UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended September 30, 2007
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the transition period from ________ to _________
Commission
file number: 000-27927
Charter
Communications, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
43-1857213
|
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification
Number)
|
12405
Powerscourt Drive
St.
Louis, Missouri 63131
(Address
of principal executive offices including zip code)
(314)
965-0555
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo þ
Number
of
shares of Class A common stock outstanding as of September 30, 2007:
403,224,161
Number
of
shares of Class B common stock outstanding as of September 30, 2007:
50,000
Charter
Communications, Inc.
Quarterly
Report on Form 10-Q for the Period ended September 30,
2007
Table
of Contents
|
PART
I. FINANCIAL INFORMATION
|
Page
|
|
Item
1. Financial
Statements - Charter Communications, Inc. and
Subsidiaries
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2007
|
|
|
and
December 31, 2006
|
4
|
|
Condensed
Consolidated Statements of Operations for the three and
nine
|
|
|
months
ended September 30, 2007 and 2006
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
nine
months ended September 30, 2007 and 2006
|
6
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
20
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
31
|
|
Item
4. Controls and Procedures
|
32
|
|
PART
II. OTHER INFORMATION
|
|
|
Item
1. Legal Proceedings
|
33
|
|
Item
1A. Risk Factors
|
33
|
|
Item
6. Exhibits
|
39
|
|
SIGNATURES
|
S-1
|
|
EXHIBIT
INDEX
|
E-1
|
This
quarterly report on Form 10-Q is for the three and nine months ended
September 30, 2007. The Securities and Exchange Commission
("SEC") allows us to "incorporate by reference" information that we file
with the SEC, which means that we can disclose important information to you
by
referring you directly to those documents. Information incorporated
by reference is considered to be part of this quarterly report. In
addition, information that we file with the SEC in the future will automatically
update and supersede information contained in this quarterly
report. In this quarterly report, "we," "us" and "our" refer to
Charter Communications, Inc., Charter Communications Holding Company, LLC and
their subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), regarding, among other things, our plans, strategies
and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" in
this quarterly report. Although we believe that our plans, intentions
and expectations reflected in or suggested by these forward-looking statements
are reasonable, we cannot assure you that we will achieve or realize these
plans, intentions or expectations. Forward-looking statements are
inherently subject to risks, uncertainties and assumptions including, without
limitation, the factors described under "Risk Factors" under Part II, Item
1A. Many of the forward-looking statements contained in this
quarterly report may be identified by the use of forward-looking words such
as
"believe," "expect," "anticipate," "should," "planned," "will," "may," "intend,"
"estimated," "aim," "on track," "target," "opportunity" and "potential" among
others. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this quarterly report
are set forth in this quarterly report and in other reports or documents that
we
file from time to time with the SEC, and include, but are not limited
to:
|
|
·
|
the
availability, in general, of funds to meet interest payment obligations
under our debt and to fund our operations and necessary capital
expenditures, either through cash flows from operating activities,
further
borrowings or other sources and, in particular, our ability to fund
debt
obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
|
|
|
·
|
our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which could trigger a default of our
other
obligations under cross-default
provisions;
|
|
|
·
|
our
ability to pay or refinance debt prior to or when it becomes due
and/or
refinance that debt through new issuances, exchange offers or otherwise,
including restructuring our balance sheet and leverage
position;
|
|
·
|
competition
from other distributors, including incumbent telephone companies,
direct
broadcast satellite operators, wireless broadband providers, and
DSL
providers;
|
|
·
|
difficulties in introducing, growing, and operating our telephone services, such as our ability to adequately meet customer expectations for the reliability of voice services; |
|
·
|
our ability to adequately meet demand for installations and customer service; |
|
|
·
|
our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and
other
services, and to maintain and grow our customer base, particularly
in the
face of increasingly aggressive
competition;
|
|
|
·
|
our
ability to obtain programming at reasonable prices or to adequately
raise
prices to offset the effects of higher programming
costs;
|
|
|
·
|
general
business conditions, economic uncertainty or slowdown;
and
|
|
|
·
|
the
effects of governmental regulation, including but not limited to
local and
state franchise authorities, on our
business.
|
All
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by this cautionary
statement. We are under no duty or obligation to update any of the
forward-looking statements after the date of this quarterly report.
3
PART
I. FINANCIAL INFORMATION.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE
DATA)
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ |
59
|
$ |
60
|
||||
|
Accounts
receivable, less allowance for doubtful accounts of
|
||||||||
|
$18
and $16, respectively
|
223
|
195
|
||||||
|
Prepaid
expenses and other current assets
|
62
|
84
|
||||||
|
Total
current assets
|
344
|
339
|
||||||
|
INVESTMENT
IN CABLE PROPERTIES:
|
||||||||
|
Property,
plant and equipment, net of accumulated
|
||||||||
|
depreciation
of $8,608 and $7,644, respectively
|
5,108
|
5,217
|
||||||
|
Franchises,
net
|
9,144
|
9,223
|
||||||
|
Total
investment in cable properties, net
|
14,252
|
14,440
|
||||||
|
OTHER
NONCURRENT ASSETS
|
323
|
321
|
||||||
|
Total
assets
|
$ |
14,919
|
$ |
15,100
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ |
1,410
|
$ |
1,298
|
||||
|
Total
current liabilities
|
1,410
|
1,298
|
||||||
|
LONG-TERM
DEBT
|
19,691
|
19,062
|
||||||
|
NOTE
PAYABLE – RELATED PARTY
|
63
|
57
|
||||||
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
14
|
14
|
||||||
|
OTHER
LONG-TERM LIABILITIES
|
874
|
692
|
||||||
|
MINORITY
INTEREST
|
196
|
192
|
||||||
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
||||||||
|
shares
authorized; 36,713 shares issued and outstanding
|
5
|
4
|
||||||
|
SHAREHOLDERS’
DEFICIT:
|
||||||||
|
Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
||||||||
|
403,224,161
and 407,994,585 shares issued and outstanding,
respectively
|
--
|
--
|
||||||
|
Class
B Common stock; $.001 par value; 4.5 billion
|
||||||||
|
shares
authorized; 50,000 shares issued and outstanding
|
--
|
--
|
||||||
|
Preferred
stock; $.001 par value; 250 million shares
|
||||||||
|
authorized;
no non-redeemable shares issued and outstanding
|
--
|
--
|
||||||
|
Additional
paid-in capital
|
5,328
|
5,313
|
||||||
|
Accumulated
deficit
|
(12,637 | ) | (11,536 | ) | ||||
|
Accumulated
other comprehensive income (loss)
|
(25 | ) |
4
|
|||||
|
Total
shareholders’ deficit
|
(7,334 | ) | (6,219 | ) | ||||
|
Total
liabilities and shareholders’ deficit
|
$ |
14,919
|
$ |
15,100
|
||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSEDCONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
REVENUES
|
$ |
1,525
|
$ |
1,388
|
$ |
4,449
|
$ |
4,091
|
||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||
|
Operating
(excluding depreciation and amortization)
|
679
|
615
|
1,957
|
1,830
|
||||||||||||
|
Selling,
general and administrative
|
341
|
309
|
961
|
860
|
||||||||||||
|
Depreciation
and amortization
|
334
|
334
|
999
|
1,024
|
||||||||||||
|
Asset
impairment charges
|
56
|
60
|
56
|
159
|
||||||||||||
|
Other
operating expenses, net
|
8
|
4
|
13
|
14
|
||||||||||||
|
1,418
|
1,322
|
3,986
|
3,887
|
|||||||||||||
|
Operating
income from continuing operations
|
107
|
66
|
463
|
204
|
||||||||||||
|
OTHER
INCOME AND (EXPENSES):
|
||||||||||||||||
|
Interest
expense, net
|
(452 | ) | (466 | ) | (1,387 | ) | (1,409 | ) | ||||||||
|
Other
income (expense), net
|
(21 | ) |
131
|
(55 | ) |
121
|
||||||||||
| (473 | ) | (335 | ) | (1,442 | ) | (1,288 | ) | |||||||||
|
Loss
from continuing operations before income taxes
|
(366 | ) | (269 | ) | (979 | ) | (1,084 | ) | ||||||||
|
INCOME
TAX EXPENSE
|
(41 | ) | (64 | ) | (169 | ) | (124 | ) | ||||||||
|
Loss
from continuing operations
|
(407 | ) | (333 | ) | (1,148 | ) | (1,208 | ) | ||||||||
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
|
--
|
200
|
--
|
234
|
||||||||||||
|
Net
loss
|
$ | (407 | ) | $ | (133 | ) | $ | (1,148 | ) | $ | (974 | ) | ||||
|
LOSS
PER COMMON SHARE, BASIC AND DILUTED:
|
||||||||||||||||
|
Loss
from continuing operations
|
$ | (1.10 | ) | $ | (1.02 | ) | $ | (3.12 | ) | $ | (3.77 | ) | ||||
|
Net
loss
|
$ | (1.10 | ) | $ | (0.41 | ) | $ | (3.12 | ) | $ | (3.04 | ) | ||||
|
Weighted
average common shares outstanding, basic and diluted
|
369,239,742
|
326,960,632
|
367,671,479
|
320,730,698
|
||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
Nine
Months Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$ | (1,148 | ) | $ | (974 | ) | ||
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
||||||||
|
Depreciation
and amortization
|
999
|
1,032
|
||||||
|
Asset
impairment charges
|
56
|
159
|
||||||
|
Noncash
interest expense
|
33
|
108
|
||||||
|
Deferred
income taxes
|
161
|
123
|
||||||
|
(Gain)
loss on sale of assets
|
5
|
(198 | ) | |||||
|
(Gain)
loss on extinguishment of debt
|
23
|
(101 | ) | |||||
|
Other,
net
|
37
|
(10 | ) | |||||
|
Changes
in operating assets and liabilities, net of effects from acquisitions
and
dispositions:
|
||||||||
|
Accounts
receivable
|
(33 | ) |
46
|
|||||
|
Prepaid
expenses and other assets
|
21
|
23
|
||||||
|
Accounts
payable, accrued expenses and other
|
173
|
140
|
||||||
|
Net
cash flows from operating activities
|
327
|
348
|
||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases
of property, plant and equipment
|
(890 | ) | (795 | ) | ||||
|
Change
in accrued expenses related to capital expenditures
|
(51 | ) |
4
|
|||||
|
Proceeds
from sales of assets, including cable systems
|
37
|
988
|
||||||
|
Other,
net
|
(31 | ) | (1 | ) | ||||
|
Net
cash flows from investing activities
|
(935 | ) |
196
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Borrowings
of long-term debt
|
7,472
|
5,970
|
||||||
|
Repayments
of long-term debt
|
(6,841 | ) | (6,846 | ) | ||||
|
Proceeds
from issuance of debt
|
--
|
440
|
||||||
|
Payments
for debt issuance costs
|
(33 | ) | (44 | ) | ||||
|
Other,
net
|
9
|
--
|
||||||
|
Net
cash flows from financing activities
|
607
|
(480 | ) | |||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(1 | ) |
64
|
|||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
60
|
21
|
||||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ |
59
|
$ |
85
|
||||
|
CASH
PAID FOR INTEREST
|
$ |
1,230
|
$ |
1,121
|
||||
|
NONCASH
TRANSACTIONS:
|
||||||||
|
Cumulative
adjustment to Accumulated Deficit for the adoption of FIN
48
|
$ |
56
|
$ |
--
|
||||
|
Issuance
of debt by CCH I, LLC
|
$ |
--
|
$ |
419
|
||||
|
Issuance
of debt by CCH II, LLC
|
$ |
--
|
$ |
410
|
||||
|
Issuance
of debt by Charter Communications Operating, LLC
|
$ |
--
|
$ |
37
|
||||
|
Retirement
of Charter Communications Holdings, LLC debt
|
$ |
--
|
$ | (796 | ) | |||
|
Retirement
of Renaissance Media Group LLC debt
|
$ |
--
|
$ | (37 | ) | |||
|
Issuance
of Class A common stock
|
$ |
--
|
$ |
68
|
||||
|
Retirement
of convertible senior notes
|
$ |
--
|
$ | (255 | ) | |||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
1. Organization
and Basis of Presentation
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets
at
September 30, 2007 are the 54% controlling common equity interest (52% for
accounting purposes) in Charter Communications Holding Company, LLC ("Charter
Holdco") and "mirror" notes that are payable by Charter Holdco to Charter and
have the same principal amount and terms as those of Charter’s convertible
senior notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"),
which is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The condensed consolidated financial statements include
the accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of
their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." Charter has 100% voting control
over Charter Holdco and consolidates Charter Holdco as a variable interest
entity under Financial Accounting Standards Board ("FASB") Interpretation
("FIN") 46(R) Consolidation of Variable Interest
Entities. Charter Holdco’s limited liability company agreement
provides that so long as Charter’s Class B common stock retains its special
voting rights, Charter will maintain a 100% voting interest in Charter
Holdco. Voting control gives Charter full authority and control over
the operations of Charter Holdco. All significant intercompany
accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (analog and digital video), high-speed
Internet services, advanced broadband services such as high definition
television, Charter OnDemand™, and digital video recorder service, and, in many
of our markets, telephone service. The Company sells its cable video
programming, high-speed Internet, telephone, and advanced broadband services
on
a subscription basis. The Company also sells local advertising on
cable networks.
The
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in
the
United States for interim financial information and the rules and regulations
of
the Securities and Exchange Commission (the "SEC"). Accordingly,
certain information and footnote disclosures typically included in Charter’s
Annual Report on Form 10-K have been condensed or omitted for this quarterly
report. The accompanying condensed consolidated financial statements
are unaudited and are subject to review by regulatory
authorities. However, in the opinion of management, such financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results
for a full year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Areas involving significant judgments and estimates
include capitalization of labor and overhead costs; depreciation and
amortization costs; impairments of property, plant and equipment, franchises
and
goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
2. Liquidity
and
Capital Resources
The
Company incurred net losses of $407 million and $133 million for the three
months ended September 30, 2007 and 2006, respectively, and $1.1 billion and
$974 million for the nine months ended September 30, 2007 and 2006,
respectively. The Company’s net cash flows from operating activities
were $327 million and $348 million for the nine months ended September 30,
2007
and 2006, respectively.
The
Company has a significant amount of debt. The Company's long-term
financing as of September 30, 2007 totaled $19.7 billion, consisting of $7.0
billion of credit facility debt, $12.3 billion accreted value of high-yield
notes, and $412 million accreted value of convertible senior
notes. For the remainder of 2007, none of the Company’s debt
matures. As of September 30, 2007, the Company’s 2008 and 2009 debt
maturities totaled $65 million and $666 million, respectively. Of the
debt scheduled to mature in 2009, $364 million was exchanged in October 2007
for
notes maturing in 2027, subject to earlier mandatory redemption at the election
of the holders in 2012 and at each five-year
7
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
anniversary. In
2010 and beyond, significant additional amounts will become due under the
Company’s remaining long-term debt obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically
funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, sales of assets, issuances of debt
and
equity securities, and cash on hand. However, the mix of funding
sources changes from period to period. For the nine months ended
September 30, 2007, the Company generated $327 million of net cash flows from
operating activities, after paying cash interest of $1.2 billion. In
addition, the Company used $890 million for purchases of property, plant and
equipment. Finally, the Company generated net cash flows from
financing activities of $607 million, as a result of refinancing transactions
completed during the period.
The
Company expects that cash on hand, cash flows from operating activities, and
the
amounts available under its credit facilities will be adequate to meet its
cash
needs through 2008. The Company believes that cash flows from operating
activities and amounts available under the Company’s credit facilities may not
be sufficient to fund the Company’s operations and satisfy its interest and
principal repayment obligations in 2009, and will not be sufficient to fund
such
needs in 2010 and beyond. The Company continues to work with its
financial advisors concerning its approach to addressing liquidity, debt
maturities, and overall balance sheet leverage.
Credit
Facility Availability
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Communications Operating,
LLC (“Charter Operating”) credit facilities. The Charter Operating
credit facilities, along with the Company’s indentures and the CCO Holdings, LLC
(“CCO Holdings”) credit facility, contain certain restrictive covenants, some of
which require the Company to maintain specified leverage ratios, meet financial
tests, and provide annual audited financial statements with an unqualified
opinion from the Company’s independent auditors. As of September 30,
2007, the Company was in compliance with the covenants under its indentures
and
credit facilities, and the Company expects to remain in compliance with those
covenants for the next twelve months. As of September 30, 2007, the
Company’s potential availability under Charter Operating’s revolving credit
facility totaled approximately $1.3 billion, none of which was limited by
covenant restrictions. Continued access to the Company’s credit
facilities is subject to the Company remaining in compliance with these
covenants, including covenants tied to the Company’s leverage
ratio. If any event of non-compliance were to occur, funding under
the credit facilities may not be available and defaults on some or potentially
all of the Company’s debt obligations could occur. An event of
default under any of the Company’s debt instruments could result in the
acceleration of its payment obligations under that debt and, under certain
circumstances, in cross-defaults under its other debt obligations, which could
have a material adverse effect on the Company’s consolidated financial condition
and results of operations.
Limitations
on Distributions
As
long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. In October
2007, Charter Holdco completed an exchange offer, in which $364 million of
Charter’s 5.875% convertible senior notes due November 2009 were exchanged for
$479 million of Charter’s 6.50% convertible senior
notes. Approximately $49 million of Charter’s 5.875% convertible
senior notes remain outstanding, net of $814 million of the 5.875% convertible
senior notes now held by Charter Holdco. Charter’s ability to make
interest payments on its convertible senior notes, and to repay the outstanding
principal of its convertible senior notes will depend on its ability to
raise additional capital and/or on receipt of payments or distributions from
Charter Holdco and its subsidiaries. As of September 30, 2007, Charter
Holdco was owed $123 million in intercompany loans from Charter Communications
Operating, LLC and had $44 million in cash, which amounts were available to
pay
interest and principal on Charter's convertible senior notes. In addition,
Charter has $25 million of U.S. government securities pledged as security for
the semi-annual interest payments on Charter’s 5.875% convertible senior notes
scheduled in November 2007. As long as Charter Holdco continues to
hold the $814 million of Charter’s 5.875% convertible senior notes, Charter
Holdco will
8
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
receive
interest payments from the government securities pledged for Charter’s 5.875%
convertible senior notes. The remaining amount of interest payments
expected to be received by Charter Holdco in November 2007 is approximately
$24
million, which may be available to pay semiannual interest on the outstanding
principal amount of $49 million of Charter’s 5.875% convertible senior notes and
$479 million of Charter’s 6.50% convertible senior notes, although Charter
Holdco may use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted
under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, Charter Operating
notes, and under the CCO Holdings credit facilities, unless there is no default
under the applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended September 30, 2007, there was no
default under any of these indentures or credit facilities. However,
certain of the Company’s subsidiaries did not meet their applicable leverage
ratio tests based on September 30, 2007 financial results. As a
result, distributions from certain of the Company’s subsidiaries to their parent
companies will continue to be restricted unless those tests are
met. Distributions by Charter Operating for payment of principal on
parent company notes are further restricted by the covenants in its credit
facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facilities.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended September
30, 2007, there was no default under Charter Holdings’ indentures and the other
specified tests were met. However, Charter Holdings did not meet the
leverage ratio test of 8.75 to 1.0 based on September 30, 2007 financial
results. As a result, distributions from Charter Holdings to Charter or
Charter Holdco would have been restricted at such time and will continue to
be
restricted unless that test is met. During periods in which
distributions are restricted, the indentures governing the Charter Holdings
notes permit Charter Holdings and its subsidiaries to make specified investments
(that are not restricted payments) in Charter Holdco or Charter, up to an amount
determined by a formula, as long as there is no default under the
indentures.
Recent
Financing Transactions
In
March
2007, Charter Operating entered into an Amended and Restated Credit Agreement
(the “Charter Operating Credit Agreement”) which provides for a $1.5 billion
senior secured revolving line of credit, a continuation of the existing $5.0
billion term loan facility (which was refinanced with new term loans in April
2007), and a $1.5 billion new term loan facility, which was funded in March
and
April 2007. In March 2007, CCO Holdings entered into a credit
agreement which consisted of a $350 million term loan facility funded in March
and April 2007. In April 2007, Charter Holdings completed a cash
tender offer and purchased $97 million of its outstanding notes. In
addition, Charter Holdings redeemed $187 million of its 8.625% senior notes
due
April 1, 2009 and CCO Holdings redeemed $550 million of its senior floating
rate
notes due December 15, 2010. These redemptions closed in April
2007. See Note 6.
3. Sale
of
Assets
In
2006,
the Company sold certain cable television systems serving approximately 356,000
analog video customers in 1) West Virginia and Virginia to Cebridge Connections,
Inc. (the “Cebridge Transaction”); 2) Illinois and Kentucky to
Telecommunications Management, LLC, doing business as New Wave Communications
(the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to
Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total
sales price of approximately $971 million. The Company used the net
proceeds from the asset sales to reduce borrowings, but not commitments, under
the revolving portion of the Company’s credit
9
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
facilities. These
cable systems met the criteria for assets held for sale. As such, the
assets were written down to fair value less estimated costs to sell, resulting
in asset impairment charges during the nine months ended September 30, 2006
of
approximately $99 million related to the New Wave Transaction and the Orange
Transaction. The Company determined that the West Virginia and
Virginia cable systems comprise operations and cash flows that for financial
reporting purposes meet the criteria for discontinued
operations. Accordingly, the results of operations for the West
Virginia and Virginia cable systems have been presented as discontinued
operations, net of tax, for the three and nine months ended September 30, 2006,
including a gain of $200 million on the sale of cable systems.
Summarized
consolidated financial information for the three and nine months ended September
30, 2006 for the West Virginia and Virginia cable systems is as
follows:
|
Three
Months
Ended
September 30, 2006
|
Nine
Months
Ended
September 30, 2006
|
|||||||
|
Revenues
|
$ |
--
|
$ |
109
|
||||
|
Income
before income taxes
|
$ |
200
|
$ |
238
|
||||
|
Income
tax expense
|
$ |
--
|
$ | (4 | ) | |||
|
Net
income
|
$ |
200
|
$ |
234
|
||||
|
Earnings
per common share, basic and diluted
|
$ |
0.61
|
$ |
0.73
|
||||
Also,
during the three months ended September 30, 2007 and 2006, the Company recorded
asset impairment charges of $56 million and $60 million, respectively, related
to other cable systems meeting the criteria of assets held for sale during
the
respective periods.
4. Franchises
and Goodwill
Franchise
rights represent the value attributed to agreements with local authorities
that
allow access to homes in cable service areas acquired through the purchase
of
cable systems. Management estimates the fair value of franchise
rights at the date of acquisition and determines if the franchise has a finite
life or an indefinite life as defined by Statement of Financial Accounting
Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets. Franchises that qualify for indefinite-life treatment
under SFAS No. 142 are tested for impairment annually each October 1 based
on valuations, or more frequently as warranted by events or changes in
circumstances. The October 1, 2007 annual impairment test will be
finalized in the fourth quarter of 2007 and any impairment resulting from such
test will be recorded in the fourth quarter. Franchises are
aggregated into essentially inseparable asset groups to conduct the
valuations. The asset groups generally represent geographical
clustering of the Company’s cable systems into groups by which such systems are
managed. Management believes such grouping represents the highest and
best use of those assets.
As
of
September 30, 2007 and December 31, 2006, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
September
30, 2007
|
December 31,
2006
|
|||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||||||||||||
|
Indefinite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with indefinite lives
|
$ |
9,131
|
$ |
--
|
$ |
9,131
|
$ |
9,207
|
$ |
--
|
$ |
9,207
|
||||||||||||
|
Goodwill
|
79
|
--
|
79
|
61
|
--
|
61
|
||||||||||||||||||
| $ |
9,210
|
$ |
--
|
$ |
9,210
|
$ |
9,268
|
$ |
--
|
$ |
9,268
|
|||||||||||||
|
Finite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with finite lives
|
$ |
23
|
$ |
10
|
$ |
13
|
$ |
23
|
$ |
7
|
$ |
16
|
||||||||||||
10
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
For the nine months ended September 30, 2007, the net carrying amount of indefinite-lived franchises was reduced by $20 million, related to cable asset sales completed in the first nine months of 2007, and $56 million as a result of asset impairment charges recorded related to other cable asset sales. Franchise amortization expense represents the amortization relating to franchises that did not qualify for indefinite-life treatment under SFAS No. 142, including costs associated with franchise renewals. Franchise amortization expense for the three and nine months ended September 30, 2007 was approximately $1 million and $3 million, respectively, and for the three and nine months ended September 30, 2006 was approximately $0 and $1 million, respectively. The Company expects that amortization expense on franchise assets will be approximately $3 million annually for each of the next five years. Actual amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives and other relevant factors.
For
the
nine months ended September 30, 2007, goodwill increased $18 million as a result
of the Company’s purchase of certain cable systems in June and August of
2007. The amount recorded to goodwill is based on a preliminary
allocation of purchase price and is subject to change based on finalization
of
the fair value allocations.
5. Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of September 30, 2007
and December 31, 2006:
|
September
30,
2007
|
December 31,
2006
|
|||||||
|
Accounts
payable - trade
|
$ |
124
|
$ |
92
|
||||
|
Accrued
capital expenditures
|
46
|
97
|
||||||
|
Accrued
expenses:
|
||||||||
|
Interest
|
534
|
410
|
||||||
|
Programming
costs
|
277
|
268
|
||||||
|
Franchise-related
fees
|
56
|
68
|
||||||
|
Compensation
|
110
|
110
|
||||||
|
Other
|
263
|
253
|
||||||
| $ |
1,410
|
$ |
1,298
|
|||||
6. Long-Term
Debt
Long-term debt consists of the following as of September 30, 2007 and December 31, 2006:
|
September
30, 2007
|
December
31, 2006
|
|||||||||||||||
|
Principal
Amount
|
Accreted
Value
|
Principal
Amount
|
Accreted
Value
|
|||||||||||||
|
Long-Term
Debt
|
||||||||||||||||
|
Charter
Communications, Inc.:
|
||||||||||||||||
|
5.875%
convertible senior notes due November 16, 2009
|
$ |
413
|
$ |
412
|
$ |
413
|
$ |
408
|
||||||||
|
Charter
Communications Holdings, LLC:
|
||||||||||||||||
|
8.250%
senior notes due April 1, 2007
|
--
|
--
|
105
|
105
|
||||||||||||
|
8.625%
senior notes due April 1, 2009
|
--
|
--
|
187
|
187
|
||||||||||||
|
10.000%
senior notes due April 1, 2009
|
88
|
88
|
105
|
105
|
||||||||||||
|
10.750%
senior notes due October 1, 2009
|
63
|
63
|
71
|
71
|
||||||||||||
|
9.625%
senior notes due November 15, 2009
|
37
|
37
|
52
|
52
|
||||||||||||
11
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
|
10.250%
senior notes due January 15, 2010
|
18
|
18
|
32
|
32
|
||||||||||||
|
11.750%
senior discount notes due January 15, 2010
|
16
|
16
|
21
|
21
|
||||||||||||
|
11.125%
senior notes due January 15, 2011
|
47
|
47
|
52
|
52
|
||||||||||||
|
13.500%
senior discount notes due January 15, 2011
|
60
|
60
|
62
|
62
|
||||||||||||
|
9.920%
senior discount notes due April 1, 2011
|
51
|
51
|
63
|
63
|
||||||||||||
|
10.000%
senior notes due May 15, 2011
|
69
|
69
|
71
|
71
|
||||||||||||
|
11.750%
senior discount notes due May 15, 2011
|
54
|
54
|
55
|
55
|
||||||||||||
|
12.125%
senior discount notes due January 15, 2012
|
75
|
75
|
91
|
91
|
||||||||||||
|
CCH
I Holdings, LLC:
|
||||||||||||||||
|
11.125%
senior notes due January 15, 2014
|
151
|
151
|
151
|
151
|
||||||||||||
|
13.500%
senior discount notes due January 15, 2014
|
581
|
581
|
581
|
581
|
||||||||||||
|
9.920%
senior discount notes due April 1, 2014
|
471
|
471
|
471
|
471
|
||||||||||||
|
10.000%
senior notes due May 15, 2014
|
299
|
299
|
299
|
299
|
||||||||||||
|
11.750%
senior discount notes due May 15, 2014
|
815
|
815
|
815
|
815
|
||||||||||||
|
12.125%
senior discount notes due January 15, 2015
|
217
|
217
|
217
|
216
|
||||||||||||
|
CCH
I, LLC:
|
||||||||||||||||
|
11.000%
senior notes due October 1, 2015
|
3,987
|
4,084
|
3,987
|
4,092
|
||||||||||||
|
CCH
II, LLC:
|
||||||||||||||||
|
10.250%
senior notes due September 15, 2010
|
2,198
|
2,192
|
2,198
|
2,190
|
||||||||||||
|
10.250% senior notes due October 1, 2013
|
250
|
261
|
250
|
262
|
||||||||||||
|
CCO
Holdings, LLC:
|
||||||||||||||||
|
Senior
floating notes due December 15, 2010
|
--
|
--
|
550
|
550
|
||||||||||||
|
8
3/4% senior notes due November 15, 2013
|
800
|
795
|
800
|
795
|
||||||||||||
|
Credit
facility
|
350
|
350
|
--
|
--
|
||||||||||||
|
Charter
Communications Operating, LLC:
|
||||||||||||||||
|
8.000%
senior second lien notes due April 30, 2012
|
1,100
|
1,100
|
1,100
|
1,100
|
||||||||||||
|
8
3/8% senior second lien notes due April 30, 2014
|
770
|
770
|
770
|
770
|
||||||||||||
|
Credit
facilities
|
6,615
|
6,615
|
5,395
|
5,395
|
||||||||||||
| $ |
19,595
|
$ |
19,691
|
$ |
18,964
|
$ |
19,062
|
The
accreted values presented above generally represent the principal amount of
the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, certain of the CCH I notes and
CCH II notes issued in exchange for Charter Holdings notes and Charter
convertible senior notes in 2006 and 2005 are recorded for financial reporting
purposes at values different from the current accreted value for legal purposes
and notes indenture purposes (the amount that is currently payable if the debt
becomes immediately due). As of September 30, 2007, the accreted
value of the Company’s debt for legal purposes and notes indenture purposes is
approximately $19.6 billion.
In
March
2007, Charter Operating entered into the Charter Operating Credit Agreement
which provides for a $1.5 billion senior secured revolving line of credit,
a
continuation of the existing $5.0 billion term loan facility (the “Existing Term
Loan”), and a $1.5 billion new term loan facility (the “New Term Loan”), which
was funded in March and April 2007. Borrowings under the Charter
Operating Credit Agreement bear interest at a variable interest rate based
on
either LIBOR or a base rate, plus in either case, an applicable
margin. The applicable margin for LIBOR loans under the New Term Loan
and revolving loans is 2.00% above LIBOR. The revolving line of
credit commitments terminate in March 2013. The Existing Term Loan
and the New Term Loan are subject to amortization at 1% of their initial
principal amount per annum commencing on March 31, 2008 with the remaining
principal amount of the New Term Loan due in March 2014. The Charter
Operating Credit Agreement also modified the quarterly consolidated leverage
ratio to be less restrictive.
In
March
2007, CCO Holdings entered into a credit agreement (the “CCO Holdings Credit
Agreement”) which consisted of a $350 million term loan facility (the “Term
Facility”). The Term Facility matures in September 2014 (the
“Maturity Date”). Borrowings under the CCO Holdings Credit Agreement
bear interest at a variable interest rate
12
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
based
on
either LIBOR or a base rate plus, in either case, an applicable
margin. The applicable margin for LIBOR term loans is 2.50% above
LIBOR. The CCO Holdings Credit Agreement is secured by the equity
interests of Charter Operating, and all proceeds thereof.
As
part
of the refinancing, the existing $350 million revolving/term credit facility
was
terminated. The refinancing resulted in a loss on extinguishment of
debt of approximately $13 million for the nine months ended September 30, 2007,
included in other income (expense), net on the Company’s condensed consolidated
statements of operations.
In
April
2007, Charter Holdings completed a tender offer, in which $97 million of Charter
Holdings’ notes were accepted in exchange for $100 million of total
consideration, including premiums and accrued interest. In addition,
Charter Holdings redeemed $187 million of its 8.625% senior notes due April
1,
2009 and CCO Holdings redeemed $550 million of its senior floating rate notes
due December 15, 2010. These redemptions closed in April
2007. The redemptions and tender resulted in a loss on extinguishment
of debt of approximately $22 million for the nine months ended September 30,
2007, included in other income (expense), net on the Company’s condensed
consolidated statements of operations.
On
April
1, 2007, $105 million of Charter Holdings 8.25% notes matured and were paid
off
with proceeds from the CCO Holdings Credit Agreement.
In
October 2007, Charter Holdco completed a tender offer, in which $364 million
of
Charter’s 5.875% convertible senior notes due 2009 were accepted for $479
million of Charter’s 6.50% convertible senior notes due 2027. The
6.50% convertible senior notes will have an initial conversion price of $3.41
and initial conversion rate of 293.3868 per $1,000 principal amount of 6.50%
convertible senior notes, with a maturity date of October 1, 2027, subject
to
earlier redemption at the option of the Company or repurchase at the option
of
the holders. The 6.50% convertible senior notes provide the holders
with the right to require Charter to repurchase some or all of the 6.50%
convertible senior notes for cash on October 1, 2012, 2017 and 2022 at a
repurchase price equal to the principal amount plus accrued
interest.
Charter
may redeem the 6.50% convertible senior notes in whole or in part for cash
at
any time at a redemption price equal to 100% of the principal amount, plus
accrued and unpaid interest, if any, but only if for any 20 trading days in
any
30 consecutive trading day period the closing price has exceeded 180% of the
conversion price provided such 30 trading day period begins prior to October
1,
2010, or 150% of the conversion price provided such 30 trading period begins
thereafter up until October 1, 2012, or at the redemption price regardless
of
the closing price of Charter’s Class A common stock
thereafter. Holders who convert any 6.50% convertible senior notes
prior to October 1, 2012 that Charter has called for redemption shall receive,
in addition to the early conversion make whole amount, if applicable, the
present value of the interest on the notes converted that would have been
payable for the period from the redemption date to, but excluding, October
1,
2012.
Charter
expects to record a loss on extinguishment of debt in the fourth quarter of
2007
related to this transaction. Approximately $49 million of Charter’s
5.875% convertible senior notes remain outstanding.
7. Minority
Interest and Equity Interest of Charter Holdco
Charter
is a holding company whose primary assets are a controlling equity interest
in
Charter Holdco, the indirect owner of the Company’s cable systems, and $413
million (at September 30, 2007 and December 31, 2006) of mirror notes payable
by
Charter Holdco to Charter, and which have the same principal amount and terms
as
those of Charter’s 5.875% convertible senior notes. Minority interest
on the Company’s condensed consolidated balance sheets represents Mr. Allen’s,
Charter’s chairman and controlling shareholder, 5.6% preferred membership
interests in CC VIII, LLC ("CC VIII"), an indirect subsidiary of Charter Holdco,
of $196 million and $192 million as of September 30, 2007 and December 31,
2006,
respectively.
In
connection with the issuance of the 6.50% convertible senior notes described
in
Note 6, Charter entered into certain agreements with Charter Holdco to provide
for the issuance of $479 million original principal amount of a 6.50%
13
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
mirror
convertible senior note due 2027 of Charter Holdco (the “Mirror Note”) to
Charter. These agreements facilitated compliance with the certificate
of incorporation of Charter and the governing documents of Charter Holdco
regarding the required issuance of mirror securities by Charter
Holdco. The terms of the Mirror Note mirror the terms of the 6.50%
convertible senior notes.
8. Share
Lending
Agreement
As
of
September 30, 2007, there were 29.8 million shares of Charter Class A common
stock outstanding that were issued in various offerings as required by the
share
lending agreement, pursuant to which Charter had previously agreed to loan
up to
150 million shares to Citigroup Global Markets Limited
("CGML"). These offerings of Charter’s Class A common stock were
conducted to facilitate transactions by which investors in Charter’s 5.875%
convertible senior notes, issued on November 22, 2004, hedged their investments
in these convertible senior notes. In conjunction with the October
2007 exchange of Charter convertible senior notes, Charter and CGML amended
the
share lending agreement in October 2007 to allow the use of the borrowed shares
to hedge investments in Charter’s 6.50% convertible senior
notes. Charter did not receive any of the proceeds from the sale of
this Class A common stock. However, under the share lending
agreement, Charter received a loan fee of $.001 for each share that it lent
to
CGML. Charter has no further obligation to issue shares pursuant to
this share lending agreement.
The
issuance of shares pursuant to this share lending agreement is essentially
analogous to a sale of shares coupled with a forward contract for the
reacquisition of the shares at a future date. An instrument that
requires physical settlement by repurchase of a fixed number of shares in
exchange for cash is considered a forward purchase instrument. While
the share lending agreement does not require a cash payment upon return of
the
shares, physical settlement is required (i.e., the shares borrowed must be
returned at the end of the arrangement). The fair value of the 29.8
million loaned shares outstanding was approximately $77 million as of September
30, 2007. However, the net effect on shareholders’ deficit of the
shares lent pursuant to the share lending agreement, which includes Charter’s
requirement to lend the shares and the counterparties’ requirement to return the
shares, is de minimis and represents the cash received upon lending of the
shares and is equal to the par value of the common stock to be
issued.
9. Rights
Agreement
In August 2007, Charter’s Board of Directors adopted a rights plan and declared a dividend of one preferred share purchase right for each issued and outstanding share of Charter’s Class A common stock and Class B common stock (a “Right”). The dividend was payable to stockholders of record as of August 31, 2007 and 403,219,728 Rights were issued. In connection with the adoption of the rights plan, the Company increased the authorized Class A common stock and Class B common stock to 10.5 billion and 4.5 billion shares, respectively. The terms of the Rights and rights plan were set forth in a Rights Agreement, by and between Charter and Mellon Investor Services LLC, dated as of August 14, 2007 (the “Rights Plan” or “Rights Agreement”).
The
Rights Plan was adopted in an effort to protect stockholder value by attempting
to protect against a possible limitation on Charter’s ability to use its net
operating loss carryforwards, which could significantly impair the value of
that
asset. See Note 14. The Rights Plan is intended to act as a
deterrent to any person or group from acquiring 5.0% or more of Charter’s Class
A common stock or any person or group holding 5.0% or more of Charter’s Class A
common stock (“Acquiring Person”) from acquiring more shares without the
approval of Charter’s Board of Directors. The Rights will not be
exercisable until 10 days after a public announcement by Charter that a person
or group has become an Acquiring Person. Except as may be determined
by Charter’s Board of Directors, with the consent of the holders of the majority
of the Class B common stock, all outstanding, valid, and exercisable Rights,
except for those Rights held by any Acquiring Person, will be exchanged for
2.5
shares of Class A common stock and/or Class B common stock, as applicable,
or an
equivalent security. If Charter’s Board of Directors and holders of the
Class B common stock determine that such an exchange does not occur, all holders
of Rights, except any Acquiring Person, may exercise their Rights upon payment
of the purchase price to purchase five shares of Charter’s Class A common stock
and/or Class B common stock, as applicable (or other securities or assets as
determined by Charter’s Board of Directors) at a 50% discount to the then
current market price. The Rights and Rights Agreement will expire on
December 31, 2008, if not terminated earlier.
14
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
10. Comprehensive
Loss
The Company reports changes in the fair value of interest rate agreements designated as hedging the variability of cash flows associated with floating-rate debt obligations, that meet the effectiveness criteria of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in accumulated other comprehensive income (loss). Comprehensive loss was $480 million and $134 million for the three months ended September 30, 2007 and 2006, respectively, and $1.2 billion and $975 million for the nine months ended September 30, 2007 and 2006, respectively.
11. Accounting
for Derivative Instruments and Hedging Activities
The Company uses interest rate derivative instruments, including but not limited to interest rate swap agreements and interest rate collar agreements (collectively referred to herein as interest rate agreements) to manage its interest costs and reduce the Company’s exposure to increases in floating interest rates. The Company’s policy is to manage its exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt within a targeted range. Using interest rate swap agreements, the Company has agreed to exchange, at specified intervals through 2013, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.
The
Company’s hedging policy does not permit it to hold or issue derivative
instruments for trading purposes. The Company does, however, have
certain interest rate derivative instruments that have been designated as cash
flow hedging instruments. Such instruments effectively convert
variable interest payments on certain debt instruments into fixed
payments. For qualifying hedges, SFAS No. 133 allows derivative gains
and losses to offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For each of the three months ended September
30, 2007 and 2006, other income (expense), net includes $0, and for the
nine months ended September 30, 2007 and 2006, other income (expense), net
includes $0 and gains of $2 million, respectively, which represent cash flow
hedge ineffectiveness on interest rate hedge agreements. This
ineffectiveness arises from differences between critical terms of the agreements
and the related hedged obligations.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating rate
debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive income (loss). For the
three months ended September
30, 2007 and 2006, losses of $73 million and $1 million, respectively,
and for the nine months ended September 30, 2007 and 2006, losses of $25 million
and $1 million, respectively, related to derivative instruments designated
as
cash flow hedges, were recorded in accumulated other comprehensive income
(loss). The amounts are subsequently reclassified as an increase or
decrease to interest expense in the same periods in which the related interest
on the floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do
not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as other income (expense) in the Company’s condensed consolidated
statements of operations. For the three months ended September
30, 2007 and 2006, other income (expense), net, includes losses of $21
million and $3 million, respectively, and for the nine months ended September
30, 2007 and 2006, other income (expense), net includes losses of $16 million
and gains of $6 million, respectively, resulting from interest rate derivative
instruments not designated as hedges.
As
of
September
30, 2007 and December 31, 2006, the Company had outstanding $4.3 billion
and $1.7 billion, respectively, in notional amounts of interest rate
swaps. The notional amounts of interest rate instruments do not
represent amounts exchanged by the parties and, thus, are not a measure of
exposure to credit loss. The amounts exchanged are determined by
reference to the notional amount and the other terms of the
contracts.
15
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Certain
provisions of the Company’s 5.875% convertible senior notes due 2009 are
considered embedded derivatives for accounting purposes and are required to
be
accounted for separately from the convertible senior notes. In
accordance with SFAS No. 133, these derivatives are marked to market with gains
or losses recorded in interest expense on the Company’s condensed consolidated
statement of operations. For the three months ended September 30,
2007 and 2006, the Company recognized gains of $7 million and $0, respectively,
and for the nine months ended September 30, 2007 and 2006, the Company
recognized losses of $2 million and gains of $2 million,
respectively. The losses resulted in an increase in interest expense
related to these derivatives and the gains resulted in a decrease in interest
expense. At September
30, 2007 and December 31, 2006, $6 million and $12 million, respectively,
is recorded in accounts payable and accrued expenses relating to the short-term
portion of these derivatives and $8 million and $0, respectively, is recorded
in
other long-term liabilities related to the long-term portion.
12. Other
Operating Expenses, Net
Other
operating expenses, net consist of the following for the three and nine months
ended September 30, 2007 and 2006:
|
Three
Months
Ended
September 30,
|
Nine
Months
Ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Loss
on sale of assets, net
|
$ |
2
|
$ |
2
|
$ |
5
|
$ |
2
|
||||||||
|
Special
charges, net
|
6
|
2
|
8
|
12
|
||||||||||||
| $ |
8
|
$ |
4
|
$ |
13
|
$ |
14
|
|||||||||
Special
charges, net for the three and nine months ended September 30, 2007 and 2006,
primarily represent severance associated with the closing of call centers and
divisional restructuring.
13. Other
Income
(Expense), Net
Other income (expense), net consists of the following for the three and nine months ended September 30, 2007 and 2006:
|
Three
Months
Ended
September 30,
|
Nine
Months
Ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Gain
(loss) on derivative instruments and
hedging
activities, net
|
$ | (21 | ) | $ | (3 | ) | $ | (16 | ) | $ |
8
|
|||||
|
Gain
(loss) on extinguishment of debt
|
--
|
128
|
(35 | ) |
101
|
|||||||||||
|
Minority
interest
|
(1 | ) | (2 | ) | (4 | ) | (3 | ) | ||||||||
|
Gain
on investments
|
2
|
8
|
1
|
12
|
||||||||||||
|
Other,
net
|
(1 | ) |
--
|
(1 | ) |
3
|
||||||||||
| $ | (21 | ) | $ |
131
|
$ | (55 | ) | $ |
121
|
|||||||
The
Charter Operating refinancing in April 2006 resulted in a loss on extinguishment
of debt for the nine months ended September 30, 2006 of approximately $27
million. The exchange in September 2006 of Charter Holdings notes for CCH
I and
CCH II notes resulted in a gain on extinguishment of debt for the three and
nine
months ended September 30, 2006 of approximately $108 million. The exchange
in
September 2006 of Charter convertible senior notes for a combination of cash,
Charter common stock, and CCH II notes resulted in a gain on extinguishment
of
debt for the three and nine months ended September 30, 2006 of approximately
$20
million.
16
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
14. Income
Taxes
All operations are held through Charter Holdco and its direct and indirect subsidiaries. Charter Holdco and the majority of its subsidiaries are generally limited liability companies that are not subject to income tax. However, certain of these limited liability companies are subject to state income tax. In addition, the subsidiaries that are corporations are subject to federal and state income tax. All of the remaining taxable income, gains, losses, deductions and credits of Charter Holdco are passed through to its members: Charter, Charter Investment, Inc. (“CII”) and Vulcan Cable III Inc. ("Vulcan Cable"). Charter is responsible for its allocated share of taxable income or loss of Charter Holdco in accordance with the Charter Holdco limited liability company agreement (the "LLC Agreement") and partnership tax rules and regulations. Charter also records financial statement deferred tax assets and liabilities related to its investment in Charter Holdco.
During
the three and nine months ended September 30, 2007, the Company recorded $41
million and $169 million of income tax expense, respectively. During
the three and nine months ended September 30, 2006, the Company recorded $64
million and $128 million of income tax expense, respectively. Income
tax expense of $0 and $4 million was associated with discontinued operations
for
the three and nine months ended September 30, 2006, respectively. Income tax
expense is recognized through increases in the deferred tax liabilities related
to Charter’s investment in Charter Holdco, as well as for certain of Charter’s
subsidiaries, current federal and state income tax expense and increases to
the
related deferred tax liabilities.
As
of
September 30, 2007 and December 31, 2006, the Company had net deferred income
tax liabilities of approximately $629 million and $514 million,
respectively. Included in these deferred tax liabilities is
approximately $230 million and $200 million of deferred tax liabilities at
September 30, 2007 and December 31, 2006, respectively, relating to certain
indirect subsidiaries of Charter Holdco that file separate income tax returns.
The remainder of the Company’s deferred tax liability arises from Charter’s
investment in Charter Holdco, and is largely attributable to the
characterization of franchises for financial reporting purposes as
indefinite-lived.
As
of
September 30, 2007 and December 31, 2006, the Company had approximately $7.6
billion and $6.7 billion, respectively, of tax net operating loss carryforwards,
resulting in gross deferred tax assets of $3.0 billion and $2.7 billion,
respectively, expiring in years 2007 through 2027. Such tax net
operating loss carryforwards accumulate and can be used to offset any of our
future taxable income. However, due to uncertainties in projected
future taxable income, valuation allowances of $2.6 billion and $2.2 billion
as
of September 30, 2007 and December 31, 2006, respectively, have been established
against these gross deferred tax assets except for deferred benefits available
to offset specific deferred tax liabilities. The Company recorded
approximately $341 million of additional gross deferred tax assets during the
nine months ended September 30, 2007, relating to net operating loss
carryforwards, but recorded a valuation allowance with respect to this amount
because of the uncertainty of the ability to realize a benefit from the
Company’s carryforwards in the future. The Company also had deferred
tax assets of approximately $2.0 billion as of September 30, 2007 and December
31, 2006, representing financial losses in excess of the tax losses that
were allocated to Charter from Charter Holdco. Valuation allowances
of $2.0 billion as of September 30, 2007 and December 31, 2006, existed with
respect to these deferred tax assets.
The
amount of any potential benefit from the Company’s tax net operating losses is
dependent on: (1) Charter and its subsidiaries’ ability to generate future
taxable income and (2) the unexpired amount of net operating loss carryforwards
available to offset amounts payable on such taxable income. Any
future “ownership changes” of Charter's common stock, as defined in the
applicable federal income tax rules, would place significant limitations, on
an
annual basis, on the use of such net operating losses to offset any future
taxable income the Company may generate. Such limitations, in
conjunction with the net operating loss expiration provisions, could effectively
eliminate the Company’s ability to use a substantial portion of its net
operating losses to offset future taxable income. Although the
Company has adopted the Rights Plan as an attempt to protect against an
“ownership change,” certain transactions and the timing of such transactions
could cause such an ownership change including, but not limited to, the
following: The issuance
of shares of common stock upon future conversion of Charter’s convertible senior
notes; reacquisition of the shares borrowed under the share lending agreement
by
Charter (of which 29.8 million remain outstanding as of
17
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
September
30, 2007); or
acquisitions or sales of shares by certain holders of Charter’s shares,
including persons who have held, currently hold, or accumulate in the future
five percent or more of Charter’s outstanding stock (including an exchange by
Mr. Allen or his affiliates, directly or indirectly, of membership units of
Charter Holdco into CCI common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
If
certain exchanges, as described above, were to take place, Charter would likely
record for financial reporting purposes additional deferred tax liability
related to any increased interest in Charter Holdco.
Charter
Holdco is currently under examination by the Internal Revenue Service for the
tax years ending December 31, 2002 through 2005. In addition, Charter
is under
examination by the Internal Revenue Service for the tax year ended December
31,
2004. Management does not expect the results of these
examinations to have a material adverse effect on the Company’s consolidated
financial condition or results of operations.
In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109, which
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. The adoption of FIN 48 resulted in a
deferred tax benefit of $56 million related to a settlement with Mr. Allen
regarding ownership of the CC VIII preferred membership interests, which was
recognized as a cumulative adjustment to the accumulated deficit in the first
quarter of 2007.
15. Contingencies
The
Company is a defendant or co-defendant in several unrelated lawsuits claiming
infringement of various patents relating to various aspects of its
businesses. Other industry participants are also defendants in
certain of these cases, and, in many cases, the Company expects that any
potential liability would be the responsibility of its equipment vendors
pursuant to applicable contractual indemnification provisions. In the event
that
a court ultimately determines that the Company infringes on any intellectual
property rights, it may be subject to substantial damages and/or an injunction
that could require the Company or its vendors to modify certain products
and services the Company offers to its subscribers. While the Company
believes the lawsuits are without merit and intends to defend the actions
vigorously, the lawsuits could be material to the Company’s consolidated results
of operations of any one period, and no assurance can be given that any
adverse outcome would not be material to the Company’s consolidated financial
condition, results of operations, or liquidity.
Charter
is a party to other lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal
matters pending against the Company or its subsidiaries cannot be predicted,
and
although such lawsuits and claims are not expected individually to have a
material adverse effect on the Company’s consolidated financial condition,
results of operations, or liquidity, such lawsuits could have, in the aggregate,
a material adverse effect on the Company’s consolidated financial condition,
results of operations, or liquidity.
16. Stock
Compensation Plans
The
Company has stock option plans (the “Plans”) which provide for the grant of
non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or restricted stock (not to exceed 20.0 million shares of Charter Class
A
common stock), as each term is defined in the Plans. Employees,
officers, consultants and directors of the Company and its subsidiaries and
affiliates are eligible to receive grants under the Plans. Options
granted generally vest over four years from the grant date, with 25% generally
vesting on the anniversary of the grant date and ratably
thereafter. Generally, options expire 10 years from the grant
date. The Plans allow for the issuance of up to a total of 90.0
million shares of Charter Class A common stock (or units convertible into
Charter Class A common stock). During the three and nine months ended
September 30, 2007, Charter granted 0.1 million and 4.0 million stock options,
respectively, and 2.6 million and 9.5 million performance units, respectively,
under Charter’s Long-Term Incentive Program. During the three and
nine months ended September 30, 2007, Charter issued 2.5 million and 2.8 million
shares of restricted Class A common
18
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
stock. The
Company recorded $5 million and $3 million of stock compensation expense for
the
three months ended September 30, 2007 and 2006, respectively, and $15 million
and $10 million for the nine months ended September 30, 2007 and 2006, which
is
included in selling, general, and administrative expense.
19
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
General
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets
at
September 30, 2007 are the 54% controlling common equity interest (52% for
accounting purposes) in Charter Communications Holding Company, LLC ("Charter
Holdco") and "mirror" notes that are payable by Charter Holdco to Charter and
have the same principal amount and terms as Charter’s convertible senior notes.
"We," "us" and "our" refer to Charter and its subsidiaries.
We
are a
broadband communications company operating in the United States. We
offer our residential and commercial customers traditional cable video
programming (analog and digital video, which we refer to as “video service”),
high-speed Internet services, advanced broadband cable services (such as Charter
OnDemand™ video service (“OnDemand”), high definition television service, and
digital video recorder (“DVR”) service) and, in many of our markets, telephone
service. We sell our cable video programming, high-speed Internet,
telephone, and advanced broadband services on a subscription basis.
The
following table summarizes our customer statistics for analog and digital video,
residential high-speed Internet and residential telephone as of September 30,
2007 and 2006:
|
Approximate
as of
|
||||||||
|
September
30,
|
September
30,
|
|||||||
|
2007
(a)
|
2006
(a)
|
|||||||
|
Video
Cable Services:
|
||||||||
|
Analog
Video:
|
||||||||
|
Residential
(non-bulk) analog video customers (b)
|
5,073,900
|
5,216,900
|
||||||
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
273,900
|
259,700
|
||||||
|
Total
analog video customers (b)(c)
|
5,347,800
|
5,476,600
|
||||||
|
Digital
Video:
|
||||||||
|
Digital
video customers (d)
|
2,882,900
|
2,767,900
|
||||||
|
Non-Video
Cable Services:
|
||||||||
|
Residential
high-speed Internet customers (e)
|
2,639,200
|
2,343,200
|
||||||
|
Telephone
customers (f)
|
802,600
|
339,600
|
||||||
After
giving effect to sales of cable systems in January 2007 and May 2007, and the
acquisition of cable systems in August 2007, analog video customers, digital
video customers, high-speed Internet customers and telephone customers would
have been 5,442,300, 2,753,700, 2,342,900, and 339,600, respectively, as of
September 30, 2006.
|
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At September 30, 2007 and
2006, "customers" include approximately 33,800 and 43,500 persons
whose accounts were over 60 days past due in payment, approximately
5,700
and 8,400 persons whose accounts were over 90 days past due in payment,
and approximately 2,100 and 5,100 of which were over 120 days past
due in
payment, respectively.
|
|
(b)
|
"Analog
video customers" include all customers who receive video
services.
|
|
(c)
|
Included
within "video customers" are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit ("EBU")
basis. EBU is calculated for a system by dividing the bulk
price charged to accounts in an area by the most prevalent
price charged
to non-bulk residential customers in that market for the comparable
tier
of service. The EBU method of estimating analog video customers
is consistent with the methodology used in determining costs
paid to
programmers and has been used
consistently.
|
20
|
(d)
|
"Digital
video customers" include all households that have one or more digital
set-top boxes or cable cards
deployed.
|
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers
who
subscribe to our high-speed Internet
service.
|
|
(f)
|
"Telephone
customers" include all customers receiving telephone
service.
|
Overview
For
the
three months ended September 30, 2007 and 2006, our operating income from
continuing operations was $107 million and $66 million, respectively, and for
the nine months ended September 30, 2007 and 2006, our operating income from
continuing operations was $463 million and $204 million,
respectively. We had operating margins of 7% and 5% for the three
months ended September 30, 2007 and 2006, respectively, and 10% and 5% for
the
nine months ended September 30, 2007 and 2006, respectively. The
increase in operating income from continuing operations and operating margins
for the three and nine months ended September 30, 2007 compared to the three
and
nine months ended September 30, 2006 was principally due to revenues increasing
at a faster rate than expenses, reflecting increased operational efficiencies,
improved geographic footprint, and benefits from improved third-party contracts,
coupled with a decrease of $103 million in asset impairment charges during
the
nine months ended September 30, 2007 compared to the nine months ended September
30, 2006.
We
have a
history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally
attributable to insufficient revenue to cover the combination of operating
expenses and interest expenses we incur because of our high amounts of debt,
and
depreciation expenses resulting from the capital investments we have made and
continue to make in our cable properties. We expect that these
expenses will remain significant.
Sales
of Assets
In 2006, we sold certain cable television systems serving approximately 356,000 analog video customers in 1) West Virginia and Virginia to Cebridge Connections, Inc. (the “Cebridge Transaction”); 2) Illinois and Kentucky to Telecommunications Management, LLC, doing business as New Wave Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total sales price of approximately $971 million. We used the net proceeds from the asset sales to reduce borrowings, but not commitments, under the revolving portion of our credit facilities. These cable systems met the criteria for assets held for sale. As such, the assets were written down to fair value less estimated costs to sell, resulting in asset impairment charges during the nine months ended September 30, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction. We determined that the West Virginia and Virginia cable systems comprise operations and cash flows that for financial reporting purposes meet the criteria for discontinued operations. Accordingly, the results of operations for the West Virginia and Virginia cable systems have been presented as discontinued operations, net of tax, for the three and nine months ended September 30, 2006, including a gain of $200 million on the sale of cable systems.
Also,
during the three months ended September 30, 2007 and 2006, we recorded asset
impairment charges of $56 million and $60 million, respectively, related to
other cable systems meeting the criteria of assets held for sale during the
respective periods.
Critical
Accounting Policies and Estimates
For
a
discussion of our critical accounting policies and the means by which we develop
estimates therefore, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in our 2006 Annual Report on
Form
10-K.
21
RESULTS
OF OPERATIONS
The
following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted for
the
periods presented (dollars in millions, except per share data):
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||||||||
|
REVENUES
|
$ |
1,525
|
100 | % | $ |
1,388
|
100 | % | $ |
4,449
|
100 | % | $ |
4,091
|
100 | % | ||||||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||||||||||||||||||
|
Operating
(excluding depreciation and amortization)
|
679
|
45 | % |
615
|
44 | % |
1,957
|
44 | % |
1,830
|
45 | % | ||||||||||||||||||||
|
Selling,
general and administrative
|
341
|
22 | % |
309
|
22 | % |
961
|
22 | % |
860
|
21 | % | ||||||||||||||||||||
|
Depreciation
and amortization
|
334
|
22 | % |
334
|
24 | % |
999
|
23 | % |
1,024
|
25 | % | ||||||||||||||||||||
|
Asset
impairment charges
|
56
|
4 | % |
60
|
5 | % |
56
|
1 | % |
159
|
4 | % | ||||||||||||||||||||
|
Other
operating expenses, net
|
8
|
--
|
4
|
--
|
13
|
--
|
14
|
--
|
||||||||||||||||||||||||
|
1,418
|
93 | % |
1,322
|
95 | % |
3,986
|
90 | % |
3,887
|
95 | % | |||||||||||||||||||||
|
Operating
income from continuing operations
|
107
|
7 | % |
66
|
5 | % |
463
|
10 | % |
204
|
5 | % | ||||||||||||||||||||
|
OTHER
INCOME AND (EXPENSES):
|
||||||||||||||||||||||||||||||||
|
Interest
expense, net
|
(452 | ) | (466 | ) | (1,387 | ) | (1,409 | ) | ||||||||||||||||||||||||
|
Other
income (expense), net
|
(21 | ) |
131
|
(55 | ) |
121
|
||||||||||||||||||||||||||
| (473 | ) | (335 | ) | (1,442 | ) | (1,288 | ) | |||||||||||||||||||||||||
|
Loss
from continuing operations before income taxes
|
(366 | ) | (269 | ) | (979 | ) | (1,084 | ) | ||||||||||||||||||||||||
|
INCOME
TAX EXPENSE
|
(41 | ) | (64 | ) | (169 | ) | (124 | ) | ||||||||||||||||||||||||
|
Loss
from continuing operations
|
(407 | ) | (333 | ) | (1,148 | ) | (1,208 | ) | ||||||||||||||||||||||||
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
|
--
|
200
|
--
|
234
|
||||||||||||||||||||||||||||
|
Net
loss
|
$ | (407 | ) | $ | (133 | ) | $ | (1,148 | ) | $ | (974 | ) | ||||||||||||||||||||
|
LOSS
PER COMMON SHARE, BASIC AND DILUTED:
|
||||||||||||||||||||||||||||||||
|
Loss
from continuing operations
|
$ | (1.10 | ) | $ | (1.02 | ) | $ | (3.12 | ) | $ | (3.77 | ) | ||||||||||||||||||||
|
Net
loss
|
$ | (1.10 | ) | $ | (0.41 | ) | $ | (3.12 | ) | $ | (3.04 | ) | ||||||||||||||||||||
|
Weighted
average common shares outstanding, basic and diluted
|
369,239,742
|
326,960,632
|
367,671,479
|
320,730,698
|
||||||||||||||||||||||||||||
Revenues. Average
monthly revenue per analog video customer increased to $95 for the three months
ended September 30, 2007 from $83 for the three months ended September 30,
2006
and increased to $92 for the nine months ended September 30, 2007 from $81
for
the nine months ended September 30, 2006, primarily as a result of increases
in
customers purchasing combinations of digital, high-speed Internet, and telephone
services, incremental revenues from OnDemand, DVR, high-definition television
services, and rate adjustments. Average monthly revenue per analog
video customer represents total quarterly revenue, divided by the number of
respective months, divided by the average number of analog video customers
during the respective period.
22
Revenues
by service offering were as follows (dollars in millions):
|
Three
Months Ended September 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2007
over 2006
|
||||||||||||||||||||||
|
Revenues
|
%
of
Revenues
|
Revenues
|
%
of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ |
845
|
55 | % | $ |
836
|
60 | % | $ |
9
|
1 | % | ||||||||||||
|
High-speed
Internet
|
320
|
21 | % |
267
|
19 | % |
53
|
20 | % | |||||||||||||||
|
Telephone
|
94
|
6 | % |
37
|
3 | % |
57
|
154 | % | |||||||||||||||
|
Advertising
sales
|
77
|
5 | % |
81
|
6 | % | (4 | ) | (5 | %) | ||||||||||||||
|
Commercial
|
87
|
6 | % |
78
|
6 | % |
9
|
12 | % | |||||||||||||||
|
Other
|
102
|
7 | % |
89
|
6 | % |
13
|
15 | % | |||||||||||||||
| $ |
1,525
|
100 | % | $ |
1,388
|
100 | % | $ |
137
|
10 | % | |||||||||||||
|
Nine
Months Ended September 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2007
over 2006
|
||||||||||||||||||||||
|
Revenues
|
%
of
Revenues
|
Revenues
|
%
of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ |
2,542
|
57 | % | $ |
2,520
|
62 | % | $ |
22
|
1 | % | ||||||||||||
|
High-speed
Internet
|
926
|
21 | % |
773
|
19 | % |
153
|
20 | % | |||||||||||||||
|
Telephone
|
236
|
5 | % |
86
|
2 | % |
150
|
174 | % | |||||||||||||||
|
Advertising
sales
|
216
|
5 | % |
228
|
6 | % | (12 | ) | (5 | %) | ||||||||||||||
|
Commercial
|
251
|
6 | % |
227
|
5 | % |
24
|
11 | % | |||||||||||||||
|
Other
|
278
|
6 | % |
257
|
6 | % |
21
|
8 | % | |||||||||||||||
| $ |
4,449
|
100 | % | $ |
4,091
|
100 | % | $ |
358
|
9 | % | |||||||||||||
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Analog video customers
decreased by 128,800 customers from September 30, 2006, 34,300 of which was
related to asset sales, net of acquisitions, compared to September 30,
2007. Digital video customers increased by 115,000, offset by a loss
of 14,200 customers related to asset sales, net of acquisitions. The
increase in video revenues is attributable to the following (dollars in
millions):
|
|
Three
months ended
September
30, 2007
compared
to
three
months ended
September
30, 2006
Increase
/ (Decrease)
|
Nine
months ended
September
30, 2007
compared
to
nine
months ended
September
30, 2006
Increase
/ (Decrease)
|
||||||
|
Rate
adjustments and incremental video services
|
$ |
16
|
$ | |||||