standards; and
- provide incentives to all employees through grants of cash bonuses
and equity options.
Ongoing Support and Monitoring. We provide local managers with
regional and corporate management guidance, marketing and other support for
implementation of their business plans. We monitor performance of our
acquired cable systems on a frequent basis to ensure that performance goals
can be met.
The turn-around in our Fort Worth system, which our management team began
to manage in October 1998, is an example of our success in integrating newly
acquired cable systems into our operations. We introduced a customer care team
that has worked closely with city governments to improve customer service and
local government relations, and each of our customer service representatives
attended a training program. We also conducted extensive training programs for
our technical and engineering, dispatch, sales and support, and management
personnel. We held a series of sales events and service demonstrations to
increase customer awareness and enhance our community exposure and reputation.
We reduced the new employee hiring process from two to three weeks to three to
five days. As a result of these and other actions taken by the Charter
management team, relations with local franchising authorities are greatly
improved, customer service has been significantly enhanced, and the number of
customers and operating cash flow have increased.
OFFER NEW PRODUCTS AND SERVICES. We intend to expand the array of products
and services we offer to our customers to implement our Wired World vision.
Using digital technology, we plan to offer additional channels on our existing
service tiers, create new service tiers, introduce multiple packages of premium
services and increase the number of pay-per-view channels. We also plan to add
digital music services and interactive program guides which are comprehensive
guides to television program listings that can be accessed by network, time,
date or programming genre. In addition, we have begun to roll out advanced
services, including interactive video programming and high-speed Internet
access, and we are currently exploring opportunities in telephony. We have
entered into agreements with several providers of high-speed Internet and other
interactive services, including High-Speed Access Corp., EarthLink Network,
Inc., Excite@Home Corporation, Convergence.com, WorldGate Communications, Inc.
and Wink Communications, Inc. We have recently entered into a joint venture with
Vulcan Ventures Inc. and Go2Net, Inc. to deliver high-speed Internet portal
services to our customers.
UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. We plan to spend
approximately $5.6 billion from 2000 to 2002 for capital expenditures.
Approximately $3.1 billion will be used to upgrade our systems to bandwidth
capacity of 550 megahertz or greater. Upgrading to at least 550 megahertz of
bandwidth capacity will allow us to:
- offer advanced services, such as digital television, Internet access and
other interactive services;
- increase channel capacity up to 82 analog channels, or even more
programming channels if some of our bandwidth is used for digital
services; and
- permit two-way communication which will give our customers the ability
to send and receive signals over the cable system so that high-speed
cable services, such as Internet access, will not require a separate
telephone line and will enable our systems to provide telephony
services.
The remaining capital will be spent on plant extensions, new services,
converters and system maintenance.
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As of December 31, 1999, approximately 45% of our customers were served by
cable systems with at least 550 megahertz bandwidth capacity, and approximately
30% of our customers had two-way communication capability. By year-end 2003,
including the Bresnan cable systems and our pending acquisition, we expect that
approximately 95% of our customers will be served by cable systems with at least
550 megahertz bandwidth capacity and two-way communication capability and
approximately 86% of our customers will be served by cable systems with at least
750 megahertz bandwidth and two-way communication capability.
Our planned upgrades are designed to reduce the number of headends from
1,257 at year-end 1999, including the Bresnan acquisition and our pending
acquisition, to 459 at year-end 2003. Reducing the number of headends will
reduce headend equipment and maintenance expenditures and, together with other
upgrades, will provide enhanced picture quality and system reliability. In
addition, by year-end 2003, including the pending acquisition, we expect that
approximately 90% of our customers will be served by headends serving at least
10,000 customers.
MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality products and services,
superior customer service and attractive programming choices at reasonable
rates. We have implemented stringent internal customer service standards which
we believe meet or exceed those established by the National Cable Television
Association, the Washington, D.C.-based trade association for the cable
television industry. We believe that our customer service efforts have
contributed to our superior customer growth, and will strengthen the Charter
brand name and increase acceptance of our new products and services.
EMPLOY INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers and increase revenue per customer. Our marketing efforts focus on
tailoring Charter-branded entertainment and information services that provide
value, choice, convenience and quality to our customers. We use demographic
"cluster codes" to address messages to target audiences through direct mail and
telemarketing. Cluster codes identify customers by marketing type such as young
professionals, retirees or families. In addition, we promote our services on
radio, in local newspapers and by door-to-door selling. In many of our systems,
we offer discounts to customers who purchase multiple premium services such as
Home Box Office or Showtime. We also have a coordinated strategy for retaining
customers that includes televised retention advertising to reinforce the link
between quality service and the Charter brand name and to encourage customers to
purchase higher service levels. Successful implementation of these marketing
techniques has contributed to internal customer growth rates in excess of the
cable industry average in each year from 1996 through 1999 for the systems we
owned in each of those years. We have begun to implement our marketing programs
in all of the systems we have recently acquired.
EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE
SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are
organized into twelve operating regions. A regional management team oversees
multiple local system operations in each region. We believe that a strong
management presence at the local system level:
- improves our customer service;
- increases our ability to respond to customer needs and programming
preferences;
- reduces the need for a large centralized corporate staff;
- fosters good relations with local governmental authorities; and
- strengthens community relations.
Our regional management teams work closely with both local managers and
senior management in our corporate office to develop budgets and coordinate
marketing, programming, purchasing and engineering activities. Our centralized
financial management enables us to set financial and operating benchmarks and
monitor performance on an ongoing basis. In order to attract and retain high
quality managers at the local and regional operating levels, we provide a high
degree of operational autonomy and accountability along with cash and
equity-based compensation. Charter Communications Holding Company has a plan to
distribute to directors, consultants and substantially all employees, including
members of corporate management and key
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regional and system-level management personnel, options exercisable for up to
25,009,798 Charter Communications Holding Company membership units that are
automatically exchanged for shares of Charter Communications, Inc. Class A
common stock on a one-for-one basis.
CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve
operating margins and increase operating efficiencies, we regularly seek to
improve the geographic clustering of our cable systems by selectively swapping
our cable systems for systems of other cable operators or acquiring systems in
close proximity to our systems. We believe that by concentrating our systems in
clusters, we will be able to generate higher growth in revenues and operating
cash flow. Clustering enables us to consolidate headends and spread fixed costs
over a larger subscriber base. Charter Communications, Inc. and AT&T Broadband &
Internet Services have entered into a non-binding letter of intent to exchange
certain cable systems (referred to as the "Swap Transaction"). If completed, the
Swap Transaction will allow us to improve the clustering of our cable systems in
certain key markets. We are negotiating with several other cable operators whose
systems we consider to be potential acquisition or swapping candidates.
RECENT EVENTS
ACQUISITIONS IN 1999 AND 2000
Since January 1, 1999, we have completed twelve acquisitions of cable
systems. A summary of information regarding these acquisitions is as follows:
AS OF AND FOR
THE YEAR ENDED
PURCHASE PRICE DECEMBER 31, 1999
(INCLUDING -----------------------------
ACQUISITION ASSUMED DEBT) REVENUES
ACQUISITION DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
- ----------- ----------- -------------- --------- --------------
Renaissance Media Group LLC............... 4/99 $ 459 134,000 $ 62,428
American Cable Entertainment, LLC......... 5/99 240 69,000 37,216
Cable systems of Greater Media
Cablevision, Inc........................ 6/99 500 176,000 85,933
Helicon Partners I, L.P. and affiliates... 7/99 550 171,000 85,224
Vista Broadband Communications, L.L.C..... 7/99 126 26,000 14,112
Cable system of Cable Satellite of South
Miami, Inc.............................. 8/99 22 9,000 4,859
Rifkin Acquisition Partners, L.L.L.P. and
InterLink Communications Partners,
LLLP.................................... 9/99 1,460 463,000 219,878
Cable systems of InterMedia Capital
Partners IV, L.P., InterMedia Partners
and affiliates.......................... 10/99 873+ 420,000 179,259
systems swap (142,000)(a) (53,056)(b)
--------- ----------
278,000 126,203
Cable systems of Fanch Cablevision L.P.
and affiliates.......................... 11/99 2,400 528,000 218,197
Falcon Communications, L.P................ 11/99 3,481 955,000 427,668
Avalon Cable of Michigan Holdings, Inc.... 11/99 845(c) 258,000(c) 109,943(d)
Bresnan Communications Company
Limited Partnership..................... 2/00 3,100 686,000(e) 290,697(f)
------------ --------- ----------
Total................................... $ 14,056 3,753,000 $1,682,358
============ ========= ==========
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(a) As part of the transaction with InterMedia, we agreed to "swap" some of our
non-strategic cable systems located in Indiana, Montana, Utah and northern
Kentucky, representing 142,000 basic customers. We transferred cable systems
with 112,000 customers to InterMedia in connection with this swap in October
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1999. The remaining Indiana cable system, with customers totaling 30,000, was
transferred in March 2000 after receipt of the necessary regulatory approvals.
(b) Includes revenues for all swapped InterMedia systems, except the retained
Indiana system, for the nine months ended September 30, 1999, the date of
the transfer of these systems, and includes revenues for the Indiana system
for the year ended December 31, 1999.
(c) Includes approximately 5,400 customers served by cable systems that we
acquired from certain former affiliates of Avalon in February 2000. The $845
million purchase price for Avalon includes the purchase price for these
systems of approximately $13 million.
(d) Includes revenues of approximately $1.6 million related to cable systems
acquired from certain former affiliates of Avalon.
(e) Includes approximately 19,400 customers served by cable systems acquired by
Bresnan since December 31, 1999.
(f) Includes revenues of approximately $7.1 million related to the cable systems
acquired by Bresnan since December 31, 1999.
ACQUISITION CRITERIA. Our primary criterion in considering acquisition and
swapping opportunities is the financial return that we expect to ultimately
realize. We consider each acquisition in the context of our overall existing and
planned operations, focusing particularly on the impact on our size and scope
and the ability to reinforce our clustering strategy, either directly or through
future swaps or acquisitions. Other specific factors we consider in acquiring a
cable system are:
- demographic profile of the market as well as the number of homes passed
and customers within the system;
- per customer revenues and operating cash flow and opportunities to
increase these financial benchmarks;
- proximity to our existing cable systems or the potential for developing
new clusters of systems;
- the technological state of such system; and
- the level of competition within the local market.
We believe that there are significant advantages in increasing the size and
scope of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for our cable plants and our infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We believe that as a result of our acquisition strategy and our systems
upgrade we will be well positioned to have cable systems with economies of scale
sufficient to allow us to execute our strategy to expand the array of products
and services that we offer to our customers as we implement our Wired World
vision. We will continue to explore acquisitions and swaps of cable systems that
would further complement our existing cable systems.
ACQUISITIONS COMPLETED IN 1999 AND 2000
MERGER WITH MARCUS HOLDINGS. On April 23, 1998, Mr. Allen acquired
approximately 99% of the non-voting economic interests in Marcus Cable Company,
L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The
aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion
in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and
all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings
on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all
remaining interests of Marcus Cable. On April 7, 1999, the holding company
parent of the Marcus companies, Marcus Holdings, merged into Charter Holdings,
which was the surviving entity of the
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merger. The subsidiaries of Marcus Holdings became subsidiaries of Charter
Operating. During the period of obtaining the requisite regulatory approvals for
the transaction, the Marcus systems came under common management with our
subsidiaries in October 1998 pursuant to the terms of a management agreement.
The cable systems we acquired in the merger with Marcus are located in
Wisconsin, Tennessee, North Carolina, Georgia, California, Alabama and Texas,
has approximately 1,001,000 customers and is operated as part of our North
Central, Southeast, Southern California, Gulf Coast and Metroplex regions. For
the year ended December 31, 1999, Marcus had revenues of approximately $511.9
million.
RENAISSANCE. In April 1999, one of Charter Holdings' subsidiaries
purchased Renaissance Media Group LLC for approximately $459 million, consisting
of $348 million in cash and $111 million of assumed debt. Renaissance owns cable
systems located in Louisiana, Mississippi and Tennessee, has approximately
134,000 customers and is operated as part of our Gulf Coast and Mid-South
regions. For the year ended December 31, 1999, Renaissance had revenues of
approximately $62.4 million.
AMERICAN CABLE. In May 1999, one of Charter Holdings' subsidiaries
purchased American Cable Entertainment, LLC for approximately $240 million.
American Cable owns cable systems located in California serving approximately
69,000 customers and is operated as part of our Southern California region. For
the year ended December 31, 1999, American Cable had revenues of approximately
$37.2 million.
GREATER MEDIA SYSTEMS. In June 1999, one of Charter Holdings' subsidiaries
purchased certain cable systems of Greater Media Cablevision Inc. for
approximately $500 million. The Greater Media systems are located in
Massachusetts, have approximately 176,000 customers and are operated as part of
our Northeast Region. For the year ended December 31, 1999, the Greater Media
systems had revenues of approximately $85.9 million.
HELICON. In July 1999, one of Charter Holdings' subsidiaries acquired
Helicon Partners I, L.P. and affiliates for approximately $550 million,
consisting of $410 million in cash, $115 million of assumed debt, and $25
million in the form of preferred limited liability company interest of
Charter-Helicon LLC, a direct wholly owned subsidiary of Charter Communications,
LLC. Helicon owns cable systems located in Alabama, Georgia, New Hampshire,
North Carolina, West Virginia, South Carolina, Tennessee, Pennsylvania,
Louisiana and Vermont, and has approximately 171,000 customers. For the year
ended December 31, 1999, Helicon had revenues of approximately $85.2 million.
VISTA AND CABLE SATELLITE. One of Charter Communications Holdings'
subsidiaries acquired Vista Broadband Communications, LLC in July 1999 and
acquired a cable system of Cable Satellite of South Miami, Inc. in August 1999.
These cable systems are located in Georgia and southern Florida and serve a
total of approximately 35,000 customers. The aggregate purchase price for these
acquisitions was approximately $148 million in cash. For the year ended December
31, 1999, these systems had revenues of approximately $19.0 million.
RIFKIN. In September 1999, Charter Operating acquired Rifkin Acquisition
Partners L.L.L.P. and InterLink Communications Partners, LLLP for a purchase
price of approximately $1.46 billion, consisting of $1.2 billion in cash, $133.3
million in equity in Charter Communications Holding Company and $128.0 million
in assumed debt.
Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana,
Tennessee, Virginia and West Virginia, serving approximately 463,000 customers.
For the year ended December 31, 1999, Rifkin had revenues of approximately
$219.9 million.
INTERMEDIA SYSTEMS. In October 1999, Charter Communications, LLC purchased
certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia
Partners and their affiliates in exchange for approximately $873 million in cash
and certain of our cable systems. The InterMedia systems serve approximately
420,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As
part of this transaction, we agreed to "swap" some of our non-strategic cable
systems serving approximately 142,000 customers in Indiana, Montana, Utah and
northern Kentucky.
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At the closing, we retained a cable system located in Indiana serving
approximately 30,000 customers for which we were unable to timely obtain the
necessary regulatory approvals of the system transfer. Such approval was
subsequently obtained and the Indiana system assets were transferred in March
2000.
This transaction, including the transfer of the retained Indiana system,
resulted in a net increase of 278,000 customers concentrated in our Southeast
and Mid-South regions. For the year ended December 31, 1999, the InterMedia
systems had revenues of approximately $179.3 million and $126.2 million on a pro
forma basis reflecting disposed systems.
The cable systems acquired in the Bresnan acquisition are located in
Michigan, Minnesota, Wisconsin and Nebraska and serve approximately 686,000
customers. For the year ended December 31, 1999, these systems had revenues of
approximately $1682.4 million.
FANCH. In November 1999, Charter Communications Holding Company purchased
the partnership interests of Fanch Cablevision of Indiana, L.P., specified
assets of Cooney Cable Associates of Ohio, Limited Partnership, Fanch-JV2 Master
Limited Partnership, Mark Twain Cablevision Limited Partnership, Fanch-
Narragansett CSI Limited Partnership, North Texas Cablevision, Ltd., Post
Cablevision of Texas, Limited Partnership and Spring Green Communications, L.P.
and the stock of Tioga Cable Company, Inc., Cable Systems, Inc. and, indirectly,
Hornell Television Service, Inc. for a total combined purchase price of
approximately $2.4 billion in cash.
The cable systems acquired in this acquisition are located in Colorado,
Indiana, Kansas, Kentucky, Michigan, Mississippi, New Mexico, Oklahoma, Texas
and Wisconsin, and serve approximately 528,000 customers. For the year ended
December 31, 1999, these systems had revenues of approximately $218.2 million.
FALCON. In November 1999, Charter Communications Holding Company purchased
partnership interests in Falcon Communications, L.P. from Falcon Holding Group,
L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held
by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in
Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon
Holding Group, L.P., and specified interests in Adlink held by DHN Inc.
The purchase price for the acquisition was approximately $3.5 billion,
consisting of cash, $550 million in common membership units in Charter
Communications Holding Company issued to certain of the Falcon sellers and $1.7
billion in assumed debt.
The Falcon cable systems are located in California and the Pacific
Northwest, Missouri, North Carolina, Alabama and Georgia and serve approximately
955,000 customers. For the year ended December 31, 1999, these systems had
revenues of approximately $427.7 million.
AVALON. In November 1999, Charter Communications Holding Company purchased
directly and indirectly all of the equity interests of Avalon Cable of Michigan
Holdings, Inc. from Avalon Cable Holdings LLC and Avalon Investors, L.L.C. for
approximately $832 million, consisting of $558.2 million in cash and $273.8
million in assumed notes.
Avalon Cable operates primarily in Michigan and New England and serves
approximately 252,000 customers. For the year ended December 31, 1999, Avalon
Cable had revenues of approximately $109.9 million.
BRESNAN. In February 2000, Charter Communications Holding Company
purchased Bresnan Communications Company Limited Partnership for a total
purchase price of approximately $3.1 billion, consisting of cash, $1.0 billion
in membership units in Charter Communications Holding Company and an indirect
subsidiary of Charter Communications Holding Company and $964.4 million in
assumed debt.
The cable systems acquired in the Bresnan acquisition are located in
Michigan, Minnesota, Wisconsin and Nebraska and serve approximately 686,000
customers. For the year ended December 31, 1999, these systems and systems
acquired by Bresnan since December 31, 1999 had revenues of approximately $290.7
million.
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PENDING TRANSACTION
In March 2000, we entered into an agreement providing for the merger of
Cablevision of Michigan, Inc., the indirect owner of a cable system in
Kalamazoo, Michigan with and into us. As a result of this merger, we will become
the indirect owner of the Kalamazoo system. The merger consideration of
approximately $173 million will be paid in Class A common stock of Charter
Communications, Inc. After the merger, we will contribute 100% of the equity
interests of the direct owner of the Kalamazoo system to Charter Communications
Holding Company in exchange for membership units. Charter Communications Holding
Company will contribute the equity interests to Charter Holdings, which will in
turn contribute the equity interests to a subsidiary. The Kalamazoo cable system
has approximately 49,000 customers and had revenue of approximately $31.9
million for the year ended December 31, 1999. We anticipate that this
transaction will close in the third quarter of 2000.
POSSIBLE SWAP TRANSACTION
On December 1, 1999, we entered into a non-binding letter of intent with
AT&T Broadband & Internet Services to exchange certain cable systems. The Swap
Transaction would involve cable systems owned by AT&T located in municipalities
in Alabama, Georgia, Illinois and Missouri serving approximately 705,000
customers and certain of our cable systems located in municipalities in
California, Connecticut, Massachusetts, Texas and other states serving
approximately 631,000 customers. As part of the Swap Transaction, we would pay
AT&T approximately $108 million in cash, which represents the difference in the
agreed values of the systems being exchanged. The Swap Transaction is subject to
the negotiation and execution of a definitive exchange agreement, regulatory
approvals and other conditions typical in transactions of this type. We cannot
assure you that the Swap Transaction will be completed.
PRODUCTS AND SERVICES
We offer our customers a full array of traditional cable television
services and programming and we have begun to offer new and advanced high
bandwidth services such as high-speed Internet access. We plan to continually
enhance and upgrade these services, including adding new programming and other
telecommunications services, and will continue to position cable television as
an essential service.
TRADITIONAL CABLE TELEVISION SERVICES. As of December 31, 1999, pro forma
for the Bresnan acquisition, approximately 85% of our customers subscribed to
both "basic" and "expanded basic" service and generally receive a line-up of
between 33 and 85 channels of television programming, depending on the bandwidth
capacity of the system. Customers who pay additional amounts can also subscribe
to additional channels, either individually or in packages of several channels,
as add-ons to the basic channels. As of December 31, 1999, more than 22% of our
customers subscribe to premium channels, with additional customers subscribing
to other special add-on packages. We tailor both our basic channel line-up and
our additional channel offerings to each system according to demographics,
programming preferences, competition, price sensitivity and local regulation.
Our traditional cable television service offerings include the following:
- BASIC CABLE. All of our customers receive basic cable services which
generally consist of local broadcast television, local community
programming, including governmental and public access and limited
satellite programming. For the year ended December 31, 1999, the average
monthly fee was $13.54 for our basic service.
- EXPANDED BASIC CABLE. This expanded tier includes a group of
satellite-delivered or non-broadcast channels such as Entertainment and
Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime
Television, in addition to the basic channel line-up. For the year ended
December 31, 1999, the average monthly fee was $14.88 for our expanded
basic service.
- PREMIUM CHANNELS. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. Home
Box Office, Cinemax and Showtime are typical
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examples. We offer subscriptions to these channels either individually or
in packages. For the year ended December 31, 1999, the average monthly
fee was $6.15 per premium subscription.
- PAY-PER-VIEW. These channels allow customers to pay to view a single
showing of a recently released movie, a one-time special sporting event
or music concerts on an unedited, commercial-free basis. We currently
charge a fee that ranges from $2.95 to $8.95 for movies. For special
events, such as championship boxing matches, we have charged a fee of up
to $54.95.
We have employed a variety of targeted marketing techniques to attract new
customers by focusing on delivering value, choice, convenience and quality. We
employ direct mail and telemarketing, using demographic "cluster codes" to
target specific messages to target audiences. In many of our systems, we offer
discounts to customers who purchase premium services on a limited trial basis in
order to encourage a higher level of service subscription. We also have a
coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the decision to subscribe and to encourage customers to
purchase higher service levels.
NEW PRODUCTS AND SERVICES. A variety of emerging technologies and the
rapid growth of Internet usage have presented us with substantial opportunities
to provide new or expanded products and services to our customers and to expand
our sources of revenue. The desire for such new technologies and the use of the
Internet by businesses in particular have triggered a significant increase in
our commercial market penetration. As a result, we are in the process of
introducing a variety of new or expanded products and services beyond the
traditional offerings of analog television programming for the benefit of both
our residential and commercial customers. These new products and services
include:
- digital television and its related enhancements;
- high-speed Internet access via cable modems installed in personal
computers;
- WorldGate television-based Internet access, which allows customers to
access the Internet through the use of our two-way capable cable plant
without the need for a personal computer;
- interactive services, such as Wink, which adds interactivity and
electronic commerce opportunities to traditional programming and
advertising; and
- telephony and data transmission services, which are private network
services interconnecting locations for a customer.
Cable television's high bandwidth allows cable to be well positioned to
deliver a multitude of channels and/or new and advanced products and services.
We believe that this high bandwidth will be a key factor in the successful
delivery of these products and services.
DIGITAL TELEVISION. As part of upgrading our systems, we are installing
headend equipment capable of delivering digitally encoded cable transmissions to
a two-way digital-capable set-top converter box in the customer's home. This
digital connection offers significant advantages. For example, we can compress
the digital signal to allow the transmission of up to twelve digital channels in
the bandwidth normally used by one analog channel. This will allow us to
increase both programming and service offerings, including near video-on-demand
for pay-per-view customers. We expect to increase the amount of these services
purchased by our customers.
Digital services customers may receive a mix of additional television
programming, an electronic program guide and up to 40 channels of digital music.
The additional programming falls into four categories which are targeted toward
specific markets:
- additional expanded basic channels, which are marketed in systems
primarily serving rural communities;
- additional premium channels, which are marketed in systems serving both
rural and urban communities;
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- "multiplexes" of premium channels to which a customer previously
subscribed, such as multiple channels of HBO or Showtime, which are
varied as to time of broadcast or programming content theme and which
are marketed in systems serving both rural and urban communities; and
- additional pay-per-view programming, such as more pay-per-view options
and/or frequent showings of the most popular films to provide near
video-on-demand, which are more heavily marketed in systems primarily
serving both rural and urban communities.
As part of our pricing strategy for digital services, we have established a
retail rate of $4.95 to $8.95 per month for the digital set-top converter and
the delivery of "multiplexes" of premium services, additional pay-per-view
channels, digital music and an electronic programming guide. Some of our systems
also offer additional expanded basic tiers of service. These tiers of services
retail for $3.95 per month each or $8.95 for all three tiers. As of December 31,
1999, pro forma for the Bresnan acquisition, more than 155,400 of our customers
subscribed to the digital service offered in 85 markets. As of December 31,
1999, pro forma for the acquisition of Bresnan, approximately 4.7 million of our
customers were served by cable systems capable of delivering digital services.
By year-end 2000, we anticipate that digital services will pass approximately
7.0 million homes.
INTERNET ACCESS. We currently provide Internet access to our customers by
two principal means:
- via cable modems attached to personal computers, either directly or
through an outsourcing contract with an Internet service provider; and
- through television access, via a service such as WorldGate.
We also provide Internet access in some markets through traditional dial-up
telephone modems, using a third party service provider.
The principal advantage of cable Internet connections is the high speed of
data transfer over a cable system. We currently offer these services to our
residential customers over coaxial cable at speeds that can range up to
approximately 50 times the speed of a conventional telephone modem. Furthermore,
a two-way communication cable system using a hybrid fiber optic/coaxial
structure can support the entire connection at cable modem speeds without the
need for a separate telephone line. If the cable system only supports one-way
signals from the headend to the customer, the customer must use a separate
telephone line in order to send signals to the provider, although such customer
still receives the benefit of high speed cable access when downloading
information, which is the primary reason for using cable as an Internet
connection. In addition to Internet access over our traditional coaxial system,
we also provide our commercial customers fiber optic cable access at a price
that we believe is less than the price offered by the telephone companies.
In the past, cable Internet connections have provided customers with widely
varying access speeds because each customer accessed the Internet by sending and
receiving data through a node. Users connecting simultaneously through a single
node share the bandwidth of that node, so that users' connection speeds may
diminish as additional users connect through the same node. To induce users to
switch to our Internet services, we guarantee our cable modem customers the
minimum access speed selected from several speed options we offer. We also
provide higher guaranteed access speeds for customers willing to pay an
additional cost. In order to meet these guarantees, we are increasing the
bandwidth of our systems and "splitting" nodes easily and cost-effectively to
reduce the number of customers per node.
CABLE MODEM-BASED INTERNET ACCESS. We have deployed cable modem-based
Internet access services in 84 markets including: Los Angeles, California; St.
Louis, Missouri; and Fort Worth, Texas.
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As of December 31, 1999, pro forma for the Bresnan acquisition, we provided
Internet access service to approximately 65,600 residential customers and 280
commercial customers. The following table indicates the projected availability,
pro forma for the Bresnan acquisition, of cable modem-based Internet access
services in our systems, as of the dates indicated. Only a small percentage of
our customers currently subscribe to these services.
HOMES MADE AVAILABLE FOR
ADVANCED DATA SERVICES
--------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
(PRO FORMA) (PROJECTED)
HIGH-SPEED INTERNET ACCESS VIA CABLE MODEMS:
High Speed Access Corp................................... 1,128,300 3,180,500
EarthLink/Charter Pipeline............................... 708,700 772,700
Excite@Home.............................................. 867,800 917,700
Convergence.com.......................................... 263,200 --
In-House/Other........................................... 445,600 523,700
--------- ---------
Total cable modems..................................... 3,413,600 5,394,600
========= =========
Internet access via WorldGate............................ 428,800 488,800
========= =========
We have a relationship with High Speed Access Corp. to offer Internet
access in some of our smaller systems. High Speed Access also provides Internet
access services to our customers under the Charter Pipeline brand name. Although
the Internet access service is provided by High Speed Access, the Internet
"domain name" of our customer's e-mail address and web site, if any, is
"Charter.net," allowing the customer to switch or expand to our other Internet
services without a change of e-mail address.
High Speed Access provides three different tiers of service to us. The base
tier is similar to our arrangements with EarthLink and Excite@Home, as described
below. The turnkey tier bears all capital, operating and marketing costs of
providing the service, and seeks to build economies of scale in our smaller
systems that we cannot efficiently build ourselves by simultaneously contracting
to provide the same services to other small geographically contiguous systems.
The third tier allows for a-la carte selection of services between the base tier
and the turnkey tier. As of December 31, 1999, pro forma for the Bresnan
acquisition, we have made Internet access available to approximately 1,128,300
of our homes passed, and approximately 15,200 customers have signed up for the
service. During 2000, we anticipate making available for service an additional
73 markets to High Speed Access, covering approximately 2,052,200 additional
homes passed.
We have an agreement with EarthLink Network, Inc., an independent Internet
service provider, to provide service marketed and branded Charter Pipeline(TM),
which is a cable modem-based, high-speed Internet access service we offer.
EarthLink and MindSpring Enterprises, Inc. merged in February 2000 creating the
second-largest Internet service provider (ISP) in the United States. We
currently charge a monthly usage fee of between $24.95 and $39.95. Our customers
have the option to lease a cable modem for $10 to $15 a month or to purchase a
modem for between $200 and $300. As of December 31, 1999, we made EarthLink
Internet access available to approximately 708,700 homes passed and had
approximately 10,500 customers who subscribed to this service.
We have a revenue sharing agreement with Excite@Home, under which
Excite@Home provides Internet service to customers in our systems serving Fort
Worth, University Park and Highland Park, Texas. The Excite@Home network
provides high-speed, cable modem-based Internet access using our cable
infrastructure. As of December 31, 1999, pro forma for the Bresnan acquisition,
we have made Excite@Home available to approximately 867,800 of our homes passed
and had approximately 18,200 customers who subscribed to this service.
We also have services agreements with Convergence.com under which
Convergence.com provides Internet service to customers in systems acquired from
Rifkin. The Convergence.com network provides high-speed, cable modem-based
Internet access using our cable infrastructure. As of December 31, 1999, pro
forma
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for the Bresnan acquisition, we have made available Convergence.com service to
approximately 263,200 homes passed and had approximately 7,100 customers who
subscribed to this service.
We actively market our cable modem service to businesses in each one of our
systems where we have the capability to offer such service. Our marketing
efforts are often door-to-door, and we have established a separate division
whose function is to make businesses aware that this type of Internet access is
available through us. We also provide several virtual local area networks for
municipal and educational facilities in our Los Angeles cluster including
California Institute of Technology located in Pasadena, the City of Pasadena and
the City of West Covina.
TV-BASED INTERNET ACCESS. We have a non-exclusive agreement with WorldGate
to provide its TV-based e-mail and Internet access to our cable customers.
WorldGate's technology is only available to cable systems with two-way
capability. WorldGate offers easy, low-cost Internet access to customers at
connection speeds ranging up to 128 kilobits per second. For a monthly fee, we
provide our customers with e-mail and Internet access that does not require the
use of a PC, an existing or additional telephone line, or any additional
equipment. Instead, the customer accesses the Internet through the set-top box,
which the customer already has on his television set, and a wireless keyboard,
that is provided with the service and which interfaces with the box. WorldGate
works on advanced analog and digital converters and, therefore, can be installed
utilizing advanced analog converters already deployed. In contrast, other
converter-based, non-PC Internet access products require a digital platform and
a digital converter prior to installation.
Customers who opt for television-based Internet access are generally
first-time Internet users who prefer this more user-friendly interface. Although
the WorldGate service bears the WorldGate brand name, the Internet domain names
of the customers who use this service is "Charter.net." This allows the
customers to switch or expand to our other Internet services without a change of
e-mail address.
We first offered WorldGate to customers on the upgraded portion of our
systems in St. Louis in April 1998. We are also currently offering this service
in five other systems. In addition, we plan to introduce it in four additional
systems during 2000. As of December 31, 1999, pro forma for the Bresnan
acquisition, we provided WorldGate Internet service to approximately 7,100
customers.
INTERNET PORTAL SERVICES. On October 1, 1999, Charter Communications
Holding Company, Vulcan Ventures, an entity controlled by Mr. Allen, and Go2Net,
Inc. entered into a joint venture to form Broadband Partners, Inc. Broadband
will provide access to the Internet through a "portal" to our customers on the
digital service tier. A portal is an Internet web site that serves as a user's
initial point of entry to the World Wide Web. By offering selected content,
services and links to other web sites, a portal guides and directs users through
the World Wide Web. In addition, the portal generates revenues from advertising
on its own web pages and by sharing revenues generated by linked or featured web
sites.
Revenue splits and other economic terms in this arrangement will be at
least as favorable to us as terms between Broadband and any other parties.
Charter Communications Holding Company has agreed to use Broadband's portal
services exclusively for an initial six-year period that will begin when the
portal services are launched, except that Charter Communications Holding
Company's existing agreements with other Internet high-speed portal services and
High Speed Access may run for their current term to the extent that such
agreements do not allow for the carriage of content provided by Charter
Communications Holding Company or Vulcan Ventures. The joint venture is for an
initial 25-year term, subject to successive five-year renewals by mutual
consent. Vulcan Ventures will own 55.2%, Charter Communications Holding Company
will own 24.9% and Go2Net will own 19.9% of Broadband's equity interests, and
Vulcan Ventures will have voting control over the Broadband entity. Broadband's
board of directors will consist of three directors designated by Vulcan Ventures
and one by each of Charter Communications Holding Company and Go2Net.
Each of Broadband's investors will be obligated to provide their pro rata
share of funding for Broadband's operations and capital expenditures, except
that Vulcan Ventures will fund our portion of Broadband's expenses for the first
four years and will fund Go2Net's portion of Broadband's expenses to the extent
Go2Net's portion exceeds budget for the first four years.
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We believe that our participation in the Broadband joint venture will
facilitate the delivery of a broad array of Internet products and services to
our customers over the television through the use of an advanced digital set-top
box or through the personal computer.
The Broadband joint venture has not yet established a timetable for a
commercial launch of its portal services. However, we anticipate that alpha and
beta testing of this Internet portal service will be completed during 2000. We
do not anticipate that our participation in the joint venture will have a
material adverse impact on our financial condition or results of operations for
the foreseeable future.
WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which
sells technology to embed interactive features, such as additional information
and statistics about a program or the option to order an advertised product,
into programming and advertisements. A customer with a Wink-enabled set-top box
and a Wink-enabled cable provider sees an icon flash on the screen when
additional Wink features are available to enhance a program or advertisement. By
pressing the select button on a standard remote control, a viewer of a
Wink-enhanced program is able to access additional information regarding such
program, including, for example, information on prior episodes or the program's
characters. A viewer watching an advertisement would be able to access
additional information regarding the advertised product and may also be able to
utilize the two-way transmission features to order a product. We have bundled
Wink's services with our traditional cable services in both our advanced analog
and digital platforms. Wink's services are provided free of charge. A company
controlled by Mr. Allen has made an equity investment in Wink.
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing
over 1,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. We receive fees from Wink
each time one of our customers uses Wink to request certain additional
information or order an advertised product.
TELEPHONE SERVICES. We expect to be able to offer cable telephony services
in the near future using our systems' direct, two-way connections to homes and
other buildings. We are exploring technologies using Internet protocol
telephony, as well as traditional switching technologies that are currently
available, to transmit digital voice signals over our systems. AT&T and other
telephone companies have already begun to pursue strategic partnering and other
programs which make it attractive for us to acquire and develop this alternative
Internet protocol technology. For the last two years, we have sold telephony
services as a competitive access provider in the state of Wisconsin through one
of our subsidiaries, and are currently looking to expand our services as a
competitive access provider into other states.
JOINT VENTURE WITH RCN CORPORATION. On October 1, 1999, Charter
Communications Holding Company and RCN Corporation entered into a binding term
sheet containing the principal terms of a non-exclusive joint venture to provide
a broad range of telephony services to the customers of Charter Communications
Holding Company's subsidiaries in its Los Angeles franchise territory. RCN is
engaged in the businesses of bundling residential voice, video and Internet
access operations, cable operations and certain long distance telephony
operations. RCN is developing advanced fiber optic networks to provide a wide
range of telecommunications services, including long distance telephone, video
programming and data services, such as high-speed Internet access.
Charter Communications Holding Company will provide access to our Los
Angeles customer base and will provide the capital necessary to develop
telephony capability in Los Angeles. In addition, Charter Communications Holding
Company will provide the necessary personnel to oversee and manage the telephony
services. RCN will provide the necessary personnel and support services to
develop and implement telephony services to be provided by Charter
Communications Holding Company. We will pay RCN's fees at rates consistent with
industry market compensation. We will have all rights to the telephony business
and assets and will receive all revenues derived from the telephony business
unless the parties expand RCN's role by mutual agreement. We believe that our
telephony joint venture, together with Mr. Allen's investment in RCN, may allow
us to take advantage of RCN's telephony experience as we deliver telephone
services to our customers, although we cannot assure you that we will realize
anticipated advantages.
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The term sheet contains only the principal terms of this joint venture and
provides that the parties will enter into definitive agreements, which will
contain, among other terms, details of the compensation to be received by RCN.
To date, we have only had preliminary discussions with RCN regarding specific
operational matters and have not determined a timetable for the commencement of
services by the joint venture. We do not anticipate that this joint venture will
have a material impact on our financial condition or results of operations in
the foreseeable future.
ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN. Mr. Allen and a
number of his affiliates have interests in various entities that provide
services or programming to a number of our subsidiaries. Given the diverse
nature of Mr. Allen's investment activities and interests, and to avoid the
possibility of future disputes as to potential business, Charter Communications
Holding Company and Charter Communications, Inc., under the terms of their
respective organizational documents, may not, and may not allow their
subsidiaries to, engage in any business transaction outside the cable
transmission business except for the joint venture with Broadband Partners and
incidental businesses engaged in as of the closing of the initial public
offering of Charter Communications, Inc. This restriction will remain in effect
until all of the shares of Charter Communications, Inc.'s high-vote Class B
common stock have been converted into shares of Class A common stock due to Mr.
Allen's equity ownership falling below specified threshholds.
Should Charter Communications, Inc. or Charter Communications Holding
Company wish to pursue, or allow their subsidiaries to pursue, a business
transaction outside of the cable transmission business, it must first offer Mr.
Allen the opportunity to pursue the particular business transaction. If he
decides not to do so and consents to our engaging in the business transaction,
we will be able to do so. In any such case, the restated certificate of
incorporation and the limited liability company agreement of Charter
Communications, Inc. and Charter Communications Holding Company would be amended
accordingly to appropriately modify the current restrictions on our ability to
engage in any business other than the cable transmission business. The cable
transmission business means the business of transmitting video, audio, including
telephony, and data over cable television systems owned, operated or managed by
us from time to time. Under Charter Communications, Inc.'s restated certificate
of incorporation, the businesses of RCN Corporation, a company in which Mr.
Allen has made a significant investment, are not considered cable transmission
businesses under these provisions.
Under Delaware corporate law, each director of Charter Communications,
Inc., including Mr. Allen, is generally required to present to Charter
Communications, Inc. any opportunity he or she may have to acquire any cable
transmission business or any company whose principal business is the ownership,
operation or management of cable transmission businesses so that we may
determine whether we wish to pursue such opportunities. However, Mr. Allen and
the other directors generally will not have an obligation to present to Charter
Communications, Inc. other business opportunities and they may exploit such
opportunities for their own account.
OUR SYSTEMS
OPERATING REGIONS. To manage and operate our systems, we have established
two divisions that contain a total of twelve operating regions. Each of the two
divisions is managed by a Senior Vice President who reports directly to Mr.
Kent, President and Chief Executive Officer, and is responsible for overall
supervision of the operating regions within the division. Each region is managed
by a team consisting of a Senior Vice President or a Vice President supported by
operational, marketing and engineering personnel. Within each region, certain
groups of cable systems are further organized into clusters. We believe that
much of our success is attributable to our operating philosophy which emphasizes
decentralized management, with decisions being made as close to the customer as
possible.
The Western Division is comprised of the following regions: Central, North
Central, MetroPlex (Dallas/ Fort Worth), Southern California, Northwest,
Michigan and National. The Eastern Division is comprised of the following
regions: Southeast, Mid-South, Northeast, Gulf Coast and Mid-Atlantic.
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The following table provides an overview of customer data for each of our
operating regions as of December 31, 1999, pro forma for the Bresnan
acquisition, and our pending acquisition, after which our systems will pass
approximately 9.9 million homes serving approximately 6.2 million customers.
CUSTOMER DATA AS OF DECEMBER 31, 1999
CHARTER BRESNAN CABLEVISION
COMMUNICATIONS INC. ACQUISITION SUBTOTAL ACQUISITION TOTAL
------------------- --------------- --------- --------------- ---------
WESTERN DIVISION:
Central.................. 428,273 -- 428,273 -- 428,273
North Central............ 423,077 377,485 800,562 -- 800,562
MetroPlex................ 188,132 -- 188,132 -- 188,132
Southern California...... 747,988 -- 747,988 -- 747,988
Northwest................ 370,619 -- 370,619 -- 370,619
Michigan................. 297,356 246,971 544,327 48,500 592,827
National................. 178,526 61,094 239,620 -- 239,620
--------- ------- --------- ------ ---------
2,633,971 685,550 3,319,521 48,500 3,368,021
EASTERN DIVISION:
Southeast................ 960,152 -- 960,152 -- 960,152
Mid-South................ 543,076 -- 543,076 -- 543,076
Northeast................ 328,108 -- 328,108 -- 328,108
Gulf Coast............... 432,488 -- 432,488 -- 432,488
Mid-Atlantic............. 554,855 -- 554,855 -- 554,855
--------- ------- --------- ------ ---------
2,818,679 -- 2,818,679 -- 2,818,679
--------- ------- --------- ------ ---------
Total.................... 5,452,650 685,550 6,138,200 48,500 6,186,700
========= ======= ========= ====== =========
The following discussion provides a description of our operating regions as
of December 31, 1999, giving effect to the Bresnan acquisition and our pending
acquisition.
CENTRAL REGION. The Central region consists of cable systems serving
approximately 428,000 customers of which approximately 255,000 customers reside
in and around St. Louis County or in adjacent areas in Illinois. The remaining
customers, approximately 173,000, reside in small to medium-sized communities in
Missouri, Illinois and Indiana.
NORTH CENTRAL REGION. The North Central region consists of cable systems
serving approximately 801,000 customers located throughout the states of
Wisconsin and Minnesota. Approximately 518,000 and 283,000 customers reside in
the states of Wisconsin and Minnesota, respectively. Within the state of
Wisconsin, the two largest operating clusters are located in and around Madison,
serving approximately 231,000 customers, and Fond du Lac, serving approximately
107,000 customers. Within the state of Minnesota, the two largest operating
clusters are located in and around Rochester, serving approximately 142,000
customers, and St. Cloud, serving approximately 62,000 customers.
METROPLEX REGION. The MetroPlex region consists of cable systems serving
approximately 188,000 customers of which approximately 132,000 are served by the
Fort Worth, Texas system.
SOUTHERN CALIFORNIA REGION. The Southern California region consists of
cable systems serving approximately 748,000 customers located in the state of
California, with approximately 509,000 customers in the Los Angeles metropolitan
area. These customers reside primarily in the communities of Pasadena, Alhambra,
Glendale, Long Beach and Riverside. We also have approximately 239,000 customers
in central California, principally located in the communities of San Luis
Obispo, West Sacramento and Turlock.
NORTHWEST REGION. The Northwest region was formed in connection with the
recent Fanch and Falcon acquisitions. After these acquisitions, the Northwest
region consists of cable systems serving approximately 371,000 customers
residing in the states of Oregon, Washington, Idaho, Utah and California. The
two largest
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operating clusters in the Northwest region are located in and around Kennewick,
Washington, serving approximately 85,000 customers and Medford, Oregon, serving
approximately 72,000 customers.
MICHIGAN REGION. The Michigan region was formed in connection with the
recent Fanch, Avalon, Falcon and Bresnan acquisitions. Pro forma for these
acquisitions and the pending acquisition, the Michigan region will consist of
cable systems serving approximately 593,000 customers. The largest operating
cluster in the Michigan region is located in and around Bay City, Michigan
serving approximately 132,000 customers.
NATIONAL REGION. The National region consists of cable systems serving
approximately 240,000 customers residing in small to medium-sized communities in
the states of Nebraska, Texas, New Mexico, North Dakota, Kansas, Colorado and
Oklahoma. These systems are managed from our Fort Worth, Texas regional office.
SOUTHEAST REGION. The Southeast region consists of cable systems serving
approximately 960,000 customers residing primarily in small to medium-sized
communities in North Carolina, South Carolina, Georgia and Florida. There are
significant clusters of cable systems in and around the cities and counties of
Greenville/Spartanburg, South Carolina; Hickory and Asheville, North Carolina;
and Atlanta, Georgia.
MID-SOUTH REGION. The Mid-South region consists of cable systems serving
approximately 543,000 customers residing in the states of Tennessee and
Kentucky. The Mid-South region has a significant cluster of cable systems in and
around Kingsport, Tennessee serving approximately 124,000 customers.
NORTHEAST REGION. The Northeast region consists of cable systems serving
approximately 328,000 customers residing in the states of Connecticut and
Massachusetts. These systems serve the communities of Newtown and Willimantic,
Connecticut, and areas in and around Pepperell and Worcester, Massachusetts.
GULF COAST REGION. The Gulf Coast region was formed in connection with the
Fanch and Falcon acquisitions. The Gulf Coast region consists of cable systems
serving approximately 432,000 customers residing in the states of Louisiana,
Mississippi and Alabama. Within the state of Alabama, the two largest operating
clusters are located in and around Birmingham, serving approximately 117,000
customers, and Montgomery, serving approximately 25,000 customers.
MID-ATLANTIC REGION. The Mid-Atlantic region consists of cable systems
serving approximately 555,000 customers residing in the states of Virginia, West
Virginia, Vermont, Ohio, Pennsylvania, New York and Maryland. The Mid-Atlantic
region has significant clusters of cable systems in and around the cities of
Charleston, West Virginia, serving approximately 189,000 customers, and
Johnstown, Pennsylvania, serving approximately 77,000 customers.
The following table describes the current technological state of our
systems and the anticipated progress of planned upgrades through 2003, based on
the percentage of our customers who will have access to the bandwidth and other
features shown:
LESS THAN 750 MEGAHERTZ TWO-WAY
550 MEGAHERTZ 550 MEGAHERTZ OR GREATER CAPABILITY
------------- ------------- ------------- ----------
December 31, 1999......................... 55% 15% 30% 30%
December 31, 2000......................... 48% 14% 38% 38%
December 31, 2001......................... 30% 12% 58% 58%
December 31, 2002......................... 16% 10% 74% 74%
December 31, 2003......................... 5% 9% 86% 86%
We have adopted the hybrid fiber coaxial cable (HFC) architecture as the
standard for our ongoing systems upgrades. HFC architecture combines the use of
fiber optic cable, which can carry hundreds of video, data and voice channels
over extended distances, with coaxial cable, which requires a more extensive
signal amplification in order to obtain the desired transmission levels for
delivering channels. In most systems, we deliver our signals via fiber optic
cable to individual nodes serving a maximum of 500 homes or commercial
buildings. Currently, our average node size is approximately 380 homes per node.
Our HFC architecture consists of six strands of fiber to each node, with two
strands activated and four strands reserved for future services. We believe that
this network design provides high capacity and superior signal quality, and will
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enable us to provide the newest forms of telecommunications services to our
customers. The primary advantages of HFC architecture over traditional coaxial
cable networks include:
- increased channel capacity of cable systems;
- reduced number of amplifiers, which are devices to compensate for signal
loss caused by coaxial cable, needed to deliver signals from the headend
to the home, resulting in improved signal quality and reliability;
- reduced number of homes that need to be connected to an individual node,
improving the capacity of the network to provide high-speed Internet
access and reducing the number of households affected by disruptions in
the network; and
- sufficient dedicated bandwidth for two-way services, which avoids
reverse signal interference problems that can otherwise occur when you
have two-way communication capability.
The HFC architecture will enable us to offer new and enhanced services,
including:
- additional channels and tiers;
- expanded pay-per-view options;
- high-speed Internet access;
- wide area networks, which permit a network of computers to be connected
together beyond an area;
- point-to-point data services, which can switch data links from one point
to another; and
- digital advertising insertion, which is the insertion of local, regional
and national programming.
The upgrades will facilitate our new services in two primary ways:
- Greater bandwidth allows us to send more information through our
systems. This provides us with the capacity to provide new services in
addition to our current services. As a result, we will be able to roll
out digital cable programming in addition to existing analog channels
offered to customers who do not wish to subscribe to a package of
digital services.
- Enhanced design configured for two-way communication with the customer
allows us to provide cable Internet services without telephone support
and other interactive services, such as an interactive program guide,
impulse pay-per-view, video-on-demand and Wink, that cannot be offered
without upgrading the bandwidth capacity of our systems.
This HFC architecture will also position us to offer cable telephony
services in the future, using either Internet protocol technology or
switch-based technology, another method of linking communications.
FRANCHISES
As of December 31, 1999, our systems operated pursuant to an aggregate of
approximately 3,670 franchises, permits and similar authorizations issued by
local and state governmental authorities. As of December 31, 1999, pro forma for
the acquisition of Bresnan, we held approximately 4,215 franchises in the
aggregate. Each franchise is awarded by a governmental authority and is usually
not transferable unless the granting governmental authority consents. Most
franchises are subject to termination proceedings in the event of a material
breach. In addition, most franchises require us to pay the granting authority a
franchise fee of up to 5.0% of gross revenues generated by cable television
services under the franchise (i.e., the maximum amount that may be charged under
the Communications Act).
Our franchises have terms which range from four years to more than 32
years. Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. This process usually takes three
years but can take a longer period of time and often involves substantial
expense. The Communications Act provides for an orderly franchise renewal
process in which granting authorities may not unreasonably withhold renewals. If
a renewal is withheld and the granting authority takes over operation of the
affected cable system or awards it to another party, the granting authority must
pay the existing cable operator
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the "fair market value" of the system. The Communications Act also established
comprehensive renewal procedures requiring that an incumbent franchisee's
renewal application be evaluated on its own merit and not as part of a
comparative process with competing applications. In connection with the
franchise renewal process, many governmental authorities require the cable
operator make certain commitments, such as technological upgrades to the system,
which may require substantial capital expenditures. We cannot assure you,
however, that any particular franchise will be renewed or that it can be renewed
on commercially favorable terms. Our failure to obtain renewals of our
franchises, especially those in major metropolitan areas where we have the most
customers, would have a material adverse effect on our business, results of
operations and financial condition.
The following table summarizes our systems' franchises by year of
expiration, and approximate number of basic customers as of December 31, 1999.
NUMBER PERCENTAGE PERCENTAGE
OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS(A) CUSTOMERS
- ---------------------------- ---------- ---------- ------------ ----------
Prior to December 31, 1999.................... 116 3% 124,300 2%
2000 to 2002.................................. 862 24% 1,452,000 27%
2003 to 2005.................................. 847 23% 1,174,500 21%
2006 or after................................. 1,844 50% 2,732,300 50%
----- --- --------- ---
Total....................................... 3,669 100% 5,483,100 100%
===== === ========= ===
- ---------------
(a) Includes approximately 30,000 customers served by an Indiana cable system
that we did not transfer at the time of the InterMedia closing but
transferred in March 2000.
Under the 1996 Telecom Act, state and local authorities are prohibited from
limiting, restricting or conditioning the provision of telecommunications
services. They may, however, impose "competitively neutral" requirements and
manage the public rights-of-way. Granting authorities may not require a cable
operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems which are eligible for renewal have been
renewed or extended at or prior to their stated expiration dates.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
Providing a high level of service to our customers has been a central
driver of our historical success. Our emphasis on system reliability,
engineering support and superior customer satisfaction is key to our management
philosophy. In support of our commitment to customer satisfaction, we operate a
24-hour customer service hotline in most systems and offer on-time installation
and service guarantees. It is our policy that if an installer is late for a
scheduled appointment the customer receives free installation, and if a service
technician is late for a service call the customer receives a $20 credit.
As of December 31, 1999, we maintained seventeen call centers located in
our twelve regions, which are responsible for handling call volume for more than
53% of our customers. They are staffed with dedicated personnel who provide
service to our customers 24 hours a day, seven days a week. We believe operating
regional call centers allows us to provide "localized" service, which also
reduces overhead costs and improves customer service. We have invested
significantly in both personnel and equipment to ensure that these call centers
are professionally managed and employ state-of-the-art technology. As of
December 31, 1999, pro forma for the Bresnan acquisition, we employed
approximately 2,920 customer service representatives. Our customer service
representatives receive extensive training to develop customer contact skills
and product knowledge critical to successful sales and high rates of customer
retention. As of December 31, 1999, pro forma for the Bresnan acquisition, we
had approximately 5,490 technical employees who are encouraged to enroll in
courses and attend regularly scheduled on-site seminars conducted by equipment
manufacturers to
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keep pace with the latest technological developments in the cable television
industry. We utilize surveys, focus groups and other research tools as part of
our efforts to determine and respond to customer needs. We believe that all of
this improves the overall quality of our services and the reliability of our
systems, resulting in fewer service calls from customers.
We are also committed to fostering strong community relations in the towns
and cities our systems serve. We support many local charities and community
causes in various ways, including marketing promotions to raise money and
supplies for persons in need, and in-kind donations that include production
services and free air-time on major cable networks. Recent charity affiliations
include campaigns for "Toys for Tots," United Way, local theatre, children's
museums, local food banks and volunteer fire and ambulance corps. We also
participate in the "Cable in the Classroom" program, whereby cable television
companies throughout the United States provide schools with free cable
television service. In addition, we install and provide free basic cable service
to public schools, government buildings and non-profit hospitals in many of the
communities in which we operate. We also provide free cable modems and
high-speed Internet access to schools and public libraries in our franchise
areas. We place a special emphasis on education, and regularly award
scholarships to employees who intend to pursue courses of study in the
communications field.
SALES AND MARKETING
PERSONNEL RESOURCES. We have a centralized team responsible for
coordinating the marketing efforts of our individual systems. For most of our
systems with over 30,000 customers we have a dedicated marketing manager, while
smaller systems are handled regionally. We believe our success in marketing
comes in large part from new and innovative ideas and from good interaction
between our corporate office, which handles programs and administration, and our
field offices, which implement the various programs. We are also continually
monitoring the regulatory arena, customer perception, competition, pricing and
product preferences to increase our responsiveness to our customer base. Our
customer service representatives are given the incentive to use their daily
contacts with customers as opportunities to sell our new service offerings.
MARKETING STRATEGY. Our long-term marketing objective is to increase cash
flow through deeper market penetration and growth in revenue per household. To
achieve this objective and to position our service as an indispensable consumer
service, we are pursuing the following strategies:
- increase the number of rooms per household with cable;
- introduce new cable products and services;
- design product offerings to enable greater opportunity for customer
choices;
- utilize "tiered" packaging strategies to promote the sale of premium
services and niche programming;
- offer our customers more value through discounted bundling of products;
- increase the number of residential consumers who use our set-top box,
which enables them to obtain advanced digital services such as a greater
number of television stations and interactive services;
- target households based on demographic data;
- develop specialized programs to attract former customers, households
that have never subscribed and illegal users of the service; and
- employ Charter branding of products to promote customer awareness and
loyalty.
We have innovative marketing programs which utilize market research on
selected systems, compare the data to national research and tailor marketing
programs for individual markets. We gather detailed customer information through
our regional marketing representatives and use the Claritas geodemographic data
program and consulting services to create unique packages of services and
marketing programs. These marketing efforts and the follow-up analysis provide
consumer information down to the city block or suburban subdivision level, which
allows us to create very targeted marketing programs.
We seek to maximize our revenue per customer through the use of "tiered"
packaging strategies to market premium services and to develop and promote niche
programming services.
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We regularly use targeted direct mail campaigns to sell these tiers and
services to our existing customer base. We are developing an in-depth profile
database that goes beyond existing and former customers to include all homes
passed. This database information is expected to improve our targeted direct
marketing efforts, bringing us closer toward our objective of increasing total
customers as well as sales per customer for both new and existing customers. For
example, using customer profile data currently available, we are able to
identify customers who have children under a specified age and do not currently
subscribe to The Disney Channel. We then target our marketing efforts with
respect to The Disney Channel to those households. In 1998, we were chosen by
Claritas Corporation, sponsor of a national marketing competition across all
industries, as the first place winner in their media division, which includes
cable systems operations, telecommunications and newspapers, for our national
segmenting and targeted marketing program.
In 1998, we introduced a new package of premium services. Customers receive
a substantial discount on bundled premium services of HBO, Showtime, Cinemax and
The Movie Channel. We were able to negotiate favorable terms with premium
networks, which allowed minimal impact on margins and provided substantial
volume incentives to grow the premium category. The MVP package has increased
our premium household penetration, premium revenue and cash flow. We are
currently introducing this same premium strategy in the systems we have recently
acquired.
We expect to continue to invest significant amounts of time, effort and
financial resources in the marketing and promotion of new and existing services.
To increase customer penetration and increase the level of services used by our
customers, we use a coordinated array of marketing techniques, including
door-to-door solicitation, telemarketing, media advertising and direct mail
solicitation. We believe we have one of the cable television industry's highest
success rates in attracting and retaining customers who have never before
subscribed to cable television. Historically, these "nevers" are the most
difficult customers to attract and retain.
PROGRAMMING SUPPLY
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. We devote considerable resources to
obtaining access to a wide range of programming that we believe will appeal to
both existing and potential customers of basic and premium services. We rely on
extensive market research, customer demographics and local programming
preferences to determine channel offerings in each of our markets.
PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. As of December 31, 1999,
we obtained approximately 64% of our programming through contracts entered into
directly with a programming supplier. We obtained the rest of our programming
through TeleSynergy, Inc., which offers its partners contract benefits in buying
programming by virtue of volume discounts available to a larger buying base.
Recent consolidation in the cable television industry coupled with our growth
through acquisitions has reduced the benefits associated with our participation
in TeleSynergy. As a result of our recent acquisitions, we reviewed our
programming arrangements and terminated our agreement with TeleSynergy,
effective January 31, 2000.
Programming tends to be made available to us for a flat fee per customer.
However, some channels are available without cost to us. In connection with the
launch of a new channel, we may receive a distribution fee to support the
channel launch, a portion of which is applied to marketing expenses associated
with the channel launch. The amounts we receive in distribution fees are not
significant.
Our programming contracts generally continue for a fixed period of time,
usually from three to ten years, and are subject to negotiated renewal. Although
longer contract terms are available, we prefer to limit contracts to three years
so that we retain flexibility to change programming and include new channels as
they become available. Some program suppliers offer marketing support or volume
discount pricing structures. Some of our programming agreements with premium
service suppliers offer cost incentives under which premium service unit prices
decline as certain premium service growth thresholds are met.
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For home shopping channels, we receive a percentage of the amount spent in
home shopping purchases by our customers on channels we carry. In 1998, cash
receipts totaled approximately $220,000. In 1999, cash receipts totaled
approximately $5.0 million.
PROGRAMMING COSTS. Our cable programming costs have increased in recent
years and are expected to continue to increase due to factors including:
- system acquisitions;
- additional programming being provided to customers;
- increased cost to produce or purchase cable programming; and
- inflationary increases.
In every year we have operated, our costs to acquire programming have
exceeded customary inflationary and cost-of-living type increases. Sports
programming costs have increased significantly over the past several years. In
addition, contracts to purchase sports programming sometimes contain built-in
cost increases for programming added during the term of the contract which we
may or may not have the option to add to our service offerings.
Under rate regulation of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "Regulation and Legislation."
We believe we will, as a general matter, be able to pass increases in our
programming costs through to customers, although we cannot assure you that it
will be possible.
RATES
Pursuant to the Federal Communications Commission's rules, we have set
rates for cable-related equipment, such as converter boxes and remote control
devices, and installation services. These rates are based on actual costs plus
an 11.25% rate of return. We have unbundled these charges from the charges for
the provision of cable service.
Rates charged to our customers vary based on the market served and service
selected, and are typically adjusted on an annual basis. As of December 31,
1999, the average monthly fee was $13.54 for basic service and $14.88 for
expanded basic service. Regulation of the expanded basic service was eliminated
by federal law as of March 31, 1999 and such rates are now based on market
conditions. A one-time installation fee, which may be waived in part during
certain promotional periods, is charged to new customers. We believe our rate
practices are in accordance with Federal Communications Commission Guidelines
and are consistent with those prevailing in the industry generally. See
"Regulation and Legislation."
THEFT PROTECTION
The unauthorized tapping of cable plant and the unauthorized receipt of
programming using cable converters purchased through unauthorized sources are
problems which continue to challenge the entire cable industry. We have adopted
specific measures to combat the unauthorized use of our plant to receive
programming. For instance, in several of our regions, we have instituted a
"perpetual audit" whereby each technician is required to check at least four
other nearby residences during each service call to determine if there are any
obvious signs of piracy, namely, a drop line leading from the main cable line
into other homes. Addresses where the technician observes drop lines are then
checked against our customer billing records. If the address is not found in the
billing records, a sales representative calls on the unauthorized user to
correct the "billing discrepancy" and persuade the user to become a formal
customer. In our experience, approximately 25% of unauthorized users who are
solicited in this manner become customers. Billing records are then closely
monitored to guard against these new customers reverting to their status as
unauthorized users. Unauthorized users who do not convert are promptly
disconnected and, in certain instances, flagrant violators are referred for
prosecution. In addition, we have prosecuted individuals who have sold cable
converters programmed to receive our signals without proper authorization.
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COMPETITION
We face competition in the areas of price, service offerings and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as Internet access, interactive services and telephony, we will
face competition from other providers of each type of service.
To date, we believe that we have not lost a significant number of customers
or a significant amount of revenue to our competitors' systems. However,
competition from other providers of the technologies we expect to offer in the
future may have a negative impact on our business in the future.
Through mergers such as the recent merger of Tele-Communications, Inc. and
AT&T and the pending merger of America Online, Inc. (AOL) and Time Warner Inc.,
customers will come to expect a variety of services from a single provider.
While these mergers have no direct or immediate impact on our business, it
encourages providers of cable and telecommunications services to expand their
service offerings. It also encourages consolidation in the cable industry as
cable operators recognize the competitive benefits of a large customer base and
expanded financial resources.
Key competitors today include:
BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. The recent licensing of digital spectrum by the Federal
Communications Commission will provide incumbent television licenses with the
ability to deliver high definition television pictures and multiple
digital-quality program streams, as well as advanced digital services such as
subscription video.
DBS. Direct broadcast satellite, known as DBS, has emerged as significant
competition to cable systems. The DBS industry has grown rapidly over the last
several years, far exceeding the growth rate of the cable television industry,
and now serves more than 10 million subscribers nationwide. DBS service allows
the subscriber to receive video services directly via satellite using a
relatively small dish antenna. Moreover, video compression technology allows DBS
providers to offer more than 100 digital channels, thereby surpassing the
typical analog cable system. DBS companies historically were prohibited from
retransmitting popular local broadcast programming, but a change to the
copyright laws in November 1999 eliminated this legal impediment. After an
initial six-month grace period, DBS companies will need to secure retransmission
consent from the popular broadcast stations they wish to carry, and they will
face mandatory carriage obligations of less popular broadcast stations as of
January 2002. In response to the legislation, DirecTV, Inc. and EchoStar
Communications Corporation already have begun carrying the major network
stations in the nation's top television markets. DBS, however, is limited in the
local programming it can provide because of the current capacity limitations of
satellite technology. It is, therefore, expected that DBS companies will offer
local broadcast programming only in the larger U.S. markets in the foreseeable
future. The same legislation providing for DBS carriage of local broadcast
stations reduced the compulsory copyright fees paid by DBS companies and allows
them to continue offering distant network signals to rural customers. In March
2000, both DirecTV and EchoStar announced that they would be capable of
providing two-way high-speed Internet access by the end of this year. AOL, the
nation's leading provider of Internet services has announced a plan to invest
$1.5 billion in Hughes Electronics Corp., DirecTV's parent company, and these
companies intend to jointly market AOL's prospective Internet television service
to DirecTV's DBS customers.
DSL. The deployment of digital subscriber line technology, known as DSL,
will allow Internet access to subscribers at data transmission speeds greater
than those of modems over conventional telephone lines. Several telephone
companies and other companies are introducing DSL service. The Federal
Communications Commission recently released an order in which it mandated that
incumbent telephone companies grant access to the high frequency portion of the
local loop over which they provide voice services. This will enable competitive
carriers to provide DSL services over the same telephone lines simultaneously
used by incumbent telephone companies to provide basic telephone service.
However, in a separate order the Federal Communi-
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cations Commission declined to mandate that incumbent telephone companies
unbundle their i