body.htm
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 June 30, 2008
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the transition period from ________ to _________
Commission
file number: 000-27927
Charter Communications,
Inc.
(Exact name of registrant as
specified in its charter)
Delaware
|
43-1857213
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
12405
Powerscourt Drive
St. Louis, Missouri
63131
(Address of principal executive
offices including zip code)
(314)
965-0555
(Registrant's telephone number,
including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo þ
Number of
shares of Class A common stock outstanding as of June 30, 2008:
407,201,927
Number of
shares of Class B common stock outstanding as of June 30, 2008:
50,000
Charter
Communications, Inc.
Quarterly
Report on Form 10-Q for the Period ended June 30, 2008
Table
of Contents
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
Item
1.Financial Statements - Charter Communications, Inc. and
Subsidiaries
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2008
|
|
and
December 31, 2007
|
4
|
Condensed
Consolidated Statements of Operations for the three and
six
|
|
months
ended June 30, 2008 and 2007
|
5
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
six
months ended June 30, 2008 and 2007
|
6
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
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
4. Submission of Matters to a Vote of Security
Holders
|
36
|
|
|
Item
6. Exhibits
|
37
|
|
|
SIGNATURES
|
S-1
|
|
|
EXHIBIT
INDEX
|
E-1
|
This
quarterly report on Form 10-Q is for the three and six months ended June
30, 2008. The Securities and Exchange Commission ("SEC") allows
us to "incorporate by reference" information that we file with the SEC, which
means that we can disclose important information to you by referring you
directly to those documents. Information incorporated by reference is
considered to be part of this quarterly report. In addition,
information that we file with the SEC in the future will automatically update
and supersede information contained in this quarterly report. In this
quarterly report, "we," "us" and "our" refer to Charter Communications, Inc.,
Charter Communications Holding Company, LLC and their subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" in
this quarterly report. Although we believe that our plans, intentions
and expectations reflected in or suggested by these forward-looking statements
are reasonable, we cannot assure you that we will achieve or realize these
plans, intentions or expectations. Forward-looking statements are
inherently subject to risks, uncertainties and assumptions including, without
limitation, the factors described under "Risk Factors" under Part II, Item 1A
and the factors described under “Risk Factors” under Part I, Item 1A of our most
recent Form 10-K filed with the SEC. Many of the forward-looking
statements contained in this quarterly report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated," "aim," "on track," "target,"
"opportunity," and "potential," among others. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this quarterly report are set forth in this quarterly
report and in other reports or documents that we file from time to time with the
SEC, and include, but are not limited to:
|
·
|
the
availability, in general, of funds to meet interest payment obligations
under our debt and to fund our operations and necessary capital
expenditures, either through cash flows from operating activities, further
borrowings or other sources and, in particular, our ability to fund debt
obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
|
|
·
|
our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which, if not cured in a timely manner, could
trigger a default of our other obligations under cross-default
provisions;
|
|
·
|
our
ability to 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;
|
|
·
|
the
impact of competition from other distributors, including incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers, and digital subscriber line (“DSL”)
providers;
|
|
·
|
difficulties
in growing, further introducing, and operating our telephone services,
while adequately meeting customer expectations for the reliability of
voice services;
|
|
·
|
our
ability to adequately meet demand for installations and customer
service;
|
|
·
|
our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and other
services, and to maintain and grow our customer base, particularly in the
face of increasingly aggressive
competition;
|
|
·
|
our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
|
|
·
|
general
business conditions, economic uncertainty or slowdown, including the
recent significant slowdown in the housing sector and overall economy;
and
|
|
·
|
the
effects of governmental regulation on our
business.
|
All
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by this cautionary
statement. We are under no duty or obligation to update any of the
forward-looking statements after the date of this quarterly report.
PART
I. FINANCIAL INFORMATION.
Item
1.
|
Financial
Statements.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
DATA)
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
63 |
|
|
$ |
75 |
|
Short-term
investments
|
|
|
13 |
|
|
|
-- |
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$19
and $18, respectively
|
|
|
250 |
|
|
|
225 |
|
Prepaid
expenses and other current assets
|
|
|
35 |
|
|
|
36 |
|
Total
current assets
|
|
|
361 |
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated
depreciation
|
|
|
5,106 |
|
|
|
5,103 |
|
Franchises,
net
|
|
|
8,935 |
|
|
|
8,942 |
|
Total
investment in cable properties, net
|
|
|
14,041 |
|
|
|
14,045 |
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
308 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
14,710 |
|
|
$ |
14,666 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,293 |
|
|
$ |
1,332 |
|
Total
current liabilities
|
|
|
1,293 |
|
|
|
1,332 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
20,480 |
|
|
|
19,908 |
|
NOTE
PAYABLE – RELATED PARTY
|
|
|
69 |
|
|
|
65 |
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
|
|
14 |
|
|
|
14 |
|
OTHER
LONG-TERM LIABILITIES
|
|
|
1,150 |
|
|
|
1,035 |
|
MINORITY
INTEREST
|
|
|
203 |
|
|
|
199 |
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
|
shares
authorized; 36,713 shares issued and outstanding
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
|
|
|
|
|
|
|
|
407,201,927
and 398,226,468 shares issued and outstanding,
respectively
|
|
|
-- |
|
|
|
-- |
|
Class
B Common stock; $.001 par value; 4.5 billion
|
|
|
|
|
|
|
|
|
shares
authorized; 50,000 shares issued and outstanding
|
|
|
-- |
|
|
|
-- |
|
Preferred
stock; $.001 par value; 250 million shares
|
|
|
|
|
|
|
|
|
authorized;
no non-redeemable shares issued and outstanding
|
|
|
-- |
|
|
|
-- |
|
Additional
paid-in capital
|
|
|
5,331 |
|
|
|
5,327 |
|
Accumulated
deficit
|
|
|
(13,730 |
) |
|
|
(13,096 |
) |
Accumulated
other comprehensive loss
|
|
|
(105 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(8,504 |
) |
|
|
(7,892 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
14,710 |
|
|
$ |
14,666 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
1,623 |
|
|
$ |
1,499 |
|
|
$ |
3,187 |
|
|
$ |
2,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
698 |
|
|
|
647 |
|
|
|
1,380 |
|
|
|
1,278 |
|
Selling,
general and administrative
|
|
|
342 |
|
|
|
317 |
|
|
|
687 |
|
|
|
620 |
|
Depreciation
and amortization
|
|
|
328 |
|
|
|
334 |
|
|
|
649 |
|
|
|
665 |
|
Other
operating expenses, net
|
|
|
25 |
|
|
|
1 |
|
|
|
36 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,393 |
|
|
|
1,299 |
|
|
|
2,752 |
|
|
|
2,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
230 |
|
|
|
200 |
|
|
|
435 |
|
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(474 |
) |
|
|
(462 |
) |
|
|
(939 |
) |
|
|
(926 |
) |
Change
in value of derivatives
|
|
|
26 |
|
|
|
(3 |
) |
|
|
(11 |
) |
|
|
(4 |
) |
Other
income (expense), net
|
|
|
1 |
|
|
|
(36 |
) |
|
|
(2 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(447 |
) |
|
|
(501 |
) |
|
|
(952 |
) |
|
|
(969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(217 |
) |
|
|
(301 |
) |
|
|
(517 |
) |
|
|
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(59 |
) |
|
|
(59 |
) |
|
|
(117 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(276 |
) |
|
$ |
(360 |
) |
|
$ |
(634 |
) |
|
$ |
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE:
|
|
$ |
(.74 |
) |
|
$ |
(.98 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
371,652,070 |
|
|
|
367,582,677 |
|
|
|
370,868,849 |
|
|
|
366,855,427 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(634 |
) |
|
$ |
(741 |
) |
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
649 |
|
|
|
665 |
|
Noncash
interest expense
|
|
|
27 |
|
|
|
21 |
|
Change
in value of derivatives
|
|
|
11 |
|
|
|
4 |
|
Deferred
income taxes
|
|
|
114 |
|
|
|
123 |
|
Other,
net
|
|
|
22 |
|
|
|
39 |
|
Changes
in operating assets and liabilities, net of effects from
dispositions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(24 |
) |
|
|
(29 |
) |
Prepaid
expenses and other assets
|
|
|
-- |
|
|
|
26 |
|
Accounts
payable, accrued expenses and other
|
|
|
3 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
168 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(650 |
) |
|
|
(579 |
) |
Change
in accrued expenses related to capital expenditures
|
|
|
(41 |
) |
|
|
(39 |
) |
Other,
net
|
|
|
(11 |
) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(702 |
) |
|
|
(587 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
1,765 |
|
|
|
7,247 |
|
Repayments
of long-term debt
|
|
|
(1,195 |
) |
|
|
(6,727 |
) |
Payments
for debt issuance costs
|
|
|
(39 |
) |
|
|
(33 |
) |
Other,
net
|
|
|
(9 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
522 |
|
|
|
490 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(12 |
) |
|
|
21 |
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
75 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
63 |
|
|
$ |
81 |
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$ |
912 |
|
|
$ |
918 |
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Cumulative
adjustment to accumulated deficit for the adoption of FIN
48
|
|
$ |
-- |
|
|
$ |
56 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
|
Organization
and Basis of Presentation
|
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets at
June 30, 2008 are the 55% controlling common equity interest (52% for accounting
purposes) in Charter Communications Holding Company, LLC ("Charter Holdco") and
"mirror" notes which are payable by Charter Holdco to Charter and have the same
principal amount and terms as those of Charter’s convertible senior
notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"), which
is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The consolidated financial statements include the
accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." Charter has 100% voting control
over Charter Holdco and consolidates Charter Holdco as a variable interest
entity under Financial Accounting Standards Board ("FASB") Interpretation
("FIN") 46(R) Consolidation of
Variable Interest Entities. Charter Holdco’s limited liability
company agreement provides that so long as Charter’s Class B common stock
retains its special voting rights, Charter will maintain a 100% voting interest
in Charter Holdco. Voting control gives Charter full authority and
control over the operations of Charter Holdco. All significant
intercompany accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (basic and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™ (“OnDemand”), and
digital video recorder ("DVR") service. The Company sells its cable
video programming, high-speed Internet, telephone, and advanced broadband
services primarily on a subscription basis. The Company also sells
local advertising on cable networks.
The
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly,
certain information and footnote disclosures typically included in Charter’s
Annual Report on Form 10-K have been condensed or omitted for this quarterly
report. The accompanying condensed consolidated financial statements
are unaudited and are subject to review by regulatory
authorities. However, in the opinion of management, such financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results
for a full year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Areas involving significant judgments
and estimates include capitalization of labor and overhead costs; depreciation
and amortization costs; impairments of property, plant and equipment, franchises
and goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
Reclassifications. Certain
prior year amounts have been reclassified to conform with the 2008
presentation.
2. Liquidity
and Capital Resources
The
Company incurred net losses of $276 million and $360 million for the three
months ended June 30, 2008 and 2007, respectively, and $634 million and $741
million for the six months ended June 30, 2008 and 2007,
respectively. The Company’s net cash flows from operating activities
were $168 million and $118 million for the six months ended June 30, 2008 and
2007, respectively.
The
Company has a significant amount of debt. The Company's long-term
debt as of June 30, 2008 totaled $20.5 billion, consisting of $7.3 billion of
credit facility debt, $12.8 billion accreted value of high-yield notes, and $365
million accreted value of convertible senior notes. For the remainder
of 2008, $36 million of the Company’s debt
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
matures. As
of June 30, 2008, the Company’s 2009 debt maturities totaled $238
million. 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, proceeds from sales of assets, issuances
of debt and equity securities, and cash on hand. However, the mix of
funding sources changes from period to period. For the six months
ended June 30, 2008, the Company generated $168 million of net cash flows from
operating activities, after paying cash interest of $912 million. In
addition, the Company used $650 million for purchases of property, plant and
equipment. Finally, the Company generated net cash flows from
financing activities of $522 million, as a result of financing transactions
completed during the six months ended June 30, 2008.
The
Company expects that cash on hand, cash flows from operating activities, and the
amounts available under the Charter Communications Operating, LLC (“Charter
Operating”) credit facilities will be adequate to fund its projected cash needs,
including scheduled maturities, through 2009. The Company believes
that cash flows from operating activities, and the amounts available under the
Charter Operating credit facilities will not be sufficient to fund projected
cash needs in 2010 (primarily as a result of the CCH II, LLC (“CCH II”) $1.9
billion of senior notes outstanding at July 2, 2008 that mature in September
2010) and thereafter. The Company’s projected cash needs and
projected sources of liquidity depend upon, among other things, its actual
results, the timing and amount of its capital expenditures, and ongoing
compliance with the Charter Operating credit facilities, including obtaining an
unqualified audit opinion from its independent accountants. Although
the Company has been able to refinance or otherwise fund the repayment of debt
in the past, it may not be able to access additional sources of refinancing on
similar terms or pricing as those that are currently in place, or at all, or
otherwise obtain other sources of funding. A continuation of the
recent turmoil in the credit markets and the general economic downturn could
adversely impact the terms and/or pricing when the Company needs to raise
additional liquidity. No assurances can be given that the Company will not
experience liquidity problems if it does not obtain sufficient additional
financing on a timely basis as the Company’s debt becomes due or because of
adverse market conditions, increased competition, or other unfavorable
events.
If, at
any time, additional capital or borrowing capacity is required beyond amounts
internally generated or available under the Company’s credit facilities, the
Company would consider issuing equity, issuing convertible debt or some other
securities, further reducing the Company’s expenses and capital expenditures,
selling assets, or requesting waivers or amendments with respect to the
Company’s credit facilities.
If the
above strategies were not successful, the Company could be forced to restructure
its obligations or seek protection under the bankruptcy laws. In
addition, if the Company needs to raise additional capital through the issuance
of equity or finds it necessary to engage in a recapitalization or other similar
transaction, the Company’s shareholders could suffer significant dilution,
including potential loss of the entire value of their investment, and in the
case of a recapitalization or other similar transaction, the Company’s
noteholders might not receive principal and interest payments to which they are
contractually entitled.
Credit
Facility Availability
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with the
Company’s indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility,
contain certain restrictive covenants, some of which require the Company to
maintain specified leverage ratios, meet financial tests, and provide annual
audited financial statements with an unqualified opinion from the Company’s
independent accountants. As of June 30, 2008, 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 June 30, 2008, the Company’s potential
availability under Charter Operating’s revolving credit facility totaled
approximately $1.4 billion, none of which was limited by covenant
restrictions. Continued access to the Company’s revolving credit
facility is subject to the Company remaining in compliance with these covenants,
including covenants tied to Charter Operating’s leverage ratio and first lien
leverage ratio. If any event of non-compliance were to occur, funding
under the revolving credit
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
facility
may not be available and defaults on some or potentially all of the Company’s
debt obligations could occur. An event of default under any of the
Company’s debt instruments could result in the acceleration of its payment
obligations under that debt and, under certain circumstances, in cross-defaults
under its other debt obligations, which could have a material adverse effect on
the Company’s consolidated financial condition and results of
operations.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. Charter’s
ability to make interest payments on its convertible senior notes, and to repay
the outstanding principal of its convertible senior notes will depend on
its ability to raise additional capital and/or on receipt of payments or
distributions from Charter Holdco and its subsidiaries. As of June 30,
2008, Charter Holdco was owed $115 million in intercompany loans from Charter
Operating, which amounts were available to pay interest and principal on
Charter's convertible senior notes. In addition, as long as Charter Holdco
continues to hold the $35 million of Charter Holdings’ notes due 2009 and 2010
(as discussed further below), Charter Holdco will receive interest and principal
payments from Charter Holdings. Such amounts may be available to pay
interest and principal on Charter’s convertible senior notes, although Charter
Holdco may use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II notes, CCO Holdings notes, Charter Operating notes, and under
the CCO Holdings credit facility, unless there is no default under the
applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended June 30, 2008, there was no
default under any of these indentures or credit facilities and each subsidiary
met its applicable leverage ratio tests based on June 30, 2008 financial
results. Such distributions would be restricted, however, if any such
subsidiary fails to meet these tests at the time of the contemplated
distribution. In the past, certain subsidiaries have from time to
time failed to meet their leverage ratio test. There can be no
assurance that they will satisfy these tests at the time of the contemplated
distribution. Distributions by Charter Operating for payment of
principal on parent company notes are further restricted by the covenants in the
Charter Operating credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended June 30,
2008, there was no default under Charter Holdings’ indentures, the other
specified tests were met, and Charter Holdings met its leverage ratio test of
8.75 to 1.0 based on June 30, 2008 financial results. Such distributions
would be restricted, however, if Charter Holdings fails to meet these tests at
the time of the contemplated distribution. In the past, Charter
Holdings has from time to time failed to meet this leverage ratio
test. There can be no assurance that Charter Holdings will satisfy
these tests at the time of the contemplated distribution. 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
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014 and borrowed $500 million principal amount of
incremental term loans under the Charter Operating credit facilities (see Note
5). In the second quarter of 2008, Charter Holdco repurchased, in
private transactions, from a small number of institutional holders, a total of
approximately $35 million principal amount of various Charter Holdings notes due
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
2009 and
2010 and approximately $46 million principal amount of Charter’s 5.875%
convertible senior notes due 2009, for approximately $77 million of
cash. Charter Holdco continues to hold the Charter Holdings
notes. The purchased 5.875% convertible senior notes were cancelled
resulting in approximately $3 million principal amount of such notes remaining
outstanding.
In July
2008, CCH II completed a tender offer, in which $338 million of CCH II’s 10.25%
senior notes due 2010 were accepted for $364 million of CCH II’s 10.25% senior
notes due 2013, which were issued as part of the same series of notes as CCH
II’s $250 million aggregate principal amount of 10.25% senior notes due 2013,
which were issued in September 2006.
3. 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. 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
June 30, 2008 and December 31, 2007, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
|
June
30, 2008
|
|
|
December 31,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$ |
8,928 |
|
|
$ |
-- |
|
|
$ |
8,928 |
|
|
$ |
8,929 |
|
|
$ |
-- |
|
|
$ |
8,929 |
|
Goodwill
|
|
|
68 |
|
|
|
-- |
|
|
|
68 |
|
|
|
67 |
|
|
|
-- |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,996 |
|
|
$ |
-- |
|
|
$ |
8,996 |
|
|
$ |
8,996 |
|
|
$ |
-- |
|
|
$ |
8,996 |
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$ |
15 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
23 |
|
|
$ |
10 |
|
|
$ |
13 |
|
Franchise
amortization expense represents the amortization relating to franchises that did
not qualify for indefinite-life treatment under SFAS No. 142, including costs
associated with franchise renewals. During the six months ended June
30, 2008, the net carrying amount of indefinite-lived franchises was reduced by
$2 million related to cable asset sales completed in 2008, and $4 million as a
result of the finalization of purchase accounting related to cable asset
acquisitions. Additionally, during the six months ended June 30,
2008, approximately $5 million of franchises that were previously classified as
finite-lived were reclassified to indefinite-lived, based on management’s
assessment when these franchises migrated to state-wide
franchising. Franchise amortization expense for the three and six
months ended June 30, 2008 was approximately $0 and $1 million,
respectively. The Company expects that amortization expense on
franchise assets will be approximately $2 million annually for each of the next
five years. Actual amortization expense in future periods could
differ from these estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives and other relevant factors.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
4. Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses consist of the following as of June 30, 2008 and
December 31, 2007:
|
|
June
30,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$ |
88 |
|
|
$ |
127 |
|
Accrued
capital expenditures
|
|
|
54 |
|
|
|
95 |
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
412 |
|
|
|
418 |
|
Programming
costs
|
|
|
288 |
|
|
|
273 |
|
Compensation
|
|
|
107 |
|
|
|
116 |
|
Franchise-related
fees
|
|
|
55 |
|
|
|
66 |
|
Other
|
|
|
289 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,293 |
|
|
$ |
1,332 |
|
5. Long-Term
Debt
Long-term
debt consists of the following as of June 30, 2008 and December 31,
2007:
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Principal
Amount
|
|
|
Accreted
Value
|
|
|
Principal
Amount
|
|
|
Accreted
Value
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due November 16, 2009
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
49 |
|
|
$ |
49 |
|
6.50%
convertible senior notes due October 1, 2027
|
|
|
479 |
|
|
|
362 |
|
|
|
479 |
|
|
|
353 |
|
Charter
Communications Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior notes due April 1, 2009
|
|
|
76 |
|
|
|
76 |
|
|
|
88 |
|
|
|
88 |
|
10.750%
senior notes due October 1, 2009
|
|
|
54 |
|
|
|
54 |
|
|
|
63 |
|
|
|
63 |
|
9.625%
senior notes due November 15, 2009
|
|
|
35 |
|
|
|
35 |
|
|
|
37 |
|
|
|
37 |
|
10.250%
senior notes due January 15, 2010
|
|
|
9 |
|
|
|
9 |
|
|
|
18 |
|
|
|
18 |
|
11.750%
senior discount notes due January 15, 2010
|
|
|
13 |
|
|
|
13 |
|
|
|
16 |
|
|
|
16 |
|
11.125%
senior notes due January 15, 2011
|
|
|
47 |
|
|
|
47 |
|
|
|
47 |
|
|
|
47 |
|
13.500%
senior discount notes due January 15, 2011
|
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
9.920%
senior discount notes due April 1, 2011
|
|
|
51 |
|
|
|
51 |
|
|
|
51 |
|
|
|
51 |
|
10.000%
senior notes due May 15, 2011
|
|
|
69 |
|
|
|
69 |
|
|
|
69 |
|
|
|
69 |
|
11.750%
senior discount notes due May 15, 2011
|
|
|
54 |
|
|
|
54 |
|
|
|
54 |
|
|
|
54 |
|
12.125%
senior discount notes due January 15, 2012
|
|
|
75 |
|
|
|
75 |
|
|
|
75 |
|
|
|
75 |
|
CCH
I Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due January 15, 2014
|
|
|
151 |
|
|
|
151 |
|
|
|
151 |
|
|
|
151 |
|
13.500%
senior discount notes due January 15, 2014
|
|
|
581 |
|
|
|
581 |
|
|
|
581 |
|
|
|
581 |
|
9.920%
senior discount notes due April 1, 2014
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
10.000%
senior notes due May 15, 2014
|
|
|
299 |
|
|
|
299 |
|
|
|
299 |
|
|
|
299 |
|
11.750%
senior discount notes due May 15, 2014
|
|
|
815 |
|
|
|
815 |
|
|
|
815 |
|
|
|
815 |
|
12.125%
senior discount notes due January 15, 2015
|
|
|
217 |
|
|
|
217 |
|
|
|
217 |
|
|
|
217 |
|
CCH
I, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.000%
senior notes due October 1, 2015
|
|
|
3,987 |
|
|
|
4,077 |
|
|
|
3,987 |
|
|
|
4,083 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
CCH
II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due September 15, 2010
|
|
|
2,198 |
|
|
|
2,193 |
|
|
|
2,198 |
|
|
|
2,192 |
|
10.250% senior notes due October 1, 2013
|
|
|
250 |
|
|
|
260 |
|
|
|
250 |
|
|
|
260 |
|
CCO
Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
¾% senior notes due November 15, 2013
|
|
|
800 |
|
|
|
796 |
|
|
|
800 |
|
|
|
795 |
|
Credit
facility
|
|
|
350 |
|
|
|
350 |
|
|
|
350 |
|
|
|
350 |
|
Charter
Communications Operating, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.000%
senior second-lien notes due April 30, 2012
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
8
3/8% senior second-lien notes due April 30, 2014
|
|
|
770 |
|
|
|
770 |
|
|
|
770 |
|
|
|
770 |
|
10.875%
senior second-lien notes due September 15, 2014
|
|
|
546 |
|
|
|
526 |
|
|
|
-- |
|
|
|
-- |
|
Credit
facilities
|
|
|
6,966 |
|
|
|
6,966 |
|
|
|
6,844 |
|
|
|
6,844 |
|
|
|
$ |
20,526 |
|
|
$ |
20,480 |
|
|
$ |
19,939 |
|
|
$ |
19,908 |
|
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, the current accreted value for
legal purposes and notes indenture purposes (the amount that is currently
payable if the debt becomes immediately due) is equal to the principal amount of
notes.
In March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014, guaranteed by CCO Holdings and certain other
subsidiaries of Charter Operating, in a private transaction. Net
proceeds from the senior second-lien notes were used to reduce borrowings, but
not commitments, under the revolving portion of the Charter Operating credit
facilities.
The
Charter Operating 10.875% senior second-lien notes may be redeemed at the option
of Charter Operating on or after varying dates, in each case at a premium, plus
the Make-Whole Premium. The Make-Whole Premium is an amount equal to the
excess of (a) the present value of the remaining interest and principal payments
due on a 10.875% senior second-lien note due 2014 to its final maturity date,
computed using a discount rate equal to the Treasury Rate on such date plus
0.50%, over (b) the outstanding principal amount of such note. The Charter
Operating 10.875% senior second-lien notes may be redeemed at any time on or
after March 15, 2012 at specified prices. In the event of specified change
of control events, Charter Operating must offer to purchase the Charter
Operating 10.875% senior second-lien notes at a purchase price equal to 101% of
the total principal amount of the Charter Operating notes repurchased plus any
accrued and unpaid interest thereon.
In
addition, Charter Operating borrowed $500 million principal amount of
incremental term loans (the “Incremental Term Loans”) under the Charter
Operating credit facilities. The Incremental Term Loans have a final maturity of
March 6, 2014 and prior to this date will amortize in quarterly principal
installments totaling 1% annually beginning on June 30, 2008. The
Incremental Term Loans bear interest at LIBOR plus 5.0%, with a LIBOR floor of
3.5%, and are otherwise governed by and subject to the existing terms of the
Charter Operating credit facilities. Net proceeds from the Incremental
Term Loans were used for general corporate purposes.
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions,
from a small number of institutional holders, a total of approximately $35
million principal amount of various Charter Holdings notes due 2009 and 2010 and
approximately $46 million principal amount of Charter’s 5.875% convertible
senior notes due 2009, for approximately $77 million of cash. Charter
Holdco continues to hold the Charter Holdings notes. The purchased
5.875% convertible senior notes were cancelled resulting in approximately $3
million principal amount of such notes remaining outstanding. The
transactions resulted in a gain on extinguishment of debt of approximately $4
million for the three months ended June 30, 2008, included in other income
(expense), net on the Company’s condensed consolidated statements of
operations.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
6. Minority
Interest and Equity Interest of Charter Holdco
Charter
is a holding company whose primary assets are a controlling equity interest in
Charter Holdco, the indirect owner of the Company’s cable systems, and $482
million and $528 million at June 30, 2008 and December 31, 2007, respectively,
of mirror notes payable by Charter Holdco to Charter, and which have the same
principal amount and terms as those of Charter’s 5.875% and 6.50% convertible
senior notes. Minority interest on the Company’s condensed
consolidated balance sheets represents Mr. Paul G. Allen’s, Charter’s chairman
and controlling shareholder, 5.6% preferred membership interests in CC VIII, LLC
(“CC VIII”), an indirect subsidiary of Charter Holdco, of $203 million and $199
million as of June 30, 2008 and December 31, 2007,
respectively.
The
Company reports changes in the fair value of interest rate agreements designated
as hedging the variability of cash flows associated with floating-rate debt
obligations, that meet the effectiveness criteria of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, in accumulated other comprehensive
loss. Comprehensive loss was $154 million and $310 million for the
three months ended June 30, 2008 and 2007, respectively, and $616 million and
$697 million for the six months ended June 30, 2008 and 2007,
respectively.
8. Accounting
for Derivative Instruments and Hedging Activities
The
Company uses interest rate swap agreements to manage its interest costs and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, the Company
agrees to exchange, at specified intervals through 2013, the difference between
fixed and variable interest amounts calculated by reference to agreed-upon
notional principal amounts.
The
Company’s hedging policy does not permit it to hold or issue derivative
instruments for speculative trading purposes. The Company does,
however, have certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments into
fixed payments. For qualifying hedges, SFAS No. 133 allows derivative
gains and losses to offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For each of the three and six months ended June 30, 2008 and
2007, there was no cash flow hedge ineffectiveness on interest rate swap
agreements.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria specified by SFAS No. 133
are reported in accumulated other comprehensive loss. For the three
months ended June 30, 2008 and 2007, gains of $122 million and $50 million,
respectively, and for the six months ended June 30, 2008 and 2007, gains of $18
million and $48 million, respectively, related to derivative instruments
designated as cash flow hedges, were recorded in accumulated other comprehensive
loss. The amounts are subsequently reclassified as an increase or
decrease to change in value of derivatives in the same periods in which the
related interest on the floating-rate debt obligations affects earnings
(losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as a change in value of derivatives in the Company’s consolidated
statements of operations. For the three months ended June 30, 2008 and
2007, change in value of derivatives includes gains of $36 million and $6
million, respectively, and for the six months ended June 30, 2008 and 2007,
gains of $6 million and $5 million, respectively, resulting from interest rate
derivative instruments not designated as hedges.
As of
June 30, 2008
and December 31, 2007, the Company had $4.3 billion in notional amounts of
interest rate swaps outstanding. The notional amounts of interest
rate instruments do not represent amounts exchanged by the parties and,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
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.
Certain
provisions of the Company’s 5.875% and 6.50% convertible senior notes issued in
November 2004 and October 2007, respectively, were considered embedded
derivatives for accounting purposes and were required to be accounted for
separately from the convertible senior notes. In accordance with SFAS
No. 133, these derivatives are marked to market with gains or losses recorded as
the change in value of derivatives on the Company’s consolidated statement of
operations. For the three months ended June 30, 2008 and 2007, the
Company recognized $10 million and $9 million in losses related to these
derivatives, respectively, and for the six months ended June 30, 2008 and 2007,
the Company recognized losses of $17 million and $9 million,
respectively. At June 30, 2008 and December 31, 2007, $50 million and
$33 million, respectively, is recorded on the Company’s balance sheets related
to these derivatives.
The Company adopted SFAS
157, Fair
Value
Measurements, on its financial assets and liabilities effective January
1, 2008, and has an established process for determining fair
value. The Company has deferred adoption of SFAS 157 on its
nonfinancial assets and liabilities including fair value measurements under SFAS
142 and SFAS 144 of franchises, goodwill, property, plant, and equipment, and
other long-term assets until January 1, 2009 as permitted by FASB Staff Position
(“FSP”) 157-2. Fair value is based upon quoted market prices, where
available. If such valuation methods are not available, fair value is
based on internally or externally developed models using market-based or
independently-sourced market parameters, where available. Fair value
may be subsequently adjusted to ensure that those assets and liabilities are
recorded at fair value. The Company’s methodology may produce a fair
value that may not be indicative of net realizable value or reflective of future
fair values, but the Company believes its methods are appropriate and consistent
with other market peers. The use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different fair value estimate as of the Company’s reporting
date.
SFAS 157
establishes a three-level hierarchy for disclosure of fair value measurements,
based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date, as follows:
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Interest
rate derivatives are valued using a present value calculation based on an
implied forward LIBOR curve (adjusted for Charter Operating’s credit risk)
classified within level 2 of the valuation hierarchy. The fair values
of the embedded derivatives within Charter’s 5.875% and 6.50% convertible senior
notes issued in November 2004 and October 2007, respectively, are derived from
valuations using a simulation technique with market based inputs, including
Charter’s Class A common stock price, implied volatility of Charter’s Class A
common stock, Charter’s credit risk and costs to borrow Charter’s Class A common
stock. These valuations are classified within level 3 of the
valuation hierarchy.
As of
June 30, 2008, Charter had $13 million of available-for-sale investments in
commercial paper with initial maturities of between three and six
months. The investments were valued using quoted prices classified
within level 1 of the valuation hierarchy.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
Company’s financial assets and financial liabilities that are accounted for at
fair value on a recurring basis are presented in the table below:
|
|
Fair
Value As of June 30, 2008
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
investments
|
|
$ |
13 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
13 |
|
|
|
$ |
13 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
$ |
-- |
|
|
$ |
145 |
|
|
$ |
-- |
|
|
$ |
145 |
|
Embedded
derivatives
|
|
|
-- |
|
|
|
-- |
|
|
|
50 |
|
|
|
50 |
|
|
|
$ |
-- |
|
|
$ |
145 |
|
|
$ |
50 |
|
|
$ |
195 |
|
9. Other
Operating Expenses, Net
Other
operating expenses, net consist of the following for the three and six months
ended June 30, 2008 and 2007:
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on sale of assets, net
|
|
$ |
2 |
|
|
$ |
-- |
|
|
$ |
4 |
|
|
$ |
3 |
|
Special
charges, net
|
|
|
23 |
|
|
|
1 |
|
|
|
32 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25 |
|
|
$ |
1 |
|
|
$ |
36 |
|
|
$ |
5 |
|
Special
charges, net for the three and six months ended June 30, 2008 includes severance
charges and expected settlement costs associated with the Sjoblon litigation
(see Note 13), offset by favorable insurance settlements related to hurricane
Katrina claims. Special charges, net for the three and six months
ended June 30, 2007 primarily represent severance charges.
10. Other
Income (Expense), Net
Other
income (expense), net consists of the following for the three and six months
ended June 30, 2008 and 2007:
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months
Ended
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on extinguishment of debt
|
|
$ |
4 |
|
|
$ |
(34 |
) |
|
$ |
4 |
|
|
$ |
(35 |
) |
Minority
interest
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
Loss
on investments
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Other,
net
|
|
|
-- |
|
|
|
-- |
|
|
|
(1 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1 |
|
|
$ |
(36 |
) |
|
$ |
(2 |
) |
|
$ |
(39 |
) |
As part
of the refinancing in March 2007, the existing CCO Holdings $350 million
revolving/term credit facility was terminated, resulting in a loss on
extinguishment of debt for the three and six months ended June 30, 2007 of
approximately $12 million and $13 million, respectively. In April
2007, Charter Holdings completed a tender offer
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
resulting
in a loss on extinguishment of debt for each of the three and six months ended
June 30, 2007 of approximately $22 million.
11. Income
Taxes
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are
generally limited liability companies that are not subject to income
tax. However, certain of these limited liability companies are
subject to state income tax. In addition, the subsidiaries that are
corporations are subject to federal and state income tax. All of the
remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, Charter Investment, Inc.
(“CII”) and Vulcan Cable III Inc. (“Vulcan Cable”). Charter is
responsible for its share of taxable income or loss of Charter Holdco allocated
to Charter in accordance with the Charter Holdco limited liability company
agreement (the “LLC Agreement”) and partnership tax rules and
regulations. Charter also records financial statement deferred tax
assets and liabilities related to its investment in Charter Holdco.
For each
of the three month periods ended June 30, 2008 and 2007, the Company recorded
$59 million of income tax expense, and for the six months ended June 30, 2008
and 2007, the Company recorded $117 million and $128 million of income tax
expense, respectively. Income tax expense was
recognized through increases in deferred tax liabilities related to Charter’s
investment in Charter Holdco, and certain of Charter’s subsidiaries, in addition
to current federal and state income tax expense.
As of
June 30, 2008 and December 31, 2007, the Company had net deferred income tax
liabilities of approximately $780 million and $665 million,
respectively. Included in these deferred tax liabilities is
approximately $226 million of deferred tax liabilities at June 30, 2008 and
December 31, 2007, relating to certain indirect subsidiaries of Charter Holdco
that file separate income tax returns. The remainder of the Company’s deferred
tax liability arose from Charter’s investment in Charter Holdco, and was largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite-lived.
As of
June 30, 2008, the Company had deferred tax assets of $5.2 billion, which
included $1.9 billion of financial losses in excess of tax losses allocated to
Charter from Charter Holdco. The deferred tax assets also included
$3.3 billion of tax net operating loss carryforwards (generally expiring in
years 2008 through 2028) of Charter and its indirect
subsidiaries. Valuation allowances of $5.0 billion exist with respect
to these deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. Because of the uncertainties in projecting future taxable
income of Charter Holdco, valuation allowances have been established except for
deferred benefits available to offset certain deferred tax liabilities that will
reverse over time.
The
amount of any benefit from the Company’s tax net operating losses is dependent
on: (1) Charter and its subsidiaries’ ability to generate future taxable income
and (2) the unexpired amount of net operating loss carryforwards available to
offset amounts payable on such taxable income. Any future “ownership
changes” of Charter’s common stock, as defined in the applicable federal income
tax rules, would place significant limitations, on an annual basis, on the use
of such net operating losses to offset any future taxable income the Company may
generate. Such limitations, in conjunction with the net operating
loss expiration provisions, could effectively eliminate the Company’s ability to
use a substantial portion of its net operating losses to offset future taxable
income. Although the Company has adopted the Rights Plan as an
attempt to protect against an “ownership change,” certain transactions and the
timing of such transactions could cause such an ownership change including, but
not limited to, the following: 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 21.8 million were outstanding as of June 30, 2008); or
acquisitions or sales of shares by certain holders of Charter’s shares,
including persons who have held, currently hold, or accumulate in the future,
five percent or more of Charter’s outstanding stock (including upon an exchange
by Mr. Allen or his affiliates, directly or indirectly, of membership units of
Charter Holdco into CCI common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
deferred tax liability for Charter’s investment in Charter Holdco is largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite lived. If Mr. Allen were to exchange his
Charter Holdco units, as described above, Charter would likely record for
financial reporting purposes additional deferred tax liability related to its
increased interest in Charter Holdco and the related underlying indefinite lived
franchise assets.
Charter
and Charter Holdco received notification from the Internal Revenue Service
(“IRS”) examining agent that no changes to the 2004 and 2005 tax returns would
be required as a result of their examination. These findings are
subject to the IRS Area Director’s approval.
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. The Company does not believe it has taken any
significant positions that would not meet the “more likely than not” criteria
and require disclosure.
12. Related
Party Transactions
The
following sets forth certain transactions in which the Company and the
directors, executive officers, and affiliates of the Company are
involved. Unless otherwise disclosed, management believes each of the
transactions described below was on terms no less favorable to the Company than
could have been obtained from independent third parties.
Digeo,
Inc.
Mr. Paul
G. Allen, the controlling shareholder of Charter, through his 100% ownership of
Vulcan Ventures Incorporated (“Vulcan Ventures”), owns a majority interest in
Digeo, Inc. on a fully-converted fully-diluted basis. Ms. Jo Allen
Patton is a director of the Company and a director and Vice President of Vulcan
Ventures. Mr. Lance Conn is a director of the Company and is
Executive Vice President of Vulcan Ventures. Currently, Charter
Operating owns 1.8% of Digeo, Inc.’s common stock.
In May
2008, Charter Operating entered into an agreement with Digeo Interactive, LLC, a
subsidiary of Digeo, Inc., for the minimum purchase of high-definition DVR units
for approximately $21 million. This minimum purchase commitment is
subject to reduction as a result of certain specified events such as the failure
to deliver units timely and catastrophic failure. The software
for these units is being supplied under a software license agreement with Digeo
Interactive, LLC; the cost of which is expected to be approximately $2 million
for the initial licenses and on-going maintenance fees of approximately
$0.3 million annually, subject to reduction to coincide with any reduction in
the minimum purchase commitment. For the six months ended June 30,
2008, Charter has not purchased any units from Digeo Interactive, LLC under
these agreements.
13. 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
no
assurance can be given that any adverse outcome would not be material to the
Company’s consolidated financial condition, results of operations or
liquidity.
In the
ordinary course of business, the Company may face employment law claims,
including claims under the Fair Labor Standards Act and wage and hour laws of
the states in which we operate. On August 15, 2007, a complaint was
filed, on behalf of both nationwide and state of Wisconsin classes of certain
categories of current and former Charter technicians, against Charter in the
United States District Court for the Western District of Wisconsin (Sjoblom v.
Charter Communications, LLC and Charter Communications, Inc.), alleging that
Charter violated the Fair Labor Standards Act and Wisconsin wage and hour laws
by failing to pay technicians for certain hours claimed to have been
worked. While the Company believes it has substantial factual and legal
defenses to the claims at issue, in order to avoid the cost and distraction of
continuing to litigate the case, the Company is in active negotiations with the
plaintiffs to reach a settlement, which would be subject to the approval of the
court. The Company has accrued expected settlement costs associated with
the Sjoblom case (see Note 9). If the Company were subjected, in the
normal course of business, to the assertion of other similar claims in other
jurisdictions, the Company could not predict the ultimate outcome of any such
proceedings or claims.
Charter
is a party to other lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal matters
pending against the Company or its subsidiaries cannot be predicted.
Although such lawsuits and claims, including the employment law claims discussed
above, are not expected individually to be material to the Company’s
consolidated financial condition, results of operations or liquidity, such
lawsuits and claims could be, in the aggregate, material to the Company’s
consolidated financial condition, results of operations or
liquidity.
14. Stock
Compensation Plans
The
Company has stock compensation plans (the “Plans”) which provide for the grant
of non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or shares of restricted stock (shares of restricted stock not to exceed 20.0
million shares of Charter Class A common stock), as each term is defined in the
Plans. Employees, officers, consultants and directors of the Company
and its subsidiaries and affiliates are eligible to receive grants under the
Plans. Options granted generally vest over four years from the grant
date, with 25% generally vesting on the first anniversary of the grant date and
ratably thereafter. Generally, options expire 10 years from the
grant date. Restricted stock vests annually over a one to three-year
period beginning from the date of grant. The 2001 Stock Incentive
Plan allows for the issuance of up to a total of 90.0 million shares of Charter
Class A common stock (or units convertible into Charter Class A common
stock). In March 2008, the Company adopted an incentive program to
allow for performance cash. Under the incentive program, performance
units under the 2001 Stock Incentive Plan and performance cash are deposited
into a performance bank of which one-third of the balance is paid out each year,
subject to meeting performance criteria. During the three and six
months ended June 30, 2008, Charter granted 0.7 million and 10.4 million shares
of restricted stock, respectively. During the six months ended June
30, 2008, Charter granted 11.5 million performance units and $8 million of
performance cash under Charter’s 2008 incentive
program.
The
Company recorded $8 million and $5 million of stock compensation expense for the
three months ended June 30, 2008 and 2007, respectively, and $16 million and $10
million for the six months ended June 30, 2008 and 2007, respectively, which is
included in selling, general, and administrative expense.
15. Recently
Issued Accounting Standards
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133, which requires companies to disclose their objectives and strategies
for using derivative instruments, whether or not designated as hedging
instruments under SFAS 133. SFAS 161 is effective for interim periods
and fiscal years beginning after November 15, 2008. The Company will
adopt SFAS 161 effective January 1, 2009. The Company is currently
assessing the impact of SFAS 161 on its financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. The Company will adopt FSP
FAS 142-3 effective January 1, 2009. The Company is currently
assessing the impact of FSP FAS 142-3 on its financial
statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company will adopt FSP
APB 14-1 effective January 1, 2009. The Company is currently
assessing the impact of FSP APB 14-1 on its financial statements.
The
Company does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its
accompanying financial statements.
|
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
June 30, 2008 are the 55% 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 are a
broadband communications company operating in the United States with
approximately 5.6 million customers at June 30, 2008. Through our
hybrid fiber and coaxial cable network, we offer our customers traditional cable
video programming (basic and digital, which we refer to as “video” service),
high-speed Internet service, and telephone services, as well as, advanced
broadband services (such as OnDemand high definition television service, and
DVR).
The
following table summarizes our customer statistics for basic video, digital
video, residential high-speed Internet, and telephone as of June 30, 2008 and
2007:
|
|
Approximate
as of
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
(a)
|
|
|
2007
(a)
|
|
|
|
|
|
|
|
|
Video
Cable Services:
|
|
|
|
|
|
|
Basic
Video:
|
|
|
|
|
|
|
Residential
(non-bulk) basic video customers (b)
|
|
|
4,897,100 |
|
|
|
5,107,800 |
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
264,900 |
|
|
|
269,000 |
|
Total
basic video customers (b)(c)
|
|
|
5,162,000 |
|
|
|
5,376,800 |
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
3,056,900 |
|
|
|
2,866,000 |
|
|
|
|
|
|
|
|
|
|
Non-Video
Cable Services:
|
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,787,300 |
|
|
|
2,583,200 |
|
Telephone
customers (f)
|
|
|
1,175,500 |
|
|
|
700,300 |
|
After
giving effect to sales and acquisitions of cable systems in 2007 and 2008, basic
video customers, digital video customers, high-speed Internet customers and
telephone customers would have been 5,323,800, 2,843,800, 2,577,900, and
701,300, respectively, as of June 30, 2007.
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At June 30, 2008 and 2007,
"customers" include approximately 34,200 and 31,300 persons whose accounts
were over 60 days past due in payment, approximately 5,300 and 3,800
persons whose accounts were over 90 days past due in payment, and
approximately 2,600 and 1,500 of which were over 120 days past due in
payment, respectively.
|
(b)
|
"Basic
video customers" include all residential customers who receive video cable
services.
|
(c)
|
Included
within "basic video customers" are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit ("EBU")
basis. EBU is calculated for a system by dividing the bulk
price charged to accounts in an area by the most prevalent price charged
to non-bulk residential customers in that market for the comparable tier
of service. The EBU method of estimating basic video customers
is consistent with the methodology used in determining costs paid to
programmers and has been used
consistently.
|
(d)
|
"Digital
video customers" include all basic video customers that have one or more
digital set-top boxes or cable cards
deployed.
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers who
subscribe to our high-speed Internet
service.
|
(f)
“Telephone customers" include all customers receiving telephone
service.
Overview
For the
three months ended June 30, 2008 and 2007, our income from operations was $230
million and $200 million, respectively, and for the six months ended June 30,
2008 and 2007, our income from operations was $435 million and $356 million,
respectively. We had operating margins of 14% and 13% for the three
months ended June 30, 2008 and 2007, respectively, and 14% and 12% for the six
months ended June 30, 2008 and 2007, respectively. The increase in
income from operations and operating margins for the three and six months ended
June 30, 2008 compared to the three and six months ended June 30, 2007 was
principally due to an increase in revenue over cash expenses as a result of
increased customers for high-speed Internet, digital video, and telephone, as
well as overall rate increases.
We have a
history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally
attributable to insufficient revenue to cover the combination of operating
expenses and interest expenses we incur because of our high amounts of debt, and
depreciation expenses resulting from the capital investments we have made and
continue to make in our cable properties. We expect that these
expenses will remain significant.
Critical
Accounting Policies and Estimates
For a
discussion of our critical accounting policies and the means by which we develop
estimates therefore, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in our 2007 Annual Report on Form
10-K.
RESULTS
OF OPERATIONS
The
following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted for the
periods presented (dollars in millions, except per share data):
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
1,623 |
|
|
|
100 |
% |
|
$ |
1,499 |
|
|
|
100 |
% |
|
$ |
3,187 |
|
|
|
100 |
% |
|
$ |
2,924 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and
amortization)
|
|
|
698 |
|
|
|
43 |
% |
|
|
647 |
|
|
|
43 |
% |
|
|
1,380 |
|
|
|
43 |
% |
|
|
1,278 |
|
|
|
44 |
% |
Selling,
general and administrative
|
|
|
342 |
|
|
|
21 |
% |
|
|
317 |
|
|
|
21 |
% |
|
|
687 |
|
|
|
22 |
% |
|
|
620 |
|
|
|
21 |
% |
Depreciation
and amortization
|
|
|
328 |
|
|
|
20 |
% |
|
|
334 |
|
|
|
23 |
% |
|
|
649 |
|
|
|
20 |
% |
|
|
665 |
|
|
|
23 |
% |
Other
operating expenses, net
|
|
|
25 |
|
|
|
2 |
% |
|
|
1 |
|
|
|
-- |
|
|
|
36 |
|
|
|
1 |
% |
|
|
5 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,393 |
|
|
|
86 |
% |
|
|
1,299 |
|
|
|
87 |
% |
|
|
2,752 |
|
|
|
86 |
% |
|
|
2,568 |
|
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
230 |
|
|
|
14 |
% |
|
|
200 |
|
|
|
13 |
% |
|
|
435 |
|
|
|
14 |
% |
|
|
356 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(474 |
) |
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
(939 |
) |
|
|
|
|
|
|
(926 |
) |
|
|
|
|
Change
in value of derivatives
|
|
|
26 |
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
Other
income (expense), net
|
|
|
1 |
|
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(447 |
) |
|
|
|
|
|
|
(501 |
) |
|
|
|
|
|
|
(952 |
) |
|
|
|
|
|
|
(969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(217 |
) |
|
|
|
|
|
|
(301 |
) |
|
|
|
|
|
|
(517 |
) |
|
|
|
|
|
|
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(59 |
) |
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(276 |
) |
|
|
|
|
|
$ |
(360 |
) |
|
|
|
|
|
$ |
(634 |
) |
|
|
|
|
|
$ |
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE
|
|
$ |
(.74 |
) |
|
|
|
|
|
$ |
(0.98 |
) |
|
|
|
|
|
$ |
(1.71 |
) |
|
|
|
|
|
$ |
(2.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding,
basic and diluted
|
|
|
371,652,070 |
|
|
|
|
|
|
|
367,582,677 |
|
|
|
|
|
|
|
370,868,849 |
|
|
|
|
|
|
|
366,855,427 |
|
|
|
|
|
Revenues. Average
monthly revenue per basic video customer increased to $104 for the three months
ended June 30, 2008 from $93 for the three months ended June 30, 2007 and
increased to $102 for the six months ended June 30, 2008 from $88 for the six
months ended June 30, 2007. Average monthly revenue per basic video
customer represents total revenue, divided by the number of respective months,
divided by the average number of basic video customers during the respective
period. Revenue growth primarily reflects increases in the number of
telephone, high-speed Internet, and digital video customers, price increases,
and incremental video revenues from OnDemand, DVR, and high-definition
television services, offset by a decrease in basic video
customers. Cable system sales, net of acquisitions, in 2007 reduced
the increase in revenues for the three and six months ended June 30, 2008 as
compared to the three and six months ended June 30, 2007 by approximately $9
million and $18 million, respectively.
Revenues
by service offering were as follows (dollars in millions):
|
|
Three
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
over 2007
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
874 |
|
|
|
54 |
% |
|
$ |
859 |
|
|
|
57 |
% |
|
$ |
15 |
|
|
|
2 |
% |
High-speed
Internet
|
|
|
339 |
|
|
|
21 |
% |
|
|
308 |
|
|
|
21 |
% |
|
|
31 |
|
|
|
10 |
% |
Telephone
|
|
|
134 |
|
|
|
8 |
% |
|
|
80 |
|
|
|
5 |
% |
|
|
54 |
|
|
|
68 |
% |
Commercial
|
|
|
96 |
|
|
|
6 |
% |
|
|
83 |
|
|
|
6 |
% |
|
|
13 |
|
|
|
16 |
% |
Advertising
sales
|
|
|
75 |
|
|
|
5 |
% |
|
|
76 |
|
|
|
5 |
% |
|
|
(1 |
) |
|
|
(1 |
%) |
Other
|
|
|
105 |
|
|
|
6 |
% |
|
|
93 |
|
|
|
6 |
% |
|
|
12 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,623 |
|
|
|
100 |
% |
|
$ |
1,499 |
|
|
|
100 |
% |
|
$ |
124 |
|
|
|
8 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
over 2007
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
1,732 |
|
|
|
54 |
% |
|
$ |
1,697 |
|
|
|
58 |
% |
|
$ |
35 |
|
|
|
2 |
% |
High-speed
Internet
|
|
|
667 |
|
|
|
21 |
% |
|
|
602 |
|
|
|
21 |
% |
|
|
65 |
|
|
|
11 |
% |
Telephone
|
|
|
255 |
|
|
|
8 |
% |
|
|
143 |
|
|
|
5 |
% |
|
|
112 |
|
|
|
78 |
% |
Commercial
|
|
|
189 |
|
|
|
6 |
% |
|
|
164 |
|
|
|
6 |
% |
|
|
25 |
|
|
|
15 |
% |
Advertising
sales
|
|
|
143 |
|
|
|
5 |
% |
|
|
139 |
|
|
|
4 |
% |
|
|
4 |
|
|
|
3 |
% |
Other
|
|
|
201 |
|
|
|
6 |
% |
|
|
179 |
|
|
|
6 |
% |
|
|
22 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,187 |
|
|
|
100 |
% |
|
$ |
2,924 |
|
|
|
100 |
% |
|
$ |
263 |
|
|
|
9 |
% |
Video
revenues consist primarily of revenues from basic and digital video services
provided to our non-commercial customers. Basic video customers
decreased by 214,800 customers from June 30, 2007, 53,000 of which was related
to asset sales, net of acquisitions, compared to June 30,
2008. Digital video customers increased by 190,900, reduced by the
sale, net of acquisitions, of 22,200 customers. The increases in
video revenues are attributable to the following (dollars in
millions):
|
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Incremental
video services and rate adjustments
|
|
$ |
22 |
|
|
$ |
51 |
|
Increase
in digital video customers
|
|
|
18 |
|
|
|
33 |
|
Decrease
in basic video customers
|
|
|
(19 |
) |
|
|
(36 |
) |
System
sales, net of acquisitions
|
|
|
(6 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
15 |
|
|
$ |
35 |
|
High-speed
Internet customers grew by 204,100 customers, reduced by system sales, net of
acquisitions, of 5,300 customers, from June 30, 2007 to June 30,
2008. The increase in high-speed Internet revenues from our
residential customers is attributable to the following (dollars in
millions):
|
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Increase
in high-speed Internet customers
|
|
$ |
28 |
|
|
$ |
61 |
|
Rate
adjustments and service upgrades
|
|
|
4 |
|
|
|
6 |
|
System
sales, net of acquisitions
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
31 |
|
|
$ |
65 |
|
Revenues
from telephone services increased primarily as a result of an increase of
475,200 telephone customers (1,000 of which was related to system acquisitions,
net of sales) from June 30, 2007 to June 30, 2008.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of
increases in commercial high-speed Internet and telephone customers, offset by
decreases of $1 million related to asset sales, net of acquisitions, for the
three and six months ended June 30, 2008.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers, and other vendors. Advertising sales revenues
for the six months ended June 30, 2008 increased primarily as a result of an
increase in political advertising sales offset by decreased revenues from the
automotive and furniture sectors and decreases of $1 million and $2 million
related to asset sales, net of acquisitions, for the three and six months ended
June 30, 2008, respectively. For the three months ended June 30, 2008
and 2007, we received $3 million and $2 million, respectively, and for the six
months ended June 30, 2008 and 2007, we received $7 million and $6 million,
respectively, in advertising sales revenues from vendors.
Other
revenues consist of franchise fees, regulatory fees, customer installations,
home shopping, late payment fees, wire maintenance fees and other miscellaneous
revenues. For the three months ended June 30, 2008 and 2007,
franchise fees represented approximately 48% and 49%, respectively, of total
other revenues. For the six months ended June 30, 2008 and 2007,
franchise fees represented approximately 47% and 50%, respectively, of total
other revenues. The increase in other revenues was primarily the
result of increases in franchise and other regulatory fees, wire maintenance
fees, and late payment fees.
Operating
expenses. The increase in
operating expenses is attributable to the following (dollars in
millions):
|
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
$ |
24 |
|
|
$ |
44 |
|
Labor
costs
|
|
|
10 |
|
|
|
30 |
|
Regulatory
taxes
|
|
|
9 |
|
|
|
14 |
|
Franchise
costs
|
|
|
3 |
|
|
|
5 |
|
Maintenance
costs
|
|
|
5 |
|
|
|
9 |
|
Other,
net
|
|
|
5 |
|
|
|
10 |
|
System
sales, net of acquisitions
|
|
|
(5 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
51 |
|
|
$ |
102 |
|
Programming
costs were approximately $410 million and $388 million, representing 59% and 60%
of total operating expenses for the three months ended June 30, 2008 and 2007,
respectively, and were approximately $819 million and $781 million, representing
59% and 61% of total operating expenses for the six months ended June 30,
2008 and
2007, respectively. Programming costs consist primarily of costs paid
to programmers for basic, premium, digital, OnDemand, and pay-per-view
programming. The increase in programming costs is primarily a result
of annual contractual rate adjustments, offset in part by system sales.
Programming
costs were impacted by approximately $6 million and $2 million of favorable
programming contract settlements in the three and six months ended June 30,
2007, respectively, that did not recur in 2008. Programming costs
were also offset by the amortization of payments received from programmers in
support of launches of new channels of $7 million and $5 million for the three
months ended June 30, 2008 and 2007, respectively, and $12 million and $10
million for the six months ended June 30, 2008 and 2007,
respectively. We expect programming expenses to continue to increase
due to a variety of factors, including annual increases imposed by programmers,
amounts paid for retransmission consent, and additional programming, including
high-definition, OnDemand, and pay-per-view programming, being provided to our
customers.
Labor
costs increased primarily due to an increased headcount to support improved
service levels and telephone deployment.
Selling, general
and administrative expenses. The increase in
selling, general and administrative expenses is attributable to the following
(dollars in millions):
|
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Employee
costs
|
|
$ |
5 |
|
|
$ |
21 |
|
Marketing
costs
|
|
|
8 |
|
|
|
15 |
|
Bad
debt and collection costs
|
|
|
3 |
|
|
|
11 |
|
Billing
costs
|
|
|
5 |
|
|
|
8 |
|
Stock
compensation costs
|
|
|
3 |
|
|
|
6 |
|
Other,
net
|
|
|
3 |
|
|
|
9 |
|
System
sales, net of acquisitions
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
25 |
|
|
$ |
67 |
|
Depreciation and
amortization. Depreciation and
amortization expense decreased by $6 million and $16 million for the three and
six months ended June 30, 2008 compared to June 30, 2007, respectively, and was
primarily the result of certain assets becoming fully depreciated and the impact
of changes in the useful lives of certain assets during 2007, offset by
depreciation on capital expenditures.
Other operating
expenses, net. For the three and six months ended June 30,
2008 compared to June 30, 2007, the increase in other operating expenses, net
was primarily attributable to a $22 million and $30 million increase in special
charges, respectively. For more information, see Note 9 to the
accompanying condensed consolidated financial statements contained in “Item 1.
Financial Statements.”
Interest expense,
net. For
the three months ended June 30, 2008 compared to June 30, 2007, net interest
expense increased by $12 million, which was a result of average debt outstanding
increasing from $19.4 billion for the second quarter of 2007 to $20.5 billion
for the second quarter of 2008, offset by a decrease in our average borrowing
rate from 9.2% in the second quarter of 2007 to 8.9% in the second quarter of
2008. For the six months ended June 30, 2008 compared to June 30,
2007, net interest expense increased by $13 million, which was a result of
average debt outstanding increasing from $19.4 billion for the six months ended
June 30, 2007 to $20.4 billion for the six months ended June 30, 2008, offset by
a decrease in our average borrowing rate from 9.3% for the six months ended June
30, 2007 to 8.8% for the six months ended June 30, 2008.
Other
income (expense), net (dollars in millions).
|
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
|
|
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
|
|
|
|
|
|
|
|
|
Decrease in
loss on extinguishment of debt
|
|
$ |
38 |
|
|
$ |
39 |
|
Increase
in minority interest
|
|
|
(1 |
) |
|
|
(1 |
) |
Other,
net
|
|
|
-- |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
37 |
|
|
$ |
37 |
|
For more
information, see Note 10 to the accompanying condensed consolidated financial
statements contained in “Item 1. Financial Statements.”
Change in value
of derivatives. Interest rate swaps are
held to manage our interest costs and reduce our exposure to increases in
floating interest rates. Additionally, certain provisions of our
5.875% and 6.50% convertible senior notes issued in November 2004 and October
2007, respectively, were considered embedded derivatives for accounting purposes
and were required to be accounted for separately from the convertible senior
notes and marked to fair value at the end of each reporting
period. Change in value of derivatives consists of the following for
the three and six months ended June 30, 2008 and 2007 (dollars in
millions):
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
36 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
5 |
|
Embedded
derivatives from convertible senior notes
|
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(17 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|