SECURITIES AND EXCHANGE COMMISSION
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-27927
Charter Communications, Inc.
| Delaware | 43-1857213 | |
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
12405 Powerscourt Drive
St. Louis, Missouri 63131
(314) 965-0555
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
| Number of shares of Class A common stock
outstanding as of September 30, 2003: 294,716,269 Number of shares of Class B common stock outstanding as of September 30, 2003: 50,000 |
Charter Communications, Inc.
Quarterly Report on Form 10-Q for the Period ended September 30, 2003
Table of Contents
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
| Item 1. | Independent Accountants Review Report | 4 | ||||
| Financial Statements - Charter Communications, Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 | 5 | |||||
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 | 6 | |||||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 | 7 | |||||
| Notes to Condensed Consolidated Financial Statements | 8 | |||||
| Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 48 | ||||
| Item 4. | Controls and Procedures | 49 | ||||
| PART II. OTHER INFORMATION | ||||||
| Item 1. | Legal Proceedings | 50 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 52 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 53 | ||||
| SIGNATURES | 56 | |||||
| EXHIBIT INDEX | 57 | |||||
This Quarterly Report on Form 10-Q is for the three and nine months ended September 30, 2003. This Quarterly Report modifies and supersedes documents filed prior to this Quarterly Report. The SEC allows Charter to incorporate by reference information that Charter files with it, which means that Charter can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this Quarterly Report. In addition, information that Charter files with the SEC in the future will automatically update and supersede information contained in this Quarterly Report. In this Quarterly Report, Charter refers to Charter Communications, Inc. and its subsidiaries, unless the context requires otherwise.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the Results of Operations and Liquidity and Capital Resources sections under Part I, Item 2 (Managements Discussion and Analysis of Financial Condition and Results of Operations) in this Quarterly Report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under Certain Trends and Uncertainties under Part I, Item 2 (Managements Discussion and Analysis of Financial Condition and Results of Operations) in this Quarterly Report. Many of the forward-looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as believe, expect, anticipate, should, planned, will, may, intend, estimated and potential, among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Quarterly Report are set forth in this Quarterly Report and in other reports or documents that we file from time to time with the United States Securities and Exchange Commission, or the SEC, and include, but are not limited to:
| | our ability to sustain and grow revenues and cash flows from operating activities by offering video and data services and to maintain a stable customer base, particularly in the face of increasingly aggressive competition from other service providers; | ||
| | our and our subsidiaries ability to comply with all covenants in our indentures and their credit facilities and indentures, any violation of which would result in a violation of the applicable facility or indenture and could trigger a default of other obligations under cross default provisions; | ||
| | our and our subsidiaries ability to refinance its remaining debt as it becomes due, commencing in 2005; | ||
| | availability of funds to meet interest payment obligations under our debt and to fund our operations and necessary capital expenditures, either through cash flows from operating activities, further borrowings or other sources; | ||
| | any adverse consequences arising out of our and our subsidiaries prior restatement of the financial statements described herein; | ||
| | the results of the pending grand jury investigation by the United States Attorneys Office for the Eastern District of Missouri, the pending SEC Division of Enforcement investigation and the putative class action and derivative shareholders litigation against us; | ||
| | our ability to obtain programming at reasonable prices or pass cost increases on to our customers; | ||
| | general business conditions, economic uncertainty or slowdown; and | ||
| | the effects of governmental regulation, including but not limited to local franchise taxing authorities, on our business. |
All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We undertake no duty or obligation to update any of the forward-looking statements after the date of this Quarterly Report.
3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
Independent Accountants Review Report
The Board of Directors and Shareholders
Charter Communications, Inc.:
We have reviewed the accompanying interim condensed consolidated balance sheet of Charter Communications, Inc., and subsidiaries as of September 30, 2003, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2003 and 2002. These interim condensed consolidated financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 4 to the interim condensed consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets.
As discussed in Note 16 to the interim condensed consolidated financial statements, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure.
/s/ KPMG LLP
St. Louis, Missouri
October 31, 2003
4
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
| September 30, | December 31, | |||||||||||
| 2003 | 2002 | |||||||||||
| (Unaudited) | ||||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 135 | $ | 321 | ||||||||
Accounts receivable, less allowance for doubtful accounts of
$17 and $19, respectively |
190 | 259 | ||||||||||
Receivables from related party |
| 8 | ||||||||||
Prepaid expenses and other current assets |
33 | 45 | ||||||||||
Total current assets |
358 | 633 | ||||||||||
INVESTMENT IN CABLE PROPERTIES: |
||||||||||||
Property, plant and equipment, net of accumulated
depreciation of $3,618 and $2,634, respectively |
7,053 | 7,679 | ||||||||||
Franchises, net of accumulated amortization
of $3,458 and $3,452, respectively |
13,721 | 13,727 | ||||||||||
Total investment in cable properties, net |
20,774 | 21,406 | ||||||||||
OTHER NONCURRENT ASSETS |
319 | 345 | ||||||||||
Total assets |
$ | 21,451 | $ | 22,384 | ||||||||
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Accounts payable and accrued expenses |
$ | 1,216 | $ | 1,345 | ||||||||
Total current liabilities |
1,216 | 1,345 | ||||||||||
LONG-TERM DEBT |
18,498 | 18,671 | ||||||||||
DEFERRED MANAGEMENT FEES RELATED PARTY |
14 | 14 | ||||||||||
OTHER LONG-TERM LIABILITIES |
1,032 | 1,212 | ||||||||||
MINORITY INTEREST |
763 | 1,050 | ||||||||||
PREFERRED STOCK REDEEMABLE; $.001 par value; 1 million
shares authorized; 545,259 and 505,664 shares issued and outstanding, respectively |
55 | 51 | ||||||||||
SHAREHOLDERS EQUITY (DEFICIT): |
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Class A Common stock; $.001 par value; 1.75 billion shares authorized;
294,716,269 and 294,620,408 shares issued and outstanding, respectively |
| | ||||||||||
Class B Common stock; $.001 par value; 750 million
shares authorized; 50,000 shares issued and outstanding |
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Preferred stock; $.001 par value; 250 million shares
authorized; no non-redeemable shares issued and outstanding |
| | ||||||||||
Additional paid-in capital |
4,697 | 4,697 | ||||||||||
Accumulated deficit |
(4,793 | ) | (4,609 | ) | ||||||||
Accumulated other comprehensive loss |
(31 | ) | (47 | ) | ||||||||
Total shareholders equity (deficit) |
(127 | ) | 41 | |||||||||
Total liabilities and shareholders equity (deficit) |
$ | 21,451 | $ | 22,384 | ||||||||
See accompanying notes to condensed consolidated financial statements.
5
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| (restated) | (restated) | ||||||||||||||||||
REVENUES |
$ | 1,207 | $ | 1,166 | $ | 3,602 | $ | 3,377 | |||||||||||
COSTS AND EXPENSES: |
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Operating (excluding depreciation and amortization and
other items listed below) |
484 | 457 | 1,457 | 1,330 | |||||||||||||||
Selling, general and administrative |
235 | 243 | 702 | 708 | |||||||||||||||
Depreciation and amortization |
362 | 374 | 1,118 | 1,061 | |||||||||||||||
Option compensation expense, net |
1 | 1 | 1 | 4 | |||||||||||||||
Special charges, net |
8 | | 18 | 1 | |||||||||||||||
| 1,090 | 1,075 | 3,296 | 3,104 | ||||||||||||||||
Income from operations |
117 | 91 | 306 | 273 | |||||||||||||||
OTHER INCOME AND EXPENSE: |
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Interest expense, net |
(387 | ) | (379 | ) | (1,163 | ) | (1,114 | ) | |||||||||||
Gain (loss) on derivative instruments and hedging activities, net |
31 | (76 | ) | 35 | (106 | ) | |||||||||||||
Gain on debt exchange, net |
267 | | 267 | | |||||||||||||||
Other, net |
(5 | ) | (3 | ) | (9 | ) | (8 | ) | |||||||||||
| (94 | ) | (458 | ) | (870 | ) | (1,228 | ) | ||||||||||||
Income (loss) before minority interest, income taxes and
cumulative effect of accounting change |
23 | (367 | ) | (564 | ) | (955 | ) | ||||||||||||
MINORITY INTEREST |
(14 | ) | 195 | 297 | 507 | ||||||||||||||
Income (loss) before income taxes and cumulative effect of
accounting change |
9 | (172 | ) | (267 | ) | (448 | ) | ||||||||||||
INCOME TAX BENEFIT |
28 | 6 | 86 | 12 | |||||||||||||||
Income (loss) before cumulative effect of accounting change |
37 | (166 | ) | (181 | ) | (436 | ) | ||||||||||||
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX |
| | | (206 | ) | ||||||||||||||
Net income (loss) |
37 | (166 | ) | (181 | ) | (642 | ) | ||||||||||||
Dividends on preferred stock redeemable |
(1 | ) | (1 | ) | (3 | ) | (3 | ) | |||||||||||
Net income (loss) applicable to common stock |
$ | 36 | $ | (167 | ) | $ | (184 | ) | $ | (645 | ) | ||||||||
EARNINGS (LOSS) PER SHARE: |
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Basic |
$ | 0.12 | $ | (0.57 | ) | $ | (0.62 | ) | $ | (2.19 | ) | ||||||||
Diluted |
$ | 0.07 | $ | (0.57 | ) | $ | (0.62 | ) | $ | (2.19 | ) | ||||||||
See accompanying notes to condensed consolidated financial statements.
6
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2003 | 2002 | ||||||||||
| (restated) | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||||||
Net loss |
$ | (181 | ) | $ | (642 | ) | |||||
Adjustments to reconcile net loss to net cash flows from operating activities: |
|||||||||||
Minority interest |
(297 | ) | (507 | ) | |||||||
Depreciation and amortization |
1,118 | 1,061 | |||||||||
Noncash interest expense |
319 | 291 | |||||||||
Loss (gain) on derivative instruments and hedging activities, net |
(35 | ) | 106 | ||||||||
Gain on debt exchange, net |
(267 | ) | | ||||||||
Deferred income taxes |
(86 | ) | (12 | ) | |||||||
Cumulative effect of accounting change, net |
| 206 | |||||||||
Other, net |
5 | 7 | |||||||||
Changes in operating assets and liabilities, net of effects from acquisitions: |
|||||||||||
Accounts receivable |
70 | 45 | |||||||||
Prepaid expenses and other assets |
7 | 7 | |||||||||
Accounts payable, accrued expenses and other |
(24 | ) | (37 | ) | |||||||
Receivables from and payables to related party, including deferred
management fees |
9 | (3 | ) | ||||||||
Net cash flows from operating activities |
638 | 522 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||||||
Purchases of property, plant and equipment |
(503 | ) | (1,588 | ) | |||||||
Change in accounts payable and accrued expenses related to capital expenditures |
(109 | ) | (89 | ) | |||||||
Payments for acquisitions, net of cash acquired |
| (139 | ) | ||||||||
Purchases of investments |
(8 | ) | (10 | ) | |||||||
Other, net |
(8 | ) | 1 | ||||||||
Net cash flows from investing activities |
(628 | ) | (1,825 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||||||
Borrowings of long-term debt |
452 | 2,440 | |||||||||
Repayments of long-term debt |
(646 | ) | (1,487 | ) | |||||||
Proceeds from issuance of debt |
30 | 895 | |||||||||
Payments for debt issuance costs |
(32 | ) | (40 | ) | |||||||
Capital contributions |
| 1 | |||||||||
Net cash flows from financing activities |
(196 | ) | 1,809 | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(186 | ) | 506 | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
321 | 2 | |||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 135 | $ | 508 | |||||||
CASH PAID FOR INTEREST |
$ | 756 | $ | 696 | |||||||
NONCASH TRANSACTIONS: |
|||||||||||
Issuance of debt by CCH II, LLC |
$ | 1,572 | $ | | |||||||
Retirement of debt | |||||||||||