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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

     
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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(R) LOGO)

Charter Communications, Inc.


(Exact name of registrant as specified in its charter)
     
Delaware   43-1857213

 
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

12405 Powerscourt Drive
St. Louis, Missouri 63131


(Address of principal executive offices including zip code)

(314) 965-0555


(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file 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



 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Accountants’ Review Report
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-3.3 Fourth Amendment to Amended/Restated Bylaws
EX-3.4 Fifth Amendment to Amended/Restated Bylaws
EX-10.1 Employment Agreement-Margaret A. Bellville
EX-15.1 Letter re Interim Financial Statements
EX-31.1 Certificate of Chief Executive Officer
EX-31.2 Certificate of Chief Financial Officer
EX-32.1 Certificate of Chief Executive Officer
EX-32.2 Certificate of Chief Financial Officer


Table of Contents

(CHARTER COMMUNICATIONS(R) LOGO)

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.   Management’s 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.

 


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the “Results of Operations” and “Liquidity and Capital Resources” sections under Part I, Item 2 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) in this Quarterly Report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Certain Trends and Uncertainties” under Part I, Item 2 (“Management’s 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 Attorney’s 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


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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 Company’s 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


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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
                         
            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):
               
 
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
           
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.

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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
Unaudited
                                       
          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:
                               
 
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:
                               
 
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:
                               
 
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.

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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS)
Unaudited
                       
          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