Charter Restatements Add to Woes

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Charter Communications Inc. said last week it will restate financial statements for the past two years because of accounting oversights, yet another blow to the MSO's crumbling credibility.

Charter — embroiled in federal investigations into its accounting practices and losing subscribers by the thousands, on Nov. 19 said it would revise its financial statements for the years 2000 and 2001.

The changes will reflect an additional $1.4 billion in franchise costs and $1.2 billion of deferred income tax liability that should have been recorded regarding the acquisition of 18 cable systems between 1999 and 2000.

The result will be a widening in Charter's net loss for the three-months ended Sept. 30 by $8.9 million, or three cents per share and an increase in the net loss during the nine-month period ended Sept. 30 by $25 million, or 9 cents per share.

Charter said that none of the adjustments would affect impact its cash position, nor would they affect previously reported revenue, operating cash flow or past or future cash tax obligations.

The St. Louis-based MSO also said the adjustments require that it restate the periods before 2002 to include $178.8 million in amortization costs as if the additional franchise costs had been recorded at the time of the acquisitions.

Charter will record the amount not covered by its 2000 and 2001 restatements as a $105.1 million minority interest and as $68.9 million as additional paid in capital.

Charter had released third-quarter results on Nov. 5, but the company did not include a balance sheet, stating that it needed time to "complete financial statements to reflect deferred income tax liabilities arising out of certain prior acquisitions."

Charter's stock actually climbed by 6 cents per share in the two days after the announcement, closing at $1.25 on Nov. 21.

But in an industry based on savvy accounting — particularly tax accounting — the Charter revelations came as a surprise to several MSO financial executives. After all, Charter was formed by two accountants and a lawyer in 1993: former CEO Jerry Kent, former vice chairman Howard Wood and former vice chairman Barry Babcock (the lawyer). All three have since left the company, with Kent and Wood forming their own investment company, Cequel III, in January.

One MSO executive who asked not to be named said the latest revelations were embarrassing, but the heavy subscriber losses are more important.

"For so many years we would look in wonderment at the subscriber numbers they were reporting and be unable to comprehend how they were getting 2 percent growth," the executive said. "Maybe that should have set off a lot of light bulbs.

"The restatement is not all that material," the executive added. "It's damaging, and I don't know how quickly you recover your reputation after that, but the subscriber erosion is the real problem."

Another industry financial executive also saw the restatements as minor, particularly when what could have happened is taken into account.

"I think they all should be relived that it wasn't worse," the financial executive said. "It has nothing to do with cash flow, so no one should care. They just forgot to write off some franchise charges. That reflects on the auditors."

But other industry observers said that the restatements only compound the uncertainty that has surrounded Charter for months.

"I would have told you before that on an aggressive accounting basis, they [Charter] were a seven on a scale of 10," said one industry financial executive who asked not to be named. "This doesn't mean that cash is going out the door, but I don't think it helps their credibility problem."

Charter lost 270,000 customers this year and is the subject of a federal grand jury investigation into its accounting practices. Last Tuesday, Charter said that the Securities and Exchange Commission is conducting an informal inquiry into its accounting methods.

Top that with the heaviest debt load in the cable industry — about $17 billion — and Charter is in serious straits.

Those problems have played havoc with Charter's stock, down more than 90 percent since the beginning of the year. But perhaps no one has felt the pain as much as Charter chairman and largest shareholder, Microsoft Corp. co-founder Paul Allen.

Allen, who has $7 billion of his own money invested in Charter, has seen his investment dwindle in value to about $500 million. And Charter's market capitalization, once as high as $7.8 billion shortly after its 1999 initial public offering, is now a paltry $368.3 million.

UBS Warburg cable debt and equity analyst Aryeh Bourkoff initiated coverage on Charter Nov. 20 with a "reduce" rating, saying the MSO's slowed growth puts it at "significant risk" of not supporting its massive debt.

"We believe the equity holds no value under most circumstances, unless the company pursues a proactive restructuring of its debt, most likely utilizing its equity as currency," Bourkoff wrote in his report.

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