================================================================================SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549---------FORM 10-Q--------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________TO _________ COMMISSION FILE NUMBER: 333-77499 333-77499-01 CHARTER COMMUNICATIONS HOLDINGS,
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto
Commission file number: 333-77499
333-77499-01Charter Communications Holdings, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION * ---------------------------------------------------------- (Exact
Charter Communications Holdings Capital Corporation*(Exact name of registrants as specified in their charters)DELAWARE 43-1843179 DELAWARE 43-1843177 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization)
Delaware 43-1843179 Delaware 43-1843177 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 12405
POWERSCOURT DRIVE ST. LOUIS, MISSOURIPowerscourt Drive
St. Louis, Missouri 63131---------------------------- (Address(Address of principal executive offices including zip code)(314) 965-0555
-------------- (Registrants'(Registrants’ telephone number, including area code)Indicate by check mark whether the registrants (1) have 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 registrants were required to file reports), and (2) have been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Number of shares of common stock of Charter Communications Holdings Capital Corporation outstanding as of
October 31, 2003:May 12, 2004: 100* Charter Communications Holdings Capital Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) to Form 10-Q and is therefore filing with the reduced disclosure format.
================================================================================CHARTER COMMUNICATIONS HOLDINGS,Charter Communications Holdings, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION QUARTERLY REPORT ON FORM
Charter Communications Holdings Capital Corporation
Quarterly Report on Form 10-QFOR THE PERIOD ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTSfor the Period ended March 31, 2004Table of Contents
This
Quarterly Reportquarterly report on Form 10-Q is for the threeand ninemonths endedSeptember 30, 2003. This Quarterly Report modifiesMarch 31, 2004. The Securities andsupersedes documents filed priorExchange Commission (“SEC”) allows us tothis Quarterly Report. The SEC allows Charter Holdings to "incorporate“incorporate byreference"reference” information thatCharter Holdings fileswe file withit,the SEC, which means thatCharter Holdingswe can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of thisQuarterly Report.quarterly report. In addition, information thatCharter Holdings fileswe file with the SEC in the future will automatically update and supersede information contained in thisQuarterly Report.quarterly report. In thisQuarterly Report, "Charter Holdings " refersquarterly report, “we,” “us” and “our” refer to Charter Communications Holdings, LLC and itssubsidiaries, unless the context requires otherwise.subsidiaries. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
Quarterly Reportquarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the"Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the"Exchange Act"“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“Results ofOperations"Operations” and"Liquidity“Liquidity and CapitalResources"Resources” sections under Part I, Item2 ("Management's2. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations")Operations” in thisQuarterly Report.quarterly report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under"Certain“Certain Trends andUncertainties"Uncertainties” under Part I, Item2 ("Management's2. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations")Operations” in thisQuarterly Report.quarterly report. Many of the forward-looking statements contained in thisQuarterly Reportquarterly report may be identified by the use of forward-looking words such as"believe," "expect," "anticipate," "should," "planned," "will," "may," "intend," "estimated"“believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” “intend,” “estimated” and"potential,"“potential,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in thisQuarterly Reportquarterly report are set forth in thisQuarterly Reportquarterly report and in other reports or documents that we file from time to time with theUnited States Securities and Exchange Commission, or the "SEC",SEC, and include, but are not limited to:o our ability to sustain and grow revenues and cash flows from operating activities by offering video and data services and to maintain a stable customer base, particularly in the face of increasingly aggressive competition from other service providers; o our and our subsidiaries' ability to comply with all covenants in our indentures and their credit facilities and indentures, any violation of which would result in a violation of the applicable facility or indenture and could trigger a default of other obligations under cross default provisions; o our, our parent companies' and our subsidiaries' ability to refinance remaining debt as it becomes due; o availability of funds to meet interest payment obligations under our and our parent and subsidiary companies' debt and to fund our operations and necessary capital expenditures, either through cash flows from operating activities, further borrowings or other sources; o any adverse consequences arising out of our and our subsidiaries' prior restatement of the financial statements described herein; o the results of the pending grand jury investigation by the United States Attorney's Office for the Eastern District of Missouri, the pending SEC Division of Enforcement investigation and the putative class action and derivative shareholders litigation against Charter Communications, Inc.; o our ability to obtain programming at reasonable prices or pass cost increases on to our customers; o general business conditions, economic uncertainty or slowdown; and o the effects of governmental regulation, including but not limited to local franchise taxing authorities, on our business.
• our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed data and other services and to maintain a stable customer base, particularly in the face of increasingly aggressive competition from other service providers; • our and our parent company’s ability to pay or refinance debt as it becomes due; • the availability of funds to meet interest payment obligations under our and our parent companies’ debt and to fund our operations and necessary capital expenditures, either through cash flows from operating activities, further borrowings or other sources; • any adverse consequences arising out of our and our parent company’s restatement of our 2000, 2001 and 2002 financial statements; • the results of the pending grand jury investigation by the United States Attorney’s Office for the Eastern District of Missouri, the pending SEC Division of Enforcement investigation, the putative class action, the unconsolidated state action, and derivative shareholders litigation against Charter Communications, Inc.; • our ability to comply with all covenants in our indentures and credit facilities, any violation of which would result in a violation of the applicable facility or indenture and could trigger a default of other obligations under cross-default provisions; • our ability to obtain programming at reasonable prices or to pass cost increases on to our customers; • general business conditions, economic uncertainty or slowdown; and • the effects of governmental regulation, including but not limited to local franchise taxing authorities, on our business. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We
undertakeare under no duty or obligation to update any of the forward-looking statements after the date of thisQuarterly Report.quarterly report.3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.--------------------------------------------------------------- INDEPENDENT ACCOUNTANTS' REVIEW REPORTIndependent Accountants’ Review Report
The Board of Directors and Member
Charter Communications Holdings, LLC:We have reviewed the accompanying interim condensed consolidated balance sheet of Charter Communications Holdings, LLC and subsidiaries (the “Company”) as of
September 30, 2003,March 31, 2004, and the related condensed consolidated statements of operationsfor the three-monthandnine-month periods ended September 30, 2003 and 2002, and the related condensed consolidated statements ofcash flows for thenine-monththree-month periods endedSeptember 30, 2003March 31, 2004 and2002.2003. These interim condensed consolidated financial statements are the responsibility of theCompany'sCompany’s management.We conducted our
reviewsreview in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.Based on our
review,reviews, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.As discussedWe have previously audited, in
Note 4accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2003, and the related consolidated statements of operations, changes in member’s equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to theinterim condensedconsolidatedfinancial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."balance sheet from which it has been derived.As discussed in Note 14 to the interim condensed consolidated financial statements, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No.
148, "Accounting123,Accounting for Stock-Based Compensation,- -as amended by Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation – Transition andDisclosure." /s/Disclosure – an amendment of FASB Statement No. 123./s/ KPMG LLP
St. Louis, Missouri
November
May 7,200320044
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS(DOLLARS
(DOLLARS IN MILLIONS)
SEPTEMBER 30, DECEMBER 31, 2003 2002 ---------------- ---------------- (UNAUDITED) ASSETSCURRENT ASSETS: Cash and cash equivalents $ 52 $ 310 Accounts receivable, less allowance for doubtful accounts of $17 and $19, respectively 187 253 Receivables from related party 85 50 Prepaid expenses and other current assets 28 40 -------- -------- Total current assets 352 653 -------- -------- INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment, net of accumulated depreciation of $3,515 and $2,550, respectively 6,862 7,460 Franchises, net of accumulated amortization of $3,458 and $3,452, respectively 13,721 13,727 -------- -------- Total investment in cable properties, net 20,583 21,187 -------- -------- OTHER NONCURRENT ASSETS 307 316 -------- -------- Total assets $ 21,242 $ 22,156 ======== ======== LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,128 $ 1,250 -------- -------- Total current liabilities 1,128 1,250 -------- -------- LONG-TERM DEBT 17,724 17,288 -------- -------- LOANS PAYABLE - RELATED PARTIES 37 73 -------- -------- DEFERRED MANAGEMENT FEES - RELATED PARTY 14 14 -------- -------- OTHER LONG-TERM LIABILITIES 838 932 -------- -------- MINORITY INTEREST 704 693 -------- -------- MEMBER'S EQUITY: Member's equity 872 2,011 Accumulated other comprehensive loss (75) (105) -------- -------- Total member's equity 797 1,906 -------- -------- Total liabilities and member's equity $ 21,242 $ 22,156 ======== ========See
March 31, December 31, 2004 2003 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 72 $ 85 Accounts receivable, less allowance for doubtful accounts of $15 and $17, respectively 164 189 Receivables from related party 95 56 Prepaid expenses and other current assets 26 21
Total current assets 357 351
INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment, net of accumulated depreciation of $4,087 and $3,834, respectively 6,513 6,808 Franchises, net of accumulated amortization of $3,298 and $3,445, respectively 13,196 13,680
Total investment in cable properties, net 19,709 20,488
OTHER NONCURRENT ASSETS 301 309
Total assets $ 20,367 $ 21,148
CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,147 $ 1,179
Total current liabilities 1,147 1,179
LONG-TERM DEBT 17,344 17,873
LOANS PAYABLE – RELATED PARTY 37 37
DEFERRED MANAGEMENT FEES – RELATED PARTY 14 14
OTHER LONG-TERM LIABILITIES 677 687
MINORITY INTEREST 722 719
MEMBER’S EQUITY: Member’s equity 485 696 Accumulated other comprehensive loss (59 ) (57 )
Total member’s equity 426 639
Total liabilities and member’s equity $ 20,367 $ 21,148
The accompanying notes
toare an integral part of these condensed consolidated financial statements.5
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(DOLLARS
(DOLLARS IN MILLIONS)UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (RESTATED) (RESTATED)REVENUES $ 1,207 $ 1,166 $ 3,602 $ 3,377 ------- ------- ------- ------- COSTS AND EXPENSES: Operating (excluding depreciation and amortization and other items listed below) 484 457 1,457 1,330 Selling, general and administrative 235 243 702 708 Depreciation and amortization 362 374 1,118 1,061 Option compensation expense, net 1 1 1 4 Special charges, net 8 -- 18 1 ------- ------- ------- ------- 1,090 1,075 3,296 3,104 ------- ------- ------- ------- Income from operations 117 91 306 273 ------- ------- ------- ------- OTHER INCOME AND EXPENSE: Interest expense, net (368) (359) (1,103) (1,054) Gain (loss) on derivative instruments and hedging 31 (76) 35 (106) activities, net Gain on debt exchange, net 187 -- 187 -- Other, net (2) (1) (3) (5) ------- ------- ------- ------- (152) (436) (884) (1,165) ------- ------- ------- ------- Loss before minority interest, income taxes and cumulative effect of accounting change (35) (345) (578) (892) MINORITY INTEREST (4) (4) (11) (11) ------- ------- ------- ------- Loss before income taxes and cumulative effect of accounting change (39) (349) (589) (903) INCOME TAX BENEFIT (EXPENSE) (1) 13 (3) 27 ------- ------- ------- ------- Loss before cumulative effect of accounting change (40) (336) (592) (876) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX -- -- -- (540) ------- ------- ------- ------- Net loss $ (40) $ (336) $ (592) $(1,416) ======= ======= ======= =======See
Unaudited
Three Months Ended March 31, 2004 2003 REVENUES $ 1,214 $ 1,178
COSTS AND EXPENSES: Operating (excluding depreciation and amortization) 512 485 Selling, general and administrative 239 235 Depreciation and amortization 370 370 (Gain) loss on sale of assets, net (106 ) 9 Option compensation expense, net 14 — Special charges, net 10 2
1,039 1,101
Income from operations 175 77
OTHER INCOME AND EXPENSE: Interest expense, net (381 ) (370 ) Gain (loss) on derivative instruments and hedging activities, net (7 ) 14 Other, net (1 ) —
(389 ) (356 )
Loss before minority interest and income taxes (214 ) (279 ) MINORITY INTEREST (3 ) (3 )
Loss before income taxes (217 ) (282 ) INCOME TAX EXPENSE (1 ) (1 )
Net loss $ (218 ) $ (283 )
The accompanying notes
toare an integral part of these condensed consolidated financial statements.6
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(DOLLARS
(DOLLARS IN MILLIONS)UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2003 2002 ------------- -------------- (RESTATED)CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (592) $(1,416) Adjustments to reconcile net loss to net cash flows from operating activities: Minority interest 11 11 Depreciation and amortization 1,118 1,061 Noncash interest expense 313 285 Loss (gain) on derivative instruments and hedging activities, net (35) 106 Gain on debt exchange, net (187) -- Deferred income taxes 3 (27) Cumulative effect of accounting change, net -- 540 Other, net 1 6 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 66 31 Prepaid expenses and other assets 6 1 Accounts payable, accrued expenses and other (50) (35) Receivables from and payables to related party, including deferred management fees (64) (60) ------- ------- Net cash flows from operating activities 590 503 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (481) (1,550) Change in accounts payable and accrued expenses related to capital expenditures (102) (89) Payments for acquisitions, net of cash acquired -- (140) Purchases of investments (6) (5) Other, net (3) 1 ------- ------- Net cash flows from investing activities (592) (1,783) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 452 2,440 Repayments of long-term debt (646) (1,486) Proceeds from issuance of debt 30 895 Payments for debt issuance costs (30) (40) Repayments to related parties (36) (109) Capital contributions -- 88 Distributions (26) (6) ------- ------- Net cash flows from financing activities (256) 1,782 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (258) 502 CASH AND CASH EQUIVALENTS, beginning of period 310 2 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 52 $ 504 ======= ======= CASH PAID FOR INTEREST $ 710 $ 658 ======= ======= NONCASH TRANSACTIONS: Issuance of debt by CCH II, LLC $ 1,572 $ -- ======= ======= Retirement of debt $ 1,257 $ -- ======= ======= CCH II, LLC notes distributed to retire parent company debt $ 521 $ -- ======= =======See
Unaudited
Three Months Ended March 31, 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (218 ) $ (283 ) Adjustments to reconcile net loss to net cash flows from operating activities: Minority interest 3 3 Depreciation and amortization 370 370 Option compensation expense, net 10 — Noncash interest expense 92 104 (Gain) loss on derivative instruments and hedging activities, net 7 (14 ) (Gain) loss on sale of assets, net (106 ) 9 Deferred income taxes 1 1 Other, net 2 9 Changes in operating assets and liabilities, net of effects from dispositions: Accounts receivable 22 26 Prepaid expenses and other assets (10 ) 1 Accounts payable, accrued expenses and other (56 ) (72 ) Receivables from and payables to related party, including deferred management fees (46 ) (3 )
Net cash flows from operating activities 71 151
CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (187 ) (101 ) Change in accrued expenses related to capital expenditures (7 ) (117 ) Proceeds from sale of assets 725 — Purchases of investments — (2 )
Net cash flows from investing activities 531 (220 )
CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 165 346 Repayments of long-term debt (779 ) (152 ) Repayments to related parties — (21 ) Payments for debt issuance costs (1 ) —
Net cash flows from financing activities (615 ) 173
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13 ) 104 CASH AND CASH EQUIVALENTS, beginning of period 85 310
CASH AND CASH EQUIVALENTS, end of period $ 72 $ 414
CASH PAID FOR INTEREST $ 227 $ 160
The accompanying notes
toare an integral part of these condensed consolidated financial statements.7
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)1.
ORGANIZATION AND BASIS OF PRESENTATIONOrganization and Basis of PresentationCharter Communications Holdings, LLC
(Charter Holdings)(“Charter Holdings”) is a holding company whoseprincipalprimary assets atSeptember 30, 2003March 31, 2004 are equity interests in itscableoperating subsidiaries. Charter Holdings is a subsidiary of Charter Communications Holding Company, LLC(Charter Holdco)(“Charter Holdco”), which is a subsidiary of Charter Communications, Inc.(Charter)(“Charter”). The condensed consolidated financial statements include the accounts of Charter Holdings and all of its direct and indirect subsidiaries. Charter Holdings and its subsidiaries are collectively referred to herein as the"Company."“Company.” Allmaterialsignificant intercompany transactions and balances have been eliminated in consolidation. The Companyownsis a broadband communications company operating in the United States. The Company offers its customers traditional cable video programming (analog andoperates cable systems that provide a full range ofdigital video) as well as high-speed data services and, in some areas, advanced broadband services such as high definition television, videodata,on demand, telephony andotherinteractive television. The Company sells its cable video programming, high-speed data and advanced broadbandservices. The Company also provides commercial high-speed data, video, telephony and Internetservicesand sells advertising and production services. In June 2003, the Company commenced an organizational restructuring, which consisted of the Company first forming CCH II, LLC (CCH II) and then contributing all of the equity interests in all of its subsidiaries (except Charter Communications Holdings Capital Corporation, the co-issuer of the Company's senior notes and senior discount notes, and Charter Communications Operating, LLC) toon anewly-formed subsidiary (CCO NR Holdings, LLC), and then contributing CCO NR Holdings, LLC to Charter Communications Operating, LLC (Charter Operating). The Company then contributed Charter Operating to a newly formed subsidiary (CCO Holdings, LLC), which was then contributed to CCH II. Thereafter, CCH I, LLC (CCH I) was formed as a new subsidiary of the Company, and the Company contributed its interest in CCH II to CCH I.subscription basis.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.Commission (“SEC”). Accordingly, certain information and footnote disclosures typically included in theCompany's Annual ReportCompany’s annual report on Form 10-K have been condensed or omitted for thisQuarterly Report.quarterly report. The accompanying condensed consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.SignificantAreas involving significant judgments and estimates include capitalization of labor and overheadcosts,costs; depreciation and amortizationcosts,costs; impairments of property, plant and equipment, franchises andgoodwill,goodwill; incometaxestaxes; andothercontingencies. Actual results could differ from those estimates.Reclassifications
Certain
20022003 amounts have been reclassified to conform with the20032004 presentation.2.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital ResourcesThe Company has incurred net losses of
$40$218 million and$592$283 million for the threeand ninemonths endedSeptember 30,March 31, 2004 and 2003,respectively, and $336 million and $1.4 billion for the three and nine months ended September 30, 2002,respectively. TheCompany'sCompany’s net cash flows from operating activities were$590$71 million and$503$151 million for theninethree months endedSeptember 30,March 31, 2004 and 2003,and 2002,respectively. The Company has historically required significant cash to fund capital expenditures and debt service costs. Historically, the Company has funded these requirements through cash flows from operating activities, borrowings undertheits credit facilities,of the Company's subsidiaries,equity contributions from Charter Holdco,byissuances of debt securities and cash on hand. The mix of funding sources changes from period to period, but for theninethree months endedSeptember 30, 2003,March 31, 2004, approximately70%9% of theCompany'sCompany’s funding requirements were from cash flows from operating activities, 90% was from proceeds from the sale of cable systems described below and30%1% was from cash on hand. For theninethree months endedSeptember 30, 2003,March 31, 2004, the Companydecreasedhad net cash flows used in financing activities of $615 million, reflecting a net repayment of $614 million of debt.In April 2004, Charter Holdings’ indirect subsidiaries, Charter Communications Operating, LLC (“Charter Operating”) and Charter Communications Operating Capital Corp., sold $1.5 billion of senior second lien notes in a private transaction. Additionally, Charter Operating amended and restated its
borrowings$5.1 billion credit facilities, among other things, to defer maturities and increase availability underitsthose facilities to approximately $6.5 billion,8
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)subsidiaries'
(dollars in millions, except where indicated)consisting of a $1.5 billion revolving credit facility, a $2.0 billion six-year term loan facility and a $3.0 billion seven-year term loan facility. Charter Operating used the additional borrowings under the amended and restated credit facilities, together with proceeds from the sale of the Charter Operating senior second lien notes to refinance the credit facilities of its subsidiaries, CC VI Operating Company, LLC (“CC VI Operating”), Falcon Cable Communications, LLC (“Falcon Cable”), and CC VIII Operating, LLC (“CC VIII Operating”), all in one concurrent transaction. The effect of the transaction, among other things, was to substitute Charter Operating as the lender in place of the banks under those subsidiaries’ credit facilities.
On March 1, 2004, the Company closed the sale of certain cable systems in Florida, Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC. This transaction resulted in a $108 million pretax gain recorded as a gain on sale of assets in the Company’s condensed consolidated statements of operations. The Company closed on the sale of an additional cable system in New York to Atlantic Broadband Finance, LLC in April 2004. Subject to post-closing contractual adjustments, the Company expects the total net proceeds from the sale of all of these systems to be approximately $733 million, of which $10 million is currently held in an indemnity escrow account (with the unused portion thereof to be released by
$193March 1, 2005). The proceeds received to date have been used to repay a portion of amounts outstanding under the Company’s credit facilities.The Company has a significant level of debt. In 2004, after giving effect to the refinancing in April 2004, $15 million of the Company’s debt matures, and
decreased cashan additional $30 million will mature in each of 2005 and 2006. In addition, the amended and restated Charter Operating credit facilities require the CC V Holdings, LLC notes to be redeemed within 45 days after the Charter Holdings leverage ratio discussed below is determined to be below 8.75 to 1.0. In subsequent years, substantial additional amounts will become due under the Company’s remaining obligations. As the principal amounts owing under the Company’s various debt obligations become due beginning in 2007, sustaining the Company’s liquidity will likely depend onhandits ability to access additional sources of capital over time, which may be affected by$258 million.our significant amount of debt. A default under the covenants governing 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 would have a material adverse effect on the Company’s financial condition or results of operations.The Company expects that cash on hand, cash flows from operating activities and the
fundsamounts available underits subsidiaries'the amended and restated Charter Operating credit facilities will be adequate to meet its2003cashneeds.needs for the foreseeable future. However, these credit facilities are subject to certain restrictive covenants,portionssome of whichare subjectrequire the Company totheachieve specified operatingresults of the Company's subsidiaries.results. TheCompany's 2003 operating plan anticipates maintainingCompany expects to maintain compliance with thesecovenants.covenants in 2004. If theCompany'sCompany’s actual operating performance resultsdo not maintain compliancein non-compliance with these covenants, or if other events ofnoncompliancenon-compliance under these credit facilities or indentures governing subsidiary or parent company debt occur, funding under thebankcredit facilities may not be available and defaults on some or potentially all debt obligations could occur. Additionally, noassurancesassurance can be given that the Company will not experience liquidity problems because of adverse market conditions, increased competition or other unfavorableevents or ifevents.The indentures governing the
Company does not obtain sufficient additional financing on a timely basis. In order to improve the Company's subsidiaries' ability to satisfy their leverage ratio covenants under their credit facilities, the Company's subsidiary,CCH II, LLC notes, CCO Holdings, LLC(CCOnotes, and Charter Operating notes restrict those note issuers from making distributions to their parent companies (including Charter and Charter Holdings), completedfor payment of principal on parent company notes, in each case unless there is no default under those indentures and aprivate placementspecified leverage ratio test can be met. Each such issuer currently meets the applicable leverage ratio test, and therefore is not currently prohibited from making any such distributions to its direct parent. The indentures governing the Charter Holdings notes permit Charter Holdings to make distributions to Charter Holdco for payment of$500 million aggregateinterest or principalamount of 8.75%on Charter’s convertible senior notes,described in Note 6. On October 1, 2003only if, after giving effect to theCompany closed ondistribution, Charter Holdings can incur additional debt under thesaleleverage ratio test ofits Port Orchard, Washington system for approximately $91 million, subject8.75 toadjustments. On September 3, 2003, the Company signed a definitive agreement with Atlantic Broadband Finance, LLC for the sale of various cable television systems in Florida, Pennsylvania, Maryland, Delaware, New York1.0, there is no default under Charter Holdings’ indentures andWest Virginia for approximately $765 million, subject to adjustments. The closing of this transaction is expected to occurother specified tests are met. However, in thefirst half ofevent that Charter Holdings could not incur any additional debt under the 8.75 to 1.0 leverage ratio test, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments in Charter Holdco or Charter, up to its formulaic capacity, if there is no default under the indentures. For the quarter ended March 31, 2004,but closingthere were no9
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)defaults under the Charter Holdings indentures and other specified tests were met. However, Charter Holdings continued to not meet the leverage ratio test at March 31, 2004. As a result, distributions from Charter Holdings to Charter Holdco or Charter again have been restricted and will continue to be restricted until that test is
subjectmet. Charter currently has sufficient assets tothe condition that revenues for the applicable systems, as reported in the audited financial statements for the applicable systems, when issued, be not less than 97% of amounts reported in previously-delivered unaudited financial statements, as well as other customary closing conditions. Charter, which is the sole manager of the Company, has a significant amount of debt, which will mature in 2005 and 2006. Charter'spay interest due on its outstanding convertible senior notes during 2004. However, Charter’s ability to make interest payments, or principal payments at maturity in 2005 and 2006, on its outstanding convertible senior notes isdependent oncontingent upon it obtaining additional debt and/or equity financing or receiving distributions or other payments from itsability to obtain additional financing and on the Company's and its other subsidiaries making distributions, loans, or payments to Charter Holdco, and on Charter Holdco paying or distributing such funds to Charter. Because Charter is the Company's sole manager, anysubsidiaries. Any financial or liquidity problems of Charter wouldbelikelytocause serious disruption to theCompany'sCompany’s business andtohave a material adverse effect onthe Company's operationsits business andresults. Any such event would likely adversely impact the Company's credit rating, and its relations with customers and suppliers, which could in turn further impair its ability to obtain financing and operate its business. Further, to the extent that any such eventresultsin a changeofcontrol of Charter (whether through a bankruptcy, receivership or other reorganization of Charter and/or Charter Holdco, or otherwise), it could result in an event of default under the credit facilities of the Company's subsidiaries and require a change of control repurchase offer under the Company's outstanding notes. As discussed in Note 6, to partially address these liquidity concerns, the Company and its subsidiaries successfully completed a private placement of $500 million aggregate principal amount of 8.75% senior notes due 2013 by CCO Holdings to repay (but not to reduce permanently) principal amounts outstanding under the Company's subsidiaries' bank credit facilities and for general corporate purposes. Also, in September 2003, the Company and its indirect subsidiary, CCH II completed the purchase of an aggregate of $609 million principal amount of Charter's convertible senior notes and $1.3 billion principal amount of the senior notes and senior discount notes issued by the Company from institutional investors in a small number of privately negotiated transactions. In consideration for these securities, CCH II issued an aggregate of $1.6 billion principal amount of 10.25% notes due 2010. CCH II also issued an additional $30 million principal amount of 10.25% notes for an equivalent amount of cash and used the proceeds for transaction costs and for general corporate purposes.operations.The
indentures governing the Company's notes permit the Company to make distributions up to its formulaic capacity to Charter Holdco for payment of interest on Charter's convertible senior notes, only if, after giving effect to the distribution, the Company can incur additional debt under the leverage ratio of 8.75 to 1.0, there is no default under the indentures and other specified tests are met. The Company did not meet the leverage ratio test at September 30, 2003, and as a result, distributions from the Company to Charter will be subject to certain restrictions until that test is met. As of September 30, 2003, Charter Holdco had $39 million in cash on hand and is owed $37 9CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) million in intercompany loans, which are available to Charter Holdco to service interest on Charter's convertible senior notes. The Company'sCompany’s long-term financing structure as ofSeptember 30, 2003March 31, 2004 includes$7.6$6.6 billion of credit facility debt and$10.1$10.7 billion of high-yield notes. The April 2004 refinancing discussed above resulted in approximately $1.5 billion of senior second lien notes replacing credit facility debt and the deferral beyond 2008 of approximately $8 billion of scheduled debt maturities and commitment reductions under the Company’s credit facilities, which would otherwise have come due or would have occurred before that time. Approximately$108$15 million ofthisfinancing matures during the remainder of2003,2004, and the Company expects tofund this through availabilitypay amounts due at maturity by borrowing under its credit facilities.Note 6 summarizesUnused availability as of theCompany's current availability under itsclosing of the amendment and restatement of the Charter Operating credit facilities on April 27, 2004 was approximately $1.0 billion.3. Franchises and
its long-term debt. 3. RESTATEMENT OF CONSOLIDATED FINANCIAL RESULTS As discussed in the Company's 2002 Form 10-K, the Company identified a series of adjustments that have resulted in the restatement of previously announced quarterly results for the first three quarters of fiscal 2002. In summary, the adjustments are grouped into the following categories: (i) launch incentives from programmers; (ii) customer incentives and inducements; (iii) capitalized labor and overhead costs; (iv) customer acquisition costs; (v) rebuild and upgrade of cable systems; (vi) deferred tax liabilities/franchise assets; and (vii) other adjustments. These adjustments have been reflected in the accompanying condensed consolidated financial statements and reduced revenues for the three and nine months ended September 30, 2002 by $13 million and $38 million, respectively. The Company's consolidated net loss decreased by $125 million and increased by $105 million for the three and nine months ended September 30, 2002, respectively. In addition, as a result of certain of these adjustments, the Company's statement of cash flows for the nine months ended September 30, 2002 has been restated. Cash flows from operating activities for the nine months ended September 30, 2002 decreased by $29 million. The more significant categories of adjustments relate to the following as outlined below. Launch Incentives from Programmers. Amounts previously recognized as advertising revenue in connection with the launch of new programming channels have been deferred and recorded in other long-term liabilities in the year such launch support was provided, and amortized as a reduction of programming costs based upon the relevant contract term. These adjustments decreased revenue by $10 million and $30 million for the three and nine months ended September 30, 2002, respectively. The corresponding amortization of such deferred amounts reduced programming expenses by $12 million and $35 million for the three and nine months ended September 30, 2002, respectively. Customer Incentives and Inducements. Marketing inducements paid to encourage potential customers to switch from satellite providers to Charter branded services and enter into multi-period service agreements were previously deferred and recorded as property, plant and equipment and recognized as depreciation and amortization expense over the life of customer contracts. These amounts have been restated as a reduction of revenues of $2 million and $5 million for the three and nine months ended September 30, 2002, respectively. Substantially all of these amounts are offset by reduced depreciation and amortization expense. Capitalized Labor and Overhead Costs. Certain elements of labor costs and related overhead allocations previously capitalized as property, plant and equipment as part of the Company's rebuild activities, customer installations and new service introductions have been expensed in the period incurred. Such adjustments increased operating expenses by $13 million and $39 million for the three and nine months ended September 30, 2002, respectively. Customer Acquisition Costs. Certain customer acquisition campaigns were conducted through third-party contractors in portions of 2002. The costs of these campaigns were originally deferred and recorded as other assets and recognized as amortization expense over the average customer contract life. These amounts have been reported as marketing expense in the period incurred and totaled $13 million and $32 million for the three and nine months ended September 30, 2002, respectively. The Company discontinued this program in the third quarter of 2002 as contracts for third-party vendors expired. Substantially all of these amounts are offset by reduced depreciation and amortization expense. Rebuild and Upgrade of Cable Systems. In 2000, the Company initiated a three-year program to replace and upgrade a substantial portion of its network. In connection with this plan, the Company assessed the carrying value of, and the associated depreciable lives of, various assets to be replaced. It was determined that $1 billion of cable 10CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) distribution system assets, originally treated as subject to replacement, were not part of the original replacement plan but were to be upgraded and have remained in service. The Company also determined that certain assets subject to replacement during the upgrade program were misstated in the allocation of the purchase price of the acquisition. This adjustment reduced property, plant and equipment and increased franchise costs by $627 million. In addition, the depreciation period for the assets subject to replacement was adjusted to more closely align with the intended service period of these assets rather than the three-year straight-line life originally assigned. As a result, adjustments were recorded to reduce depreciation expense by $115 million and $353 million for the three and nine months ended September 30, 2002, respectively. Deferred Tax Liabilities/Franchise Assets. Adjustments were made to record deferred tax liabilities associated with the acquisition of various cable television businesses. These adjustments increased amounts assigned to franchise assets by $1.4 billion with a corresponding increase in deferred tax liabilities of $0.6 billion and to member's equity of $0.8 billion. In addition, as described above, a correction was made to reduce amounts assigned in purchase accounting to assets identified for replacement over the three-year period of the Company's rebuild and upgrade of its network. This reduced the amount assigned to the network assets to be retained and increased the amount assigned to franchise assets by $627 million with a resulting increase in amortization expense for the years restated. Such adjustments increased the cumulative effect of accounting change recorded upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142 by $199 million, before tax effects, for the nine months ended September 30, 2002. Other Adjustments. In addition to the items described above, other adjustments of expenses include additional amounts charged to special charges related to the 2001 restructuring plan, certain tax reclassifications from tax expense to operating costs and other miscellaneous adjustments. The net impact of these adjustments to net loss is a decrease of $1 million and an increase of $4 million for the three and nine months ended September 30, 2002, respectively. The following tables summarize the effects of the adjustments on the condensed consolidated statements of operations and cash flows for the three and nine month ended September 30, 2002 (dollars in millions). CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2002 --------------------------- --------------------------- AS PREVIOUSLY AS PREVIOUSLY REPORTED RESTATED REPORTED RESTATED ------------- -------- ------------- --------Revenues $ 1,179 $ 1,166 $ 3,415 $ 3,377 Income (loss) from operations (17) 91 (47) 273 Minority interest (3) (3) (10) (11) Cumulative effect of accounting change, net of tax -- -- (83) (540) Net loss (461) (336) (1,311) (1,416)CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------------------------ AS PREVIOUSLY REPORTED RESTATED ---------------- ---------------Net cash flows from operating activities $ 532 $ 503 Net cash flows from investing activities (1,807) (1,783) Net cash flows from financing activities 1,778 1,78211CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. FRANCHISES AND GOODWILLGoodwillOn January 1, 2002, the Company adopted
SFASStatement of Financial Accounting Standards (“SFAS”) No. 142, which eliminates the amortization of indefinite lived intangible assets. Accordingly, beginning January 1, 2002, all franchises that qualify for indefinite life treatment under SFAS No. 142 are no longer amortized against earnings but insteadwill beare tested for impairment annually, or more frequently as warranted by events or changes in circumstances.During the first quarter of 2002, the Company had an independent appraiser perform valuations of its franchises as of January 1, 2002.Based on the guidance prescribed in Emerging Issues Task Force(EITF)(“EITF”) Issue No. 02-7,Unit of Accounting for Testing of Impairment of Indefinite-Lived Intangible Assets,franchiseswereare aggregated into essentially inseparable asset groups to conduct the valuations. The asset groups generallyrepresentrepresented geographic clusters of theCompany'sCompany’s cable systems, which management believes represents the highest and best use of those assets. Fair valuewasis determined based on estimated discounted future cash flows usingreasonable and appropriateassumptions that are consistent with internal forecasts.As a result, the Company determined that franchises were impaired and recorded the cumulative effect of a change in accounting principle of $540 million (approximately $572 million before tax effects of $32 million).The effect of
adoption was to increase net loss by $540 million.SFAS No. 142does not permit the recognition of the customer relationship asset not previously recognized. Accordingly, the impairment included approximately $373 million before tax effects attributable to customer relationship valuesas ofJanuary 1, 2002. In determining whether its franchises have an indefinite life, the Company considered the exclusivity of the franchise, its expected costs of franchise renewals, and the technological state of the associated cable systems with a view to whether or not the Company is in compliance with any technology upgrading requirements. Certain franchises did not qualify for indefinite-life treatment due to technological or operational factors that limit their lives. These franchise costs are amortized on a straight-line basis over 10 years. The following table presents the Company's indefinite-lived and finite-lived intangible assets as of September 30, 2003March 31, 2004 and December 31,2002 (dollars2003 is presented inmillions):the following table:
SEPTEMBER 30, 2003 DECEMBER 31, 2002 ------------------------------------- --------------------------------------- GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT ------ ------------ ------ ------ ------------ ------INDEFINITE-LIVED INTANGIBLE ASSETS: Franchise with indefinite lives $17,076 $ 3,428 $13,648 $17,076 $ 3,428 $13,648 Goodwill 54 -- 54 54 -- 54 ------- ------- ------- ------- ------- ------- $17,130 $ 3,428 $13,702 $17,130 $ 3,428 $13,702 ======= ======= ======= ======= ======= ======= FINITE-LIVED INTANGIBLE ASSETS: Franchises with finite lives $ 103 $ 30 $ 73 $ 103 $ 24 $ 79 ======= ======= ======= ======= ======= =======
March 31, 2004 December 31, 2003 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Franchises with indefinite lives $ 16,439 $ 3,287 $ 13,152 $ 17,018 $ 3,412 $ 13,606 Goodwill 52 — 52 52 — 52
$ 16,491 $ 3,287 $ 13,204 $ 17,070 $ 3,412 $ 13,658
Franchises with finite lives $ 55 $ 11 $ 44 $ 107 $ 33 $ 74
For the three months ended March 31, 2004, the net carrying amount of indefinite-lived intangible assets was reduced by $483 million as a result of the sale of cable systems to Atlantic Broadband Finance, LLC discussed in Note 2. Additionally, approximately $29 million of franchises that were previously classified as finite-lived were
10
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)reclassified to indefinite-lived, based on the Company’s ability in 2003 to renew these franchise assets. Franchise amortization expense for each of the three
and ninemonths endedSeptember 30,March 31, 2004 and 2003and 2002was$2$1 million and$6$2 million, respectively, which represents the amortization relating to franchises that did not qualify for indefinite-life treatment under SFAS No. 142, including costs associated with franchise renewals.For each of the next five years,The Company expects that amortization expenserelating to these franchises is expected toon franchise assets will be approximately$9 million.$4 million annually. Actual amortization expense to be reported 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.12CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of
September 30, 2003March 31, 2004 and December 31,2002 (dollars in millions):
SEPTEMBER 30, DECEMBER 31, 2003 2002 ---------------- ----------------Accounts payable $137 $182 Capital expenditures 32 134 Accrued interest 315 234 Programming costs 254 282 Accrued general and administrative 100 91 Franchise fees 58 68 State sales tax 65 67 Other accrued expenses 167 192 ---------------- ---------------- $1,128 $1,250 ================ ================6. LONG-TERM DEBT2003:
March 31, December 31, 2004 2003 Accounts payable — trade $ 119 $ 150 Accrued capital expenditures 100 93 Accrued interest 332 270 Programming costs 306 319 Franchise related fees 39 70 State sales tax 56 61 Other accrued expenses 195 216
$ 1,147 $ 1,179
5. Long-Term Debt
Long-term debt consists of the following as of
September 30, 2003March 31, 2004 and December 31,2002 (dollars in millions):
SEPTEMBER 30, 2003 DECEMBER 31, 2002 ---------------------------- ---------------------------- ACCRETED ACCRETED FACE VALUE VALUE FACE VALUE VALUE ------------ ------------ ----------- -------------LONG-TERM DEBT Charter Holdings: March 1999 8.250% senior notes due 2007 451 450 600 599 8.625% senior notes due 2009 1,244 1,242 1,500 1,497 9.920% senior discount notes due 2011 1,108 1,056 1,475 1,307 January 2000 10.000% senior notes due 2009 640 640 675 675 10.250% senior notes due 2010 318 318 325 325 11.750% senior discount notes due 2010 450 388 532 421 January 2001 10.750% senior notes due 2009 874 873 900 900 11.125% senior notes due 2011 500 500 500 500 13.500% senior discount notes due 2011 675 501 675 454 May 2001 9.625% senior notes due 2009 290 290 350 350 10.000% senior notes due 2011 410 410 575 575 11.750% senior discount notes due 2011 939 696 1,018 693 January 2002 9.625% senior notes due 2009 350 348 350 348 10.000% senior notes due 2011 300 298 300 298 12.125% senior discount notes due 2012 330 224 450 280 CCH II: 10.250% senior notes due 2010 1,601 1,601 -- -- Renaissance: 10.00% senior discount notes due 2008 114 116 114 113 CC V Holdings:132003:
March 31, 2004 December 31, 2003 Face Accreted Face Accreted Value Value Value Value Charter Holdings: March 1999 8.250% senior notes due 2007 451 451 451 450 8.625% senior notes due 2009 1,244 1,242 1,244 1,242 9.920% senior discount notes due 2011 1,108 1,108 1,108 1,082 January 2000 10.000% senior notes due 2009 640 640 640 640 10.250% senior notes due 2010 318 318 318 318 11.750% senior discount notes due 2010 450 411 450 400 January 2001 10.750% senior notes due 2009 874 874 874 873 11.125% senior notes due 2011 500 500 500 500 13.500% senior discount notes due 2011 675 535 675 517 May 2001 9.625% senior notes due 2009 (includes January 2002 additional notes issue) 640 638 640 638 10.000% senior notes due 2011 (includes January 2002 additional notes issue) 710 708 710 708 11
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003 DECEMBER 31, 2002 ---------------------------- ---------------------------- ACCRETED ACCRETED FACE VALUE VALUE FACE VALUE VALUE ------------ ------------ ----------- -------------11.875% senior discount notes due 2008 180 177 180 163 Other long-term debt -- -- 1 1 CREDIT FACILITIES
(dollars in millions, except where indicated)
March 31, 2004 December 31, 2003 Face Accreted Face Accreted Value Value Value Value 11.750% senior discount notes due 2011 939 737 939 717 January 2002 12.125% senior discount notes due 2012 330 238 330 231 CCH II: 10.250% senior notes due 2010 1,601 1,601 1,601 1,601 CCO Holdings: 8 ¾% senior notes due 2013 500 500 500 500 Renaissance: 10.00% senior discount notes due 2008 114 116 114 116 CC V Holdings: 11.875% senior discount notes due 2008 113 113 113 113 Charter Operating 4,248 4,248 4,459 4,459 CC VI Operating 702 702 868 868 Falcon Cable 641 641 856 856 CC VIII Operating 1,023 1,023 1,044 1,044
$ 17,821 $ 17,344 $ 18,434 $ 17,873
In April 2004, Charter Holdings’ indirect subsidiaries, Charter Operating and Charter Communications Operating Capital Corp., sold $1.5 billion of senior second lien notes in a private transaction. Additionally, Charter Operating
4,483 4,483 4,542 4,542 CC VI 880 880 926 926 Falcon Cable 1,133 1,133 1,155 1,155 CC VIII Operating 1,100 1,100 1,166 1,166 ------- ------- ------- ------- $18,370 $17,724 $18,309 $17,288 ======= ======= ======= =======Charter Operating Credit Facilities. The Charter Operating credit facilities wereamended and restatedasits $5.1 billion credit facilities, among other things, to defer maturities and increase availability under those facilities to approximately $6.5 billion, consisting ofJune 19, 2003 to allow for the insertion of intermediate holding companies between the Companya $1.5 billion revolving credit facility, a $2.0 billion six-year term loan facility andCharter Operating. In exchange for the lenders' consent to the organizational restructuring described below,a $3.0 billion seven-year term loan facility. Charter Operatingincreased pricing by 50 basis points inused theexisting Charter Operating pricing grid across all levels. Obligationsadditional borrowings under the amended and restated credit facilities, together with proceeds from the sale of the Charter Operatingcredit facilities are guaranteed by the Company, CCO Holdings, LLC and by Charter Operating's subsidiaries, other than the non-recourse subsidiaries, subsidiaries precluded from so guaranteeing by reason of the provisions of other indebtednesssenior second lien notes towhich they are subject, and immaterial subsidiaries. The obligations under the Charter Operating credit facilities are secured by pledges of all equity interests owned by Charter Operating in its direct subsidiaries, all equity interests owned by its guarantor subsidiaries in their respective subsidiaries, and intercompany obligations owing to Charter Operating and/or its guarantor subsidiaries by their affiliates. CCO Holdings has guaranteed Charter Operating's obligations underrefinance the credit facilitiesand pledged its equity interest in allof itsdirectsubsidiaries,includingCC VI Operating, Falcon Cable, and CC VIII Operating, all in one concurrent transaction. The effect of the transaction, among other things, was to substitute Charter Operating ascollateral. Exchangethe lender in place ofIndebtedness.the banks under those subsidiaries’ credit facilities.In
September 2003,addition, in connection with this transaction, a requirement was imposed that the CC V Holdings, LLC senior discount notes be redeemed within 45 days after Charter Holdings’ leverage ratio (determined under theCompany and their indirect subsidiary, CCH II, completed the purchase of an aggregate of $609 million principal amount of Charter's convertible senior notes and $1.3 billion principal amount ofindentures governing the senior notes and senior discount notes issued by Charter Holdings) is determined to be below 8.75 to 1.0, provided theCompany from institutional investors in a small number of privately negotiated transactions. In consideration for these securities, CCH II issued an aggregate of $1.6 billion principal amount of 10.25% notes due 2010. CCH II also issued an additional $30 million principal amount of 10.25% notes for an equivalent amount of cash and used the proceeds for transaction costs and general corporate purposes. This transaction resulted in a gain on debt exchange of $187 million, which is net of the write-off of deferred financing costs of $18 million associated with the retired debt. Private Placement. In November 2003, the Company completed a private placement of $500 million aggregate principal amount of 8.75% senior notes due 2013 by CCO Holdings. The 8.75% senior notes issued in the private placement have not been and will not be registered under the Securities Act of 1933 and may not be offered in the United States absent registration or an applicable exemption from registration requirements. Vulcan Inc. Commitment. The Company's subsidiary entered into a commitment letter with Vulcan Inc., which is an affiliate of Paul Allen, pursuant to which Vulcan Inc. agreed to lend, or cause an affiliate to lend to CCO Holdings, LLC an aggregate amount of up to $300 million. As of September 30, 2003, the Company has not drawn on the facility, and it intends to terminate the commitment as a result of the recent private placement of $500 million aggregate principal amount of 8.75% senior notes due 2013 by CCO Holdings. 14CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The tableratio then remains belowpresents the unused total potential availability under each of the Company's credit facilities and the availability as limited by financial covenants as of September 30, 2003, which become more restrictive over the term of each facility before becoming fixed (dollars in millions):
UNUSED TOTAL AVAILABILITY AS POTENTIAL LIMITED BY FINANCIAL AVAILABILITY COVENANTS ----------------------- ------------------------Charter Operating $666 $210 CC VI 234 75 Falcon Cable 181 133 CC VIII Operating 328 317 ----------------------- ------------------------ Total $1,409 $735 ======================= ========================7. COMPREHENSIVE LOSSthat level.6. Comprehensive Loss
Certain marketable equity securities are classified as available-for-sale and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive loss on the accompanying
condensedconsolidated balance sheets. The Company reports changes in the fair value of interest rate agreements designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, that meet the effectiveness criteria of SFAS No. 133,"AccountingAccounting for Derivative Instruments and Hedging Activities", in accumulated other comprehensive loss. Comprehensive loss for the three months endedSeptember 30,March 31, 2004 and 2003and 2002was$19$220 million and$394$276 million, respectively.Comprehensive loss7. Accounting for
the nine months ended September 30, 2003Derivative Instruments and2002 was $562 million and $1.5 billion, respectively. 8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESHedging ActivitiesThe Company uses interest rate risk management derivative instruments, such as interest rate swap agreements and interest rate collar agreements (collectively referred to herein as interest rate agreements)
as required under the terms ofto manage itscredit facilities.interest costs. TheCompany'sCompany’s policy is to manage interest costs using a mix of fixed and variable rate debt. Using interest rate swap agreements, the Companyagreeshas agreed to exchange, at specified intervals through 2007, the difference between12
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Interest rate collar agreements are used to limit the
Company'sCompany’s exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates.The Company does not hold or issue derivative instruments for trading purposes. The Company does however have certain interest rate derivative instruments that have been designated as cash flow hedging instruments. Such instruments are those that 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 condensed consolidated statement of operations. The Company has formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting. For the three months ended
September 30,March 31, 2004 and 2003, net gain (loss) on derivative instruments and2002, other incomehedging activities includes losses of $1 million andexpense includesgains of$0 and $2 million, respectively, and for the nine months ended September 30, 2003 and 2002, other expenses includes gains of $8 million and losses of $3$9 million, respectively, which represent cash flow hedge ineffectiveness on interest rate hedge agreements arising from differences between the critical terms of the agreements and the related hedged obligations. Changes in the fair value of interest rate agreements designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations that meet the effectiveness criteria of SFAS No. 133 are reported in accumulated other comprehensiveloss and minority interest.loss. For the threeand ninemonths endedSeptember 30,March 31, 2004 and 2003, a loss of $2 million and a gain of$21 million and $30 million, respectively, and for the three and nine months ended September 30, 2002, a loss of $58 million and $70$7 million, respectively, related to derivative instruments designated as cash flow hedges, was recorded in accumulated other comprehensive loss. The amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the floating-rate debt obligations affects earnings (losses).15CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)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
againor loss(loss) oninterest rate agreements.derivative instruments and hedging activities in the Company’s condensed consolidated statements of operations. For the three months endedSeptember 30,March 31, 2004 and 2003, net gain (loss) on derivative instruments and2002, the Company recorded, within other income and expense, incomehedging activities includes losses of$31$6 million andexpensegains of$79 million, respectively, and for the nine months ended September 30, 2003 and 2002, recorded other income of $27 million and other expense of $103$5 million, respectively, for interest rate derivative instruments not designated as hedges.At September 30, 2003As of March 31, 2004 and December 31,
2002,2003, the Company had outstanding$3.3$2.9 billion and$3.4$3.0 billionrespectively,and $520 million and $520 million, respectively, in notional amounts of interest rate swaps and collars, respectively. The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to credit loss. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts.The Company does not hold collateral for these instruments and is therefore subject to credit loss in the event of nonperformance by the counterparty to the interest rate exchange agreement. However the counterparties are banks and we do not anticipate nonperformance by any of them on any interest rate exchange agreement. 9. REVENUES8. Revenues
Revenues consist of the following for the three
and ninemonths endedSeptember 30, 2003March 31, 2004 and2002 (dollars2003:
Three Months Ended March 31, 2004 2003 Video $ 849 $ 866 High-speed data 168 122 Advertising sales 59 57 Commercial 56 47 Other 82 86
$ 1,214 $ 1,178
13
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars inmillions):
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ---------- -----------Video $866 $862 $2,607 $2,553 High-speed data 145 91 403 231 Advertising sales 64 86 188 216 Commercial 52 41 149 117 Other 80 86 255 260 ----------- ----------- ---------- ----------- $1,207 $1,166 $3,602 $3,377 =========== =========== ========== ===========10. OPERATING EXPENSESmillions, except where indicated)9. Operating Expenses
Operating expenses consist of the following for the three
and ninemonths endedSeptember 30, 2003March 31, 2004 and2002 (dollars in millions):
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ---------- -----------Programming costs $307 $296 $934 $873 Advertising sales 21 23 65 63 Service costs 156 138 458 394 ---------- ----------- ---------- ----------- $484 $457 $1,457 $1,330 ========== =========== ========== ===========The Company has various contracts2003:
Three Months Ended March 31, 2004 2003 Programming costs $ 334 $ 314 Advertising sales 23 21 Service costs 155 150
$ 512 $ 485
10. Selling, General and
other arrangements to obtain basic, premiumAdministrative ExpensesSelling, general and
digital programming from program suppliers that receive compensation typically based on a monthly flat fee per customer. The costadministrative expenses consist of the16CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) right to exhibit network programming under such arrangements is recordedfollowing for the three months ended March 31, 2004 and 2003:
Three Months Ended March 31, 2004 2003 General and administrative $ 208 $ 215 Marketing 31 20
$ 239 $ 235
Components of selling expense are included in
the month the programming is available for exhibition.general and administrative and marketing expense.11.
SPECIAL CHARGESSpecial ChargesIn the fourth quarter of 2002, the Company recorded a special charge of
$35 million, of which$31 millionwasassociated withitsthe Company’s workforce reduction program and the consolidation of its operations from three divisions and ten regions into five operating divisions, elimination of redundant practices and streamlining its management structure.The remaining $4 million related to legal and other costs associated with Charter's ongoing grand jury investigation, shareholder lawsuits and SEC investigation. The $31 million charge related to realignment activities, included severance costs of $28 million related to approximately 1,400 employees identified for termination as ofDuring the year ended December 31,20022003, additional severance related costs were incurred of $26 million andlease termination costsrecorded as a special charge. In the first quarter of$3 million. During the three and nine months ended September 30, 2003,2004, an additional400 and 1,100100 employeesrespectively,were identified for termination, andadditionalseverance costs of$8$1 millionand $23 million, respectively,were recorded in special charges.In total, approximately 400 and 2,300 employees were terminated during the three and nine months ended September 30, 2003, respectively.Severance payments aregenerallymade over a period of up totwelve monthstwo years with approximately$11$8 millionand $34 million, respectively,paid during the threeand ninemonths endedSeptember 30,March 31, 2004 and $43 million paid during the year ended December 31, 2003. As ofSeptember 30, 2003March 31, 2004 and December 31,2002,2003, a liability of approximately$19$7 million and$31$14 million, respectively, is recorded on the accompanying condensed consolidated balance sheets related to the realignment activities. For theninethree months endedSeptember 30,March 31, 2004, special charges also include approximately $9 million, which represents litigation costs related to the tentative settlement of the South Carolina national class action suit, subject to final documentation and court approval (see note 13).During the three months ended March 31, 2003, the
additionalCompany recorded severance costswere offset byof $7 million in special charges. These severance costs included a $5 million settlement from the Internet service provider Excite@Home related to the conversion of approximately 145,000 high-speed data customers to our Charter Pipeline service in2001, for which costs of $15 million were recorded2001.14
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars inthe fourth quarter of 2001. In December 2001,millions, except where indicated)12. Income Taxes
Charter
implemented a restructuring plan to reduce its workforce in certain markets and reorganize its operating divisions from two to three and operating regions from twelve to ten. The restructuring plan was completed during the first quarter of 2002, resulting in the termination of approximately 320 employees and severance costs of $4 million, of which $1 million was recorded during the nine months ended September 30, 2002. 12. INCOME TAXES The CompanyHoldings is a single member limited liability company not subject to income tax.The CompanyCharter Holdings holds all operations through indirect subsidiaries. The majority of these indirect subsidiaries are limited liability companies that are not subject to income tax. However, certain ofthe Company'sCharter Holdings’ indirect subsidiaries are corporations and are subject to income tax.As of
September 30, 2003March 31, 2004 and December 31,2002,2003, the Companyhashad net deferred income tax liabilities of approximately$238 million and $232 million, respectively. These$267 million. The net deferred income tax liabilities relate to certain ofthe Company'sCharter Holdings’ indirect subsidiaries, which file separate income tax returns. During the three months endedSeptember 30,March 31, 2004 and 2003,and 2002,the Company recorded $1 million of income taxexpense and $13 million of income tax benefit, respectively. During the nine months ended September 30, 2003 and 2002, the Company recorded $3 million of income tax expense and $27 million of income tax benefit, respectively.expense. The income tax expenserecorded for the three and nine months ended September 30, 2003isthe result of changesrecognized through increases in current state income tax expense as well as increases to the deferred tax liabilitiesand federal and state income taxes payableof certain ofthe Company'sCharter Holdings’ indirect corporate subsidiaries.The income tax benefit recorded for the three and nine months ended September 30, 2002 was the result of changes in deferred taxes related to the differences in accounting for franchises. The CompanyCharter Holdco is currently under examination by the Internal Revenue Service for the tax years ending December 31, 2000 and 1999. Management does not expect the results of this examination to have a material adverse effect on the
Company's consolidatedCompany’s financial position or results of operations.13.
CONTINGENCIESContingenciesFourteen putative federal class action lawsuits (the
"Federal''Federal ClassActions"Actions’’) have been filed against Charter and17CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)certain of its former and present officers and directors in various jurisdictions allegedly on behalf of all purchasers ofCharter'sCharter’s securities during the period from either November 8 or November 9, 1999 through July 17 or July 18, 2002. Unspecified damages are sought by the plaintiffs. In general, the lawsuits allege that Charter utilized misleading accounting practices and failed to disclose these accounting practices and/or issued false and misleading financial statements and press releases concerningCharter'sCharter’s operations and prospects. The Federal Class Actions were specifically and individually identified in public filings made by Charter prior to the date of this quarterly report.In October 2002, Charter filed a motion with the Judicial Panel on Multidistrict Litigation (the
"Panel"''Panel’’) to transfer the Federal Class Actions to the Eastern District of Missouri. On March 12, 2003, the Panel transferred the six Federal Class Actions not filed in the Eastern District of Missouri to that district for coordinated or consolidated pretrial proceedings with the eight Federal Class Actions already pending there. ThePanel'sPanel’s transfer order assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a prior court order, StoneRidge Investment Partners LLC became lead plaintiff upon entry of thePanel'sPanel’s transfer order. StoneRidge subsequently filed a Consolidated Amended Complaint. The Court subsequently consolidated the Federal Class Actions into a single consolidated action (the ''Consolidated Federal Class Action’’) for pretrial purposes. On June 19, 2003, following a pretrial conference with the parties, the Court issued a Case Management Order setting forth a schedule for the pretrial phase of theconsolidated class action.Consolidated Federal Class Action. Motions to dismiss the Consolidated Amended Complaint have been filed. On February 10, 2004, in response to a joint motion made by StoneRidge and defendants, Charter, Vogel and Allen, the court entered an order providing, among other things, that: (1) the parties who filed such motion, engage in a mediation within ninety (90) days; and (2) all proceedings in the Consolidated Federal Class Action were stayed until May 10, 2004. On May 11, 2004, the court extended the stay in the Consolidated Federal Class Action for an additional sixty (60) days.On September 12, 2002, a shareholders derivative suit (the
"State''State DerivativeAction"Action’’) was filed in the Circuit Court of the City of St. Louis, State of Missouristate court(the “Missouri State Court”) against Charter and its then current directors, as well as its former auditors. A substantively identical derivative action was later filed and consolidated into the State Derivative Action. The plaintiffs allege that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly onCharter'sCharter’s behalf, are sought by the plaintiffs.15
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)On March 12, 2004, an action substantively identical to the State Derivative Action was filed in the Missouri State Court against Charter and certain of its current and former directors, as well as its former auditors. The plaintiffs allege that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. This case has not yet been consolidated with the State Derivative Action, but Charter expects that it will be in the future. Unspecified damages, allegedly on Charter’s behalf, are sought by plaintiffs.
Separately, on February 12, 2003, a shareholders derivative suit (the
"Federal''Federal DerivativeAction"Action’’), was filed against Charter and its then current directors in the United States District Court for the Eastern District of Missouri. The plaintiff alleges that the individual defendants breached their fiduciary duties and grossly mismanaged Charter by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly onCharter'sCharter’s behalf, are sought by the plaintiffs.In addition to the Federal Class Actions, the State Derivative Action, the new Missouri State Court derivative action and the Federal Derivative Action, six putative class action lawsuits have been filed against Charter and certain of its then current directors and officers in the Court of Chancery of the State of Delaware (the
"Delaware''Delaware ClassActions"Actions’’). TheDelaware Class Actions are substantively identicallawsuits were filed after the filing of a Schedule 13D amendment by Mr. Allen indicating that he was exploring a number of possible alternatives with respect to restructuring or expanding his ownership interest in Charter. Charter believes that the plaintiffs speculated that Mr. Allen might have been contemplating an unfair bid for shares of Charter or some other sort of going private transaction on unfair terms and generallyallegealleged that the defendants breached their fiduciary duties by participating in or acquiescinginto such apurported and threatened attempt by Defendant Paul Allen to purchase shares and assets of Charter at an unfair price.transaction. The lawsuits were brought on behalf ofCharter'sCharter’s securities holders as of July 29, 2002, and seek unspecified damages and possible injunctive relief. The Delaware Class Actions are substantively identical. No suchproposedtransaction by Mr. Allen has been presented.TheOrders of dismissal without prejudice have been entered in each of the Delaware Class Actions.All of the lawsuits discussed above are each in preliminary stages. No reserves have been established for
thosepotential losses or related insurance recoveries on these matters because Charter is unable to predict theCompany believes they are either not estimable or not probable.outcome. Charter has advised the Company that it intends to vigorously defend the lawsuits.In August 2002, Charter became aware of a grand jury investigation being conducted by the
United States Attorney'sU.S. Attorney’s Office for the Eastern District of Missouri into certain of its accounting and reporting practices, focusing on how Charter reported customer numbers, and its reporting of amounts received from digital set-top terminal suppliers for advertising. The U.S.Attorney'sAttorney’s Office has publicly stated that Charter is not currently a target of the investigation. Charter has also been advised by theU.S. Attorney's OfficeU. S. Attorney’s office that no member of its board of directors, including its Chief Executive Officer, is a target of the investigation. On July 24, 2003, a federal grand jury charged four former officers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inflatedsubscribercustomer account numbers. On July 25, 2003 one of the former officers who was indicted entered a guilty plea. Charter has advised the Company that it is fully cooperating with the investigation.On November 4, 2002, Charter received an informal, non-public inquiry from the
Staffstaff of theSecurities and 18CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Exchange Commission (SEC).SEC. The SEC has subsequently issued a formal order of investigation dated January 23, 2003, and subsequent document and testimony subpoenas. The investigation and subpoenas generally concernCharter'sCharter’s prior reports with respect to its determination of the number of customers, and various of itsotheraccounting policies and practices including its capitalization of certain expenses and dealings with certain vendors, including programmers and digital set-top terminal suppliers. Charter has advised the Company that it is fully cooperating with the SECStaff.staff.Charter is generally required to indemnify each of the named individual defendants in connection with the matters described above pursuant to the terms of its bylaws and (where applicable) such individual defendants’ employment agreements. In accordance with these documents, in connection with the pending grand jury investigation, SEC
16
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)investigation and the above described lawsuits, some of its current and former directors and Charter’s current and former officers have been advanced certain costs and expenses incurred in connection with their defense.
Charter has
advised usliability insurance coverage that it believes is available for the matters described above, where applicable, subject to the terms, conditions and limitations of the respective policies. There is no assurance that current coverage will be sufficient for all claims described above or any future claims that may arise.In October 2001, two customers, Nikki Nicholls and Geraldine M. Barber, filed a class action suit against Charter Holdco in South Carolina Court of Common Pleas, purportedly on behalf of a class of Charter Holdco’s customers, alleging that Charter Holdco improperly charged them a wire maintenance fee without request or permission. They also claimed that Charter Holdco improperly required them to rent analog and/or digital set-top terminals even though their television sets were ''cable ready.’’ Charter Holdco removed this case to the United States District Court for the District of South Carolina in November 2001, and moved to dismiss the suit in December 2001. The federal judge remanded the case to the South Carolina Court of Common Pleas in August 2002 without ruling on the motion to dismiss. The plaintiffs subsequently moved for a default judgment, arguing that upon return to state court, Charter Holdco should have but did not file a new motion to dismiss. The state court judge granted the plaintiff’s motion over Charter Holdco’s objection in September 2002. Charter Holdco immediately appealed that decision to the South Carolina Court of Appeals and the South Carolina Supreme Court, but those courts have ruled that until a final judgment is entered against Charter Holdco, they
arelack jurisdiction to hear the appeal.In January 2003, the Court of Common Pleas granted the plaintiffs’ motion for class certification. In October and November 2003, Charter Holdco filed motions (a) asking that court to set aside the default judgment, and (b) seeking dismissal of plaintiffs’ suit for failure to state a claim. In January 2004, the Court of Common Pleas granted in part and denied in part Charter Holdco’s motion to dismiss for failure to state a claim. It also took under advisement Charter Holdco’s motion to set aside the default judgment. In April 2004, the parties participated in a mediation with respect to this and related litigation. The mediator made a proposal to the parties. In May 2004, the parties to this and the related litigation accepted the mediator’s proposal and reached a tentative settlement. The tentative settlement remains subject to final documentation and court approval. As a result of the tentative settlement, the Company has recorded a special charge of $9 million in its condensed consolidated statement of operations for the three months ended March 31, 2004 (see note 11).
Charter is unable to predict the outcome of the lawsuits and the government investigations described above. An unfavorable outcome in
theany of these lawsuits or the government investigationsdescribed abovecould have a material adverse effect onCharter'sCharter’s and theCompany'sCompany’s financial condition, results of operationsand financial condition. Charter is generally required to indemnify each of the named individual defendants in connection with these matters pursuant to the terms ofor itsBylaws and (where applicable) such individual defendants' employment agreements. Pursuant to the terms of certain employment agreements and in accordance with the Bylaws of Charter, in connection with the pending grand jury investigation, SEC investigation and the above described lawsuits, Charter's current directors and its current and former officers have been advanced certain costs and expenses incurred in connection with their defense.liquidity.In addition to the matters set forth above, Charter and the Company are also party to other lawsuits and claims that arose in the ordinary course of conducting its business. In the opinion of management, after taking into account recorded liabilities, the outcome of these other lawsuits and claims
willare not expected to have a material adverse effect on theCompany's consolidatedCompany’s financialposition orcondition, results ofoperations. Charter has directors' and officers' liability insurance coverage that it believes is available for these matters, where applicable, and subject to the terms, conditions and limitations of the respective policies.operations or its liquidity.14.
STOCK COMPENSATION PLANSStock Compensation PlansThe Company has historically accounted for stock-based compensation in accordance with Accounting Principles Board
(APB)(“APB”) Opinion No. 25,"AccountingAccounting for Stock Issued to Employees", and related interpretations, as permitted by SFAS No. 123,"AccountingAccounting for Stock-BasedCompensation."Compensation. On January 1, 2003, the Company adopted the fair value measurement provisions of SFAS No. 123 using the prospective method under which the Company recognizes compensation expense of a stock-based award to an employee over the vesting period based on the fair value of the award on the grant date consistent with the method described in Financial Accounting Standards Board Interpretation No. 28,(FIN 28),Accounting for Stock Appreciation Rights and Other Variable Stock Option or AwardPlans.Plans. Adoption of these provisions resulted in utilizing a preferable accounting method as the condensed consolidated financial statementspresentswill present the estimated fair value of stock-based compensation in expense consistently with other forms17
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)of compensation and other expense associated with goods and services received for equity instruments. In accordance with SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure,the fair value method is being applied only to awards granted or modified after January 1, 2003, whereas awards granted prior to such date will continue to be accounted for under APB No. 25, unless they are modified or settled in cash.
TheManagement believes the adoption of these provisionsdidwill not have a material impact on the consolidated results of operations or financialpositioncondition of the Company. The ongoing effect onconsolidatedresults of operations or financialpositioncondition willbe dependent upondepend on futurestock basedstock-based compensation awards granted byCharter. HadtheCompany adopted SFAS No. 123 as of January 1, 2002, using the prospective method, option compensation expense for the three and nine months ended September 30, 2002 would have been approximately $7 million and $10 million, respectively. 19CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Company.SFAS No. 123 requires pro forma disclosure of the impact on earnings as if the compensation expense for these plans had been determined using the fair value method. The following table presents the
Company'sCompany’s net loss as reported and the pro formaamountamounts that would have been reported using the fair value method under SFAS No. 123 for theyears presented (dollarsperiods presented:
Three Months Ended March 31, 2004 2003 Net loss $ (218 ) $ (283 ) Add back stock-based compensation expense related to stock options included in reported net loss 14 — Less employee stock-based compensation expense determined under fair value based method for all employee stock option awards (12 ) (5 ) Effects of stock option exchange 48 —
Pro forma $ (168 ) $ (288 )
In January 2004, Charter commenced an option exchange program in
millions):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2003 2002 2003 2002 ------------ ------------- ------------- --------------Net loss $(40) $(336) $(592) $(1,416) Pro forma (46) (362) (614) (1,497)In July 2003, Charter's shareholders approved an amendmentwhich employees of the Company were offered the right toCharter'sexchange all stock options (vested and unvested) issued under the 1999 Charter Communications Option Plan and 2001 Stock Incentive Planto increase by 30,000,000that had an exercise price over $10 per share for sharesthe numberof restricted Charter Class A common stockauthorizedor, in some instances, cash. Based on a sliding exchange ratio, which varied depending on the exercise price of an employees outstanding options, if an employee would have received more than 400 shares of restricted stock in exchange forissuancetendered options, Charter issued to that employee shares of restricted stock in the exchange. If, based on the exchange ratios, an employee would have received 400 or fewer shares of restricted stock in exchange for tendered options, Charter instead paid the employee cash in an amount equal to the number of shares the employee would have received multiplied by $5.00. The offer applied to options (vested and unvested) to purchase a total of 22,929,573 shares of Charter Class A common stock, or approximately 48% of Charter’s 47,882,365 total options issued and outstanding as of December 31, 2003. Participation by employees was voluntary. Those members of Charter’s board of directors who were not also employees of the Company were not eligible to participate in the exchange offer.In the closing of the exchange offer on February 20, 2004, Charter accepted for cancellation eligible options to purchase approximately 18,137,664 shares of Charter Class A common stock. In exchange, Charter granted 1,966,686 shares of restricted stock, including 460,777 performance shares to eligible employees of the rank of senior vice president and above, and paid a total cash amount of approximately $4 million (which amount includes applicable withholding taxes) to those employees who received cash rather than shares of restricted stock. The grants of restricted stock were effective as of February 25, 2004. Employees tendered approximately 79% of the options exchangeable under the
Plan as well as amendmentsprogram.The cost to the
1999 Option PlanCompany of the stock option exchange program was approximately $12 million, with a 2004 cash compensation expense of approximately $4 million and a non-cash compensation expense of approximately $8 million to be expensed ratably over the three-year vesting period of the restricted stock issued in the exchange.18
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)In January 2004, the Compensation Committee of the board of directors of Charter approved Charter’s Long-Term Incentive Program (“LTIP”), which is a program administered under the 2001 Stock Incentive
PlanPlan. Employees of Charter and its subsidiaries whose pay classifications exceed a certain level are eligible toauthorizereceive stock options, and more senior level employees are eligible to receive stock options and performance shares. Under therepricingLTIP, the stock options vest 25% on each ofoutstanding options.the first four anniversaries of the date of grant. The performance shares are earned on the third anniversary of the grant date, conditional upon Charter’s performance against financial performance measures established by Charter’s management and approved by its board of directors as of the time of the award.15.
RELATED PARTIES Comcast Put Right.Related PartiesCC VIII.As part of the acquisition of the cable
televisionsystems owned by Bresnan Communications Company Limited Partnership in February 2000, CC VIII, LLC(CC VIII)(“CC VIII”),the Company'sCharter Holdings’ indirect limited liability company subsidiary, issued, after adjustments, 24,279,943 Class APreferred Membership Interestspreferred membership units (collectively, the"CC''CC VIIIInterest"interest’’) with a value and an initial capital account of approximately $630 million to certain sellers affiliated with AT&T Broadband,nowsubsequently owned by Comcast Corporation (the"Comcast Sellers"''Comcast sellers’’). While held by the ComcastSellers,sellers, the CC VIIIInterestinterest was entitled to a 2% priority return on its initial capitalamountaccount and such priority return was entitled to preferential distributions from available cash and upon liquidation of CC VIII. While held by the ComcastSellers,sellers, the CC VIIIInterestinterest generally did not share in the profits and losses of CC VIII.PaulMr. Allen granted the ComcastSellerssellers the right to sell to him the CC VIIIInterestinterest for approximately $630 million plus 4.5% interest annually from February 2000 (the"Comcast Put Right"''Comcast put right’’). In April 2002, the ComcastSellerssellers exercised the ComcastPut Rightput right in full, and this transaction was consummated on June 6, 2003. Accordingly, Mr. Allen has become the holder of the CC VIIIInterestinterest, indirectly through an affiliate. Consequently, subject to the matters referenced in the next paragraph, Mr. Allen generally thereafter will be allocated his pro rata share (based onthenumber of membership interests outstanding) of profits or losses of CCVIII.VIII, which is recorded in the accompanying condensed consolidated financial statements as minority interest. In the event of a liquidation of CC VIII, Mr. Allenwill notwould be entitled toanya prioritydistributions (exceptdistribution with respect to the 2% priority returnas to which such priority(which will continue to accrete), and Mr. Allen's share of any. Any remaining distributions in liquidation would be distributed to CC V Holdings, LLC and Mr. Allen in proportion to CC V Holdings, LLC’s capital account and Mr. Allen’s capital account (which willbeequaltothe initial capital account of the ComcastSellerssellers of approximately $630 million, increased or decreased by Mr.Allen'sAllen’s pro rata share of CCVIII'sVIII’s profits or losses (as computed for capital account purposes) after June 6,2003. At September 30, 2003, Mr. Allen's CC VIII Interest was $678 million.2003). The limited liability company agreement of CC VIII does not provide for a mandatory redemption of the CC VIIIInterest.interest.An issue has arisen as to whether the documentation for the Bresnan transaction was correct and complete with regard to the ultimate ownership of the CC VIII
Interestinterest following consummation of the ComcastPut Right. Charter's Boardput right. Specifically, under the terms ofDirectorsthe Bresnan transaction documents that were entered into in June 1999, the Comcast sellers originally would have received, after adjustments, 24,273,943 Charter Holdco membership units, but due to an FCC regulatory issue raised by the Comcast sellers shortly before closing, the Bresnan transaction was modified to provide that the Comcast sellers instead would receive the preferred equity interests in CC VIII represented by the CC VIII interest. As part of the last-minute changes to the Bresnan transaction documents, a draft amended version of the Charter Holdco limited liability company agreement was prepared, and contract provisions were drafted for that agreement that would have required an automatic exchange of the CC VIII interest for 24,273,943 Charter Holdco membership units if the Comcast sellers exercised the Comcast put right and sold the CC VIII interest to Mr. Allen or his affiliates. However, the provisions that would have required this automatic exchange did not appear in the final version of the Charter Holdco limited liability company agreement that was delivered and executed at the closing of the Bresnan transaction. The law firm that prepared the documents for the Bresnan transaction brought this matter to the attention of Charter and representatives of Mr. Allen in 2002.Thereafter, the board of directors of Charter formed a Special Committee
initially(currently comprised of Messrs. Tory, Wangberg andNelsonMerritt) to investigate the matter and take any other appropriate action onitsbehalf of Charter with respect to this matter.Charter's Board of Directors recently appointed David Merritt to the Special Committee to take the place of Mr. Nelson, who is no longer a director of Charter.After conducting an investigation of the relevant facts and circumstances,relating to this matter,the Special Committeehas reacheddetermined that apreliminary determination that, due to a mistake that''scrivener’s error’’ had occurred inpreparingFebruary 2000 in connection with the preparation19
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)of the last-minute revisions to the Bresnan transaction documents and that, as a result, Charter should seek the reformation of
certain contractual provisionsthe Charter Holdco limited liability company agreement, or alternative relief, insuch documentsorder to restore andhas notified Mr. Allen of this conclusion.ensure the obligation that the CC VIII interest be automatically exchanged for Charter Holdco units. The Special Committeealso has preliminarilyfurther determined that, as part of such contract reformation or alternative relief, Mr. Allen should be required to contribute the CC VIIIInterestinterest to Charter Holdco in exchange for 24,273,943 Charter Holdco membership units. The Special Committee alsohasrecommended to theBoardboard ofDirectorsdirectors of Charter that, to the extent the contract reformation is achieved, theBoardboard of directors should consider whether the CC VIIIInterestinterest should ultimately be held by Charter Holdcothe Companyor Charter Holdings or another entity owned directly or20CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)indirectly by them.Mr. Allen
has notified the Special Committee that hedisagrees with the SpecialCommittee's preliminary determinations.Committee’s determinations described above and has so notified the Special Committee. Mr. Allen contends that the transaction is accurately reflected in the transaction documentation and contemporaneous and subsequent company public disclosures.The parties engaged in a process of non-binding mediation to seek to resolve this matter, without success. The Special Committee is evaluating what further actions or processes it may undertake to resolve this
dispute, which may includedispute. To accommodate further deliberation, each party has agreed to refrain from initiating legal proceedings over this matter until it has given at least ten days’ prior notice to the other. In addition, the Special Committee and Mr. Allen have determined to utilize the Delaware Court of Chancery’s program for mediation of complex business disputes in an effort to resolve the CC VIII interest dispute. If the Special Committee and Mr. Allen are unable to reach a resolution through that mediation process or to agree on an alternative dispute resolutionproceedings orprocess, theinitiationSpecial Committee intends to seek resolution of this dispute through judicial proceedings in an action that would be commenced, after appropriate notice, in the Delaware Court ofChancery. Debt Held by Affiliates. CertainChancery against Mr. Allen and his affiliates seeking contract reformation, declaratory relief as to the respective rights of the parties regarding this dispute and alternative forms of legal and equitable relief. The ultimate resolution and financial impact of the dispute are not determinable at this time.TechTV, Inc.TechTV, Inc. (“TechTV”) operates a cable television network that offers programming mostly related
parties, including members of Charter's Board of Directorsto technology. Pursuant to an affiliation agreement that originated in 1998 andmanagement, hold intereststhat terminates in 2008, TechTV has provided the Company with programming for distribution via its cable systems. The affiliation agreement provides, among other things, that TechTV must offer Charter Holdco certain terms and conditions that are no less favorable in theCompany's senior notesaffiliation agreement than are given to any other distributor that serves the same number of or fewer TechTV viewing customers. Additionally, pursuant to the affiliation agreement, the Company was entitled to incentive payments for channel launches through December 31, 2003.In March 2004, Charter Holdco entered into agreements with Vulcan Programming and
discount notesTechTV, which provide for (i) Charter Holdco and TechTV to amend the affiliation agreement which, among other things, revises the description of the TechTV network content, provides for Charter Holdco to waive certain claims against TechTV relating to alleged breaches of the affiliation agreement and provides for TechTV to make payment of outstanding launch receivables due to Charter Holdco under the affiliation agreement, (ii) Vulcan Programming to pay approximately$56$10 million and purchase over a 24-month period, at fair market rates, $2 million offace valueadvertising time across various cable networks on the Company’s cable systems in consideration of the agreements, obligations, releases and waivers under the agreements and in settlement of the aforementioned claims and (iii) TechTV to be a provider of content relating to technology and video gaming for the Company’s interactive television platforms through December 31, 2006 (exclusive for the first year). The Company recognized approximately $4 million of the Vulcan Programming payment as an offset to programming expense during the three months ended March 31, 2004 with the remaining to be recognized over the term of the agreement. The Company believes that Vulcan Programming, which is 100% owned by Mr. Allen, owned an approximate 98% equity interest in TechTV as of March 31, 2004. Until September 2003, Mr. Savoy, a former Charter director, was the president and director of Vulcan Programming and was a director of TechTV. Mr. Wangberg, one of Charter’s directors, was the chairman, chief executive officer and a director of TechTV. Although Mr. Wangberg resigned as the chief executive officer of TechTV in July 2002, he remained a director of TechTV until Vulcan Programming sold TechTV to an unrelated20
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)third party in May 2004. Mr. Allen was a director of TechTV until such sale.
Digeo, Inc.On June 30, 2003, Charter Holdco entered into an agreement with Motorola for the purchase of 100,000 digital video recorder (“DVR”) units. The software for these DVR units is being supplied by Digeo Interactive, LLC (“Digeo Interactive”), a wholly owned subsidiary of Digeo, Inc. (“Digeo”), under a license agreement entered into in April 2004. Under the license agreement Digeo Interactive granted to Charter Holdco the right to use Digeo’s proprietary software for the number of DVR units that the Company deploys from a maximum of 10 headends through year-end 2004. The license granted for each unit deployed under the agreement is valid for five years. In addition, the Company will pay certain other fees including a per-headend license fee and maintenance fees. Total license and maintenance fees during the term of the agreement are expected to be approximately $3 million. The agreement provides that the Company is entitled to receive contract terms, considered on the whole, and license fees, considered apart from other contract terms, no less favorable than those accorded to any other Digeo customer.
In May 2004, Charter Holdco entered into a binding term sheet with Digeo Interactive for the purchase of 70,000 Digeo PowerKey DVR units. The term sheet provides that the parties will proceed in good faith to negotiate, prior to year-end 2004, definitive agreements for the purchase of the DVR units and that the parties will enter into a license agreement for Digeo’s proprietary software on terms substantially similar to the terms of the license agreement described above. Total purchase price and license and maintenance fees during the term of the definitive agreements are expected to be approximately $40 million. The term sheet and any definitive agreements will be terminable at no penalty to Charter Holdco in certain circumstances.
The Company believes that Vulcan Ventures, an entity controlled by Mr. Allen, owns an approximate 60% equity interest in Digeo, Inc. Messrs. Allen and Vogel are directors of Digeo. Mr. Savoy, who resigned from Charter’s board of directors in April 2004, was a director and served on the compensation committee of Digeo until September
30,2003. Mr. Vogel owns options to purchase 10,000 shares of Digeo common stock.21
ITEM 2.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.GENERALGeneral
Charter Communications Holdings, LLC
("(“CharterHoldings"Holdings”) is a holding company whose principal assets as ofSeptember 30, 2003March 31, 2004 are equity interests in itscableoperating subsidiaries. Charter Holdings is a subsidiary of Charter Communications Holding Company, LLC("(“CharterHoldco"Holdco”), which is a subsidiary of Charter Communications, Inc.("Charter"(“Charter”)."We," "us"“We,” “us” and"our"“our” refer to Charter Holdings and its subsidiaries. Weownoffer our customers traditional cable video programming (analog andoperate cable systems that provide a full range ofdigital video) as well as high-speed data services and in some areas advanced broadband services such as high definition television, videodata,on demand, telephony andotherinteractive television. We sell our cable video programming, high-speed data and advanced broadbandservices. We also provide commercial high-speed data, video and telephonyservicesand sell advertising and production services.on a subscription basis.The following table summarizes our
approximatecustomer statistics for analog and digital video, residential high-speed datatelephony,andadvanced servicesresidential telephony as ofSeptember 30,March 31, 2004 and 2003:
Approximate as of March 31, March 31, 2004 (a) 2003 (a) Residential (non-bulk) analog video customers (b) 5,953,200 6,277,300 Multi-dwelling (bulk) and commercial unit customers (c) 238,800 250,900
Analog video customers (b)(c) 6,192,000 6,528,200
Digital video customers (d) 2,657,400 2,651,100 Digital percentage of analog video customers (b)(c)(d)(e) 43 % 41 % Digital set-top terminals deployed 3,756,300 3,749,400 Residential high-speed data customers (f) 1,653,000 1,272,300 Dial-up customers 8,900 12,700 Telephony customers (g) 26,300 22,800 Pro forma for the effect of the sale of systems to Atlantic Broadband Finance, LLC, which closed in March and April 2004, and to WaveDivision Holdings, LLC, which closed on October 1, 2003,
June 30,as if all of these sales had occurred as of January 1, 2003, analog video customers, digital video customers andSeptember 30, 2002:residential high-speed data customers would have been 6,265,900, 2,556,700 and 1,229,200, respectively as of March 31, 2003.
APPROXIMATE AS OF -------------------------------------------------- SEPTEMBER 30, JUNE 30, SEPTEMBER 30,(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). Further, “customers” include persons receiving service under promotional programs that offered up to two months of service for free, some of whom had not requested to be disconnected, but had not become paying customers as of March 31, 2004. If such persons do not become paying customers, we do not believe this would have a material impact on our consolidated financial condition or consolidated results of operations. In addition, at March 31, 2004 and 2003, (A) 2003 (A) 2002 (A) ---------- ---------- ----------CUSTOMER SUMMARY: CUSTOMER RELATIONSHIPS: Video“customers” include approximately 5,800 and 3,700 persons, whose accounts were over 90 days past due in payment and approximately 2,200 and 1,000 of which were over 120 days past due in payment, respectively.(b) “Residential (non-bulk) analog video customers” include all residential customers (b)who receive video services, except for complimentary accounts (such as our employees).22
(c) 6,498,100 6,486,900 6,647,600 Non-video customers (b) 54,800 52,000 50,300 ---------- ---------- ---------- Total customer relationships (d) 6,552,900 6,538,900 6,697,900 ========== ========== ========== Average monthly revenue per customer relationship (e) $ 61.46 $ 61.82 $ 57.66 Bundled customers (f) 1,434,900 1,297,000 919,600 REVENUE GENERATING UNITS: AnalogIncluded within video customers (b)(c) 6,498,100 6,486,900 6,647,600are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit (“EBU”) basis. EBU is calculated for a system by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service. The EBU method of estimating analog video customers is consistent with the methodology used in determining costs paid to programmers and has been consistently applied year over year. As we increase our effective analog video prices to residential customers without a corresponding increase in the prices charged to commercial service or multi-dwelling customers, our EBU count will decline even if there is no real loss in commercial service or multi-dwelling customers.(d) “Digital video customers (g) 2,664,800 2,603,900 2,527,700 High-speed data customers (h)(i) 1,489,700 1,349,000 969,900 Telephony customers (j) 24,100 23,700 19,700 ---------- ---------- ---------- Total revenue generating units (k) 10,676,700 10,463,500 10,164,900 ========== ========== ========== VIDEO SERVICES: ANALOG VIDEO: Estimated homes passed (l) 12,403,400 12,189,400 11,972,600 Analogcustomers” include all households that have one or more digital set-top terminals. Included in digital video customers(b)(c) 6,498,100 6,486,900 6,647,600 Estimated penetrationon March 31, 2004 and 2003 are approximately 12,000 and 14,800 customers, respectively, that receive digital video service directly through satellite transmission.(e) Represents the number of analog video homes passed (b)(c)(l)(m) 52% 53% 56% Average monthly analog revenue per analog video customer (n) $ 36.66 $ 36.98 $ 35.75 DIGITAL VIDEO: Estimateddigitalhomes passed (l) 12,243,300 11,958,200 11,492,800 Digitalvideo customers(g) 2,664,800 2,603,900 2,527,700 Estimated penetration of digital homes passed (g)(l)(m) 22% 22% 22% Digitalas a percentage of analog video customers.(f) All of these customers (b)(c)(g)(o) 41% 40% 38% Digital set-top terminals deployed 3,749,200 3,680,000 3,537,800 Average incremental monthly digital revenue per digitalalso receive videocustomer (n) $ 23.41 $ 23.47 $ 23.77 Estimatedservice and are included in the videoon demand homes passed (l) 3,948,700 3,371,900 1,994,70022
NON-VIDEO SERVICES: HIGH-SPEED DATA SERVICES: Estimatedstatistics above, except that the video statistics do not include approximately 142,700 and 56,700 of these customers at March 31, 2004 and 2003, respectively, who were residential high-speed datahomes passed (l) 10,496,900 10,013,100 8,973,200 Residential high-speed data customers (h) (i) 1,489,700 1,349,000 969,900 Estimated penetration of high-speed data homes passed (h)(i)(l)(m) 14% 13% 11% Average incremental monthly high-speed data revenue per high-speed data customer (n) $ 34.05 $ 34.59 $ 33.70 Dial-up customers 10,900 11,700 15,800only customers.(g) “Telephony customers (j) 24,100 23,700 19,700customers” include all households receiving telephone service.(a) "Customers" include all persons corporate billing records show as receiving service, regardlessOverview of
their payment status, except for complimentary accounts (such as our employees). (b) Analog video customers include all customers who purchase video services (including those who also purchase high-speed data and telephony services), but excludes approximately 54,800, 52,000 and 50,300 customer relationships, respectively, who pay for high-speed data service only and who are only counted as high-speed data customers (and therefore are shown as "non-video" customers). This represents a change in our methodology from prior reports through September 30, 2002, in which high-speed data service only customers were included within our analog video customers. We made this change because we determined that most of these customers were unable to receive our most basic level of analog video service because this service was physically secured or blocked, was unavailable in certain areas or the customers were unaware that this service was available to them. However, this year through an ongoing study, we have determined that 13,400 of these high-speed data customers have been receiving or were otherwise upgraded to receive, analog video services. This resulted in 11,100 customers being added to the June 30, 2003 analog video customers and an additional 2,300 being added to the September 30, 2003 analog video customers. Additionally, 135,200 of our analog video customers have been added during this quarter pursuant to promotional programs, which include the initial two months of service for free. There is no assurance that they will remain as customers once the period of free service expires. (c) Included within video customers are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit ("EBU") basis. EBU is calculated for a system by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service. The EBU method of estimating analog video customers is consistent with the methodology used in determining costs paid to programmers and has been consistently applied year over year. As we increase our effective analog prices to residential customers without a corresponding increase in the prices charged to commercial service or multi-dwelling customers, our EBU count will decline even if there is no real loss in commercial service or multi-dwelling customers. Our policy is not to count complimentary accounts (such as our employees) as customers. (d) Customer relationships include the number of customers that receive at least one level of service encompassing video and data services, without regard to which service(s) such customers purchase. This statistic is computed in accordance with the guidelines of the National Cable & Telecommunications Association (NCTA) that have been adopted by eleven publicly traded cable operators (including Charter) as an industry standard. (e) Average monthly revenue per customer relationship is calculated as total quarterly revenue divided by three divided by the average number of customer relationships during the respective quarter. (f) Bundled customers include customers subscribing to Charter's video service and data service. Bundled customers do not include customers who only subscribe to video service. 23(g) Digital video customers include all households that have one or more digital set-top terminals. Included in digital video customers at September 30, 2003, June 30, 2003 and September 30, 2002 are approximately 12,600, 13,300 and 13,400 customers, respectively, that receive digital video service directly through satellite transmission. Additionally, 121,000 of our digital video customers have been added during this quarter pursuant to promotional programs which include the initial two months of service for free. There is no assurance that they will remain as customers once the period of free service expires. (h) As noted above, all of these customers also receive video service and are included in the video statistics above, except that the video statistics do not include approximately 54,800, 52,000 and 50,300 of these customers at September 30, 2003, June 30, 2003 and September 30, 2002, respectively, who were high-speed data only customers. Additionally, 103,800 of our high-speed data customers have been added during this quarter pursuant to promotional programs, which include the initial two months of service for free. There is no assurance that they will remain as customers once the period of free service expires. (i) During the first three quarters of 2002, commercial high-speed data customers were calculated on an Equivalent Modem Unit or EMU basis, which involves converting commercial revenues to residential customer counts. Given the growth plans for our commercial data business, we do not believe that converting commercial revenues to residential customer counts is the most meaningful way to disclose or describe this growing business. We, therefore, excluded 85,500 EMUs that were previously reported in our September 30, 2002 customer totals for comparative purposes. (j) Telephony customers include all households purchasing telephone service. (k) Revenue generating units represent the sum total of all primary analog video, digital video, high-speed data and telephony customers (including those under promotional pricing programs that may not generate cash revenues initially or at all), not counting additional outlets within one household. For example, a customer who receives two types of services (such as analog video and digital video) would be treated as two revenue generating units, and if that customer added on high-speed data service, the customer would be treated as three revenue generating units. This statistic is computed in accordance with the guidelines of the NCTA that have been adopted by eleven publicly traded cable operators (including Charter) as an industry standard. (l) Homes passed represents our estimate of the number of living units, such as single family homes, apartment units and condominium units passed by the cable distribution network in the areas in which we offer the service indicated. Homes passed excludes commercial units passed by the cable distribution network. The figures in this table reflect an increase at September 30, 2003 in our estimated homes passed from that previously reported for June 30, 2003. This increase is in part due to a refinement of methods used to estimate homes passed and in part due to line mileage within our network that was not previously reflected. (m) Penetration represents customers as a percentage of homes passed. (n) Average monthly revenue represents quarterly revenue for the service indicated divided by three divided by average number of customers for the service indicated during the respective quarter. (o) Represents the number of digital video customers as a percentage of analog video customers. RESTATEMENT OF CONSOLIDATED FINANCIAL RESULTS As discussed in our 2002 Form 10-K, we identified a series of adjustments that have resulted in the restatement of previously announced quarterly results for the first three quarters of fiscal 2002. In summary, the adjustments are grouped into the following categories: (i) launch incentives from programmers; (ii) customer incentives and inducements; (iii) capitalized labor and overhead costs; (iv) customer acquisition costs; (v) rebuild and upgrade of cable systems; (vi) deferred tax liabilities/franchise assets; and (vii) other adjustments. These adjustments have been reflected in the accompanying condensed consolidated financial statements and reduced revenues for the three and nine months ended September 30, 2002 by $13 million and $38 million, respectively. Our consolidated net loss 24decreased by $125 million and increased by $105 million for the three and nine months ended September 30, 2002, respectively. In addition, as a result of certain of these adjustments, our statement of cash flows for the nine months ended September 30, 2002 has been restated. Cash flows from operating activities for the nine months ended September 30, 2002 decreased by $29 million. The more significant categories of adjustments relate to the following as outlined below. Launch Incentives from Programmers. Amounts previously recognized as advertising revenue in connection with the launch of new programming channels have been deferred and recorded in other long-term liabilities in the year such launch support was provided, and amortized as a reduction of programming costs based upon the relevant contract term. These adjustments decreased revenue by $10 million and $30 million for the three and nine months ended September 30, 2002, respectively. The corresponding amortization of such deferred amounts reduced programming expenses by $12 million and $35 million for the three and nine months ended September 30, 2002. Customer Incentives and Inducements. Marketing inducements paid to encourage potential customers to switch from satellite providers to Charter branded services and enter into multi-period service agreements were previously deferred and recorded as property, plant and equipment and recognized as depreciation and amortization expense over the life of customer contracts. These amounts have been restated as a reduction of revenues of $2 million and $5 million for the three and nine months ended September 30, 2002. Substantially all of these amounts are offset by reduced depreciation and amortization expense. Capitalized Labor and Overhead Costs. Certain elements of labor costs and related overhead allocations previously capitalized as property, plant and equipment as part of our rebuild activities, customer installations and new service introductions have been expensed in the period incurred. Such adjustments increased operating expenses by $13 million and $39 million for the three and nine months ended September 30, 2002. Customer Acquisition Costs. Certain customer acquisition campaigns were conducted through third-party contractors in portions of 2002. The costs of these campaigns were originally deferred and recorded as other assets and recognized as amortization expense over the average customer contract life. These amounts have been reported as marketing expense in the period incurred and totaled $13 million and $32 million for the three and nine months ended September 30, 2002. We discontinued this program in the third quarter of 2002 as contracts for third-party vendors expired. Substantially all of these amounts are offset by reduced depreciation and amortization expense. Rebuild and Upgrade of Cable Systems. In 2000, we initiated a three-year program to replace and upgrade a substantial portion of our network. In connection with this plan, we assessed the carrying value of, and the associated depreciable lives of, various assets to be replaced. It was determined that $1 billion of cable distribution system assets, originally treated as subject to replacement, were not part of the original replacement plan but were to be upgraded and have remained in service. We also determined that certain assets subject to replacement during the upgrade program were misstated in the allocation of the purchase price of the acquisition. This adjustment reduced property, plant and equipment and increased franchise costs by $627 million. In addition, the depreciation period for the assets subject to replacement was adjusted to more closely align with the intended service period of these assets rather than the three-year straight-line life originally assigned. As a result, adjustments were recorded to reduce depreciation expense by $115 million and $353 million for the three and nine months ended September 30, 2002. Deferred Tax Liabilities/Franchise Assets. Adjustments were made to record deferred tax liabilities associated with the acquisition of various cable television businesses. These adjustments increased amounts assigned to franchise assets by $1.4 billion with a corresponding increase in deferred tax liabilities of $0.6 billion and to member's equity of $0.8 billion. In addition, as described above, a correction was made to reduce amounts assigned in purchase accounting to assets identified for replacement over the three-year period of our rebuild and upgrade of its network. This reduced the amount assigned to the network assets to be retained and increased the amount assigned to franchise assets by $627 million with a resulting increase in amortization expense for the years restated. Such adjustments increased the cumulative effect of accounting change recorded upon adoption of Statement of Financial Accounting Standards No. 142 by $199 million, before tax effects, for the nine months ended September 30, 2002. Other Adjustments. In addition to the items described above, other adjustments of expenses include additional amounts charged to special charges related to the 2001 restructuring plan, certain tax reclassifications from tax 25expense to operating costs and other miscellaneous adjustments. The net impact of these adjustments to net loss is a decrease of $1 million and an increase of $4 million for the three and nine months ended September 30, 2002. The following tables summarize the effects of the adjustments on the condensed consolidated statements of operations and cash flows for the three and nine months ended September 30, 2002 (dollars in millions). CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2002 ------------------------- ------------------------ AS PREVIOUSLY AS PREVIOUSLY REPORTED RESTATED REPORTED RESTATED -------- -------- -------- --------Revenues $ 1,179 $ 1,166 $ 3,415 $ 3,377 Income (loss) from operations (17) 91 (47) 273 Minority interest (3) (3) (10) (11) Cumulative effect of accounting change, net of tax -- -- (83) (540) Net loss (461) (336) (1,311) (1,416)CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------------------ AS PREVIOUSLY REPORTED RESTATED ------------ ----------Net cash flows from operating activities $532 $503 Net cash flows from investing activities (1,807) (1,783) Net cash flows from financing activities 1,778 1,782OVERVIEWOperationsWe have
hada history of net losses. Further, we expect to continue to report net losses for the foreseeable future.The principal reasons for our priorOur net lossesinclude our depreciation and amortization expensesare principally attributable to insufficient revenue to cover the combination of operating costs and interest costswhich decreasedwe incur because of our high level of debt, depreciation expenses that we incur resulting from the capital investments we have made and continue to make inthe aggregate by $3 millionour cable properties, and amortization and impairment of our franchise intangibles. We expect that these expenses (other than amortization and impairment of franchises) will remain significant, and we therefore expect to continue to report net losses for thethree months ended September 30, 2003, as compared to the same prior year period and increased in the aggregate by $106 million for the nine months ended September 30, 2003 as compared to the same prior year period. Continued net losses could have a material adverse impact on our ability to access necessary capital and to fund ongoing operations.foreseeable future.
For the three months endedSeptember 30,March 31, 2004 and 2003,and 2002,our income from operations, which includes depreciation and amortization expense but excludes interest expense, was$117$175 million and$91$77 million, respectively.For the nine months ended September 30, 2003 and 2002, our income from operations was $306 million and $273 million, respectively. TheseOur operating margins increased from8%7% for the three months endedSeptember 30, 2002March 31, 2003 to10%14% for the three months endedSeptember 30, 2003,March 31, 2004, primarily the result of a gain on the sale of certain cable systems in Florida, Pennsylvania, Maryland, Delaware andremained constant at 8% forWest Virginia to Atlantic Broadband Finance, LLC of approximately $108 million, partially offset by increases in option compensation expense and special charges that we recognized in theninethree months endedSeptember 30, 2003March 31, 2004.
Since our inception, and2002. Historically,currently, our ability to conduct operations has been and continues to be dependent on ourcontinuedaccess to creditpursuant to our subsidiaries' credit facilities. While our use of cash has migrated over time such that the substantial majority of our cash now comes from cash flows from operations, we expect we will continue to borrowunder oursubsidiaries'creditfacilities from time to time to fund cash needs.facilities. The occurrence of an event of default under oursubsidiaries'credit facilities could result in borrowings from these credit facilities being unavailable to us and could, in the event of a payment default or acceleration, also trigger events of default under ourand our subsidiaries'outstandingpublicnotes and would have a material adverse effect on us.In addition,Including the effects of the refinancing in April 2004, approximately$108$15 million of our financing26matures during the remainder of 2003,2004, which we expect to fund throughavailabilityborrowings under oursubsidiaries'credit facilities.CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We disclosedFor a discussion of our critical accounting policies and the means by which we develop estimates
therefor in "Itemtherefore see “Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” in our20022003 Annual Report on Form 10-K.23
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002The following table sets forth the percentages of revenues that items in the accompanying condensed consolidated statements of operations
constituteconstituted for the periods presented (dollars in millions):
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------- 2003 2002 ---------------------------- -------------------------- (RESTATED)Revenues $ 1,207 100% $ 1,166 100% --------------- --------- -------------- ------- Costs and expenses: Operating (excluding depreciation and amortization and other items listed below) 484 40% 457 39% Selling, general and administrative 235 19% 243 21% Depreciation and amortization 362 30% 374 32% Option compensation expense, net 1 - 1 - Special charges, net 8 1% - - --------------- --------- -------------- ------- 1,090 90% 1,075 92% --------------- --------- -------------- ------- Income from operations 117 10% 91 8% --------------- -------------- Interest expense, net (368) (359) Gain (loss) on derivative instruments and hedging activities, net 31 (76) Gain on debt exchange, net 187 - Other, net (2) (1) --------------- -------------- (152) (436) --------------- -------------- Loss before minority interest and income taxes (35) (345) Minority interest (4) (4) --------------- -------------- Loss before income taxes (39) (349) Income tax benefit (expense) (1) 13 --------------- -------------- Net loss $ (40) $ (336) =============== ==============REVENUES.
Three Months Ended March 31, 2004 2003 Revenues $ 1,214 100 % $ 1,178 100 %
Costs and expenses: Operating (excluding depreciation and amortization) 512 42 % 485 41 % Selling, general and administrative 239 20 % 235 20 % Depreciation and amortization 370 31 % 370 31 % (Gain) loss on sale of assets, net (106 ) (9 )% 9 1 % Option compensation expense, net 14 1 % — — Special charges, net 10 1 % 2 —
1,039 86 % 1,101 93 %
Income from operations 175 14 % 77 7 %
Interest expense, net (381 ) (370 ) Gain (loss) on derivative instruments and hedging activities, net (7 ) 14 Other, net (1 ) —
(389 ) (356 )
Loss before minority interest and income taxes (214 ) (279 ) Minority interest (3 ) (3 )
Loss before income taxes (217 ) (282 ) Income tax expense (1 ) (1 )
Net loss $ (218 ) $ (283 )
Revenues.Revenues increased by
$41$36 million, or4%3%, from $1.2 billion for the three months endedSeptember 30,March 31, 2003as comparedto $1.2 billion for the three months endedSeptember 30, 2002.March 31, 2004. This increase is principally the result ofincreases in the numberan increase of 380,700 and 6,300 high-speed data and digital video customers, respectively, as well as price increases for video and high-speed data services, and is offsetsomewhatpartially by a decrease of 336,200 analog video customers. Included in thedeclinereduction inanalog customers. At September 30, 2003, we had approximately 135,200analog video customers121,000and reducing the increase in digital video and high-speed data customers are 262,300 analog video customers, 94,400 digital video customers and103,80043,100 high-speed data customersthat were obtained through promotional programs and are in free service periods. These free service periods generally expire in November 2003. We believe this strategy will reposition our services to these consumers and build a foundation for expected 27increases in revenuessold in thefuture. We have instituted specific retention programscable system sales to Atlantic Broadband Finance, LLC, which closed on March 1, 2004, and to WaveDivision Holdings, LLC, which closed on October 1, 2003 (collectively referred to herein as the “Systems Sales”), and the sale of the New York system to Atlantic Broadband Finance, LLC, which occurred inthe fourth quarter for customers added from these promotional offers which include offering additional incremental services such as video on demand, subscription video on demand and increased speed and broadband content for our high-speed data platform.April 2004. Our goal is to increase revenues byreversingstabilizing our analog video customerlosses,base, implementinglimitedprice increases on certain services and packages and increasing revenues from incremental high-speed data services, digital video and advanced products and services, such as telephony using voice-over-Internet protocol, video on demand (“VOD”), high definition television and digital video recorders, that we provide to our existing customer base and commercialservices to new and existingcustomers.Average monthly revenue per customer relationship increased from $57.66 for the three months ended September 30, 2002 to $61.46 for the three months ended September 30, 2003. Average monthly revenue per customer relationship represents total revenue for the three months ended September 30, divided by three, divided by the average number of customer relationships. In the third quarter of 2003, we changed our revenue classifications. Commercial revenue, which was included within the video, high-speed data, and other revenue line items on our statements of operations, is now broken out as a separate component of revenue.24
Revenues by service offering are as follows (dollars in millions):
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------------- 2003 2002 2003 OVER 2002 ---------------------------- ----------------------------- ----------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES CHANGE ------------ ------------ ------------ ------------ ------------ ------------Video $866 72% $862 74% $4 - High-speed data 145 12% 91 8% 54 59% Advertising sales 64 5% 86 7% (22) (26)% Commercial 52 4% 41 4% 11 27% Other 80 7% 86 7% (6) (7)% ------------ ------------ ------------ ------------ ------------ $1,207 100% $1,166 100% $41 4% ============ ============ ============ ============ ============
Three Months Ended March 31, 2004 2003 2004 over 2003 % of % of % Revenues Revenues Revenues Revenues Change Change Video $ 849 70 % $ 866 74 % $ (17 ) (2 )% High-speed data 168 14 % 122 10 % 46 38 % Advertising sales 59 5 % 57 5 % 2 4 % Commercial 56 4 % 47 4 % 9 19 % Other 82 7 % 86 7 % (4 ) (5 )%
$ 1,214 100 % $ 1,178 100 % $ 36 3 %
Video revenues consist primarily of revenues from analog and digital
services.video services provided to our non-commercial customers. Video revenuesincreaseddecreased by$4$17 million,toor 2%, from $866 million for the three months endedSeptember 30,March 31, 2003as comparedto$862$849 million for the three months endedSeptember 30, 2002. The increaseMarch 31, 2004. Approximately $14 million of the decrease was the result of the System Sales, while the remaining decrease of approximately $3 million was primarilydue to rate increases andtheadditionresult ofdigital video customers, offset somewhat by thea decline in analog video customers partially offset by price increases and an increase in digital video customers.High-speedRevenues from high-speed data
revenuesservices provided to our non-commercial customers increased$54$46 million, or59%38%, from$91$122 million for the three months endedSeptember 30, 2002March 31, 2003 to$145$168 million for the three months endedSeptember 30, 2003.March 31, 2004. Approximately 92% of the increase related to the increase in the average number of customers, whereas approximately 8% related to the increase in average price of the service. The increase was primarilydue tothe result of the addition ofhigh-speed data customers. We increased the number of ourhigh-speed data customers within our existing service areas. We were also able to offer this service to more of our customers, as the estimated percentage of homes passed that could receive high-speed data service increased from75%84% as ofSeptember 30, 2002March 31, 2003 to85%87% as ofSeptember 30, 2003March 31, 2004 as a result of our system upgrades.Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors. Advertising sales
decreased $22increased $2 million, or26%4%, from $57 million for the three months ended March 31, 2003 to $59 million for the three months ended March 31, 2004, primarily as a result of an increase in local advertising sales revenues offset partially by a decrease in advertising revenue from vendors. For the three months ended March 31, 2004 and 2003, we received $3 million and $4 million, respectively, in advertising revenue from vendors.Commercial revenues consist primarily of revenues from cable video and high-speed data services to our commercial customers. Commercial revenues increased $9 million, or 19%, from $47 million for the three months ended March 31, 2003 to $56 million for the three months ended March 31, 2004, primarily a result of an increase in commercial high-speed data revenues.
Other revenues consist of revenues from franchise fees, equipment rental, customer installations, home shopping, dial-up Internet service, late payment fees, wire maintenance fees and other miscellaneous revenues. Other revenues decreased $4 million, or 5%, from $86 million for the three months ended
September 30, 2002March 31, 2003 to$64$82 million for the three months endedSeptember 30, 2003. For the three months ended September 30, 2003 and 2002, we received $3 million and $27 million, respectively, in advertising revenue from vendors. Commercial revenues consist primarily of revenues from commercial video and high-speed data services. Commercial revenues increased $11 million, or 27%, from $41 million for the three months ended September 2002 to $52 million for the three months ended September 30, 2003 primarily due to an increase in commercial high-speed data revenues. Other revenues consist primarily of revenues from franchise fees, late payment fees, customer installations, wire maintenance fees, home shopping, equipment rental, dial-up Internet service and other miscellaneous revenues. Other revenues decreased $6 million, or 7%, from $86 million for the three months ended September 30, 2002 to 28$80 million for the three months ended September 30, 2003.March 31, 2004. The decrease was primarilydue tothe result of a decrease inprocessing fees andinstallation revenue.OPERATING EXPENSES.25
Operating Expenses.Operating expenses increased $27 million, or 6%, from
$457$485 million for the three months endedSeptember 30, 2002March 31, 2003 to$484$512 million for the three months endedSeptember 30, 2003. Total programmingMarch 31, 2004. Programming costspaid to programmersincluded in the accompanying condensed consolidated statements of operations were$307$334 million and$296$314 million, representing28%32% and 29% of total costs and expenses for the three months endedSeptember 30,March 31, 2004 and 2003,and 2002,respectively. Key expense components as a percentage of revenuesarewere as follows (dollars in millions):
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------------- 2003 2002 2003 OVER 2002 ---------------------------- ----------------------------- ----------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES CHANGE ------------ ------------ ------------ ------------ ------------ ------------Programming costs $307 25% $296 25% $11 4% Advertising sales 21 2% 23 2% (2) (9)% Service costs 156 13% 138 12% 18 13% ------------ ------------ ------------ ------------ ------------ $484 40% $457 39% $27 6% ============ ============ ============ ============ ============
Three Months Ended March 31, 2004 2003 2004 over 2003 % of % of % Expenses Revenues Expenses Revenues Change Change Programming $ 334 27 % $ 314 26 % $ 20 6 % Advertising sales 23 2 % 21 2 % 2 10 % Service costs 155 13 % 150 13 % 5 3 %
$ 512 42 % $ 485 41 % $ 27 6 %
Programming costs consist primarily of costs paid to programmers for the provision of analog, premium and digital channels and pay-per-view
programs.programming. The increase in programming costs of$11$20 million, or4%6%, for the three months ended March 31, 2004 over the three months ended March 31, 2003, wasprimarily due toa result of price increases, particularly in sports programming,andan increased number of channels carried on our systems, and an increase in digital video customers, partially offset bydecreasesa decrease in analog video customers. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channelsagainst programming costsof$16$14 million and$15$16 million for the three months endedSeptember 30,March 31, 2004 and 2003,and 2002,respectively. Programming costsfor the three months ended September 30, 2003alsoincludedinclude a$9$4 million reduction related tochanges in estimatesthe settlement ofprogrammer-related disputes, which represented 3% of quarterly programming costs.a dispute with TechTV, Inc. See note 15 to the condensed consolidated financial statements.Our cable programming costs have increased in every year we have operated in excess of customary inflationary and cost-of-living type increases, and
they are expectedwe expect them to continue to increasedue tobecause of a variety of factors, including additional programming being provided to customers as a result of system rebuilds that increase channel capacity, increased costs to produce or purchasecable programming, increased costs from certain previously discountedprogramming and inflationary or negotiated annual increases. Our increasing programming costs will result in declining video product margins to the extent we are unable to pass on cost increases to our customers. We expect to partially offset any resulting margin compression from our traditionalcorevideo services with revenue fromotheradvanced video services, increased incremental high-speed data revenues, advertising revenues and commercial services revenues.Advertising sales expenses consist of costs related to traditional advertising services provided to advertising customers, including salaries and benefits and commissions. Advertising sales expenses
decreasedincreased $2 million, or9%10%, primarilydue to decreased sales commissions.as a result of increased salary and benefit costs and marketing costs. Service costs consist primarily of service personnel salaries and benefits, franchise fees, system utilities, Internet service provider fees, maintenance and pole rent expense. The increase in service costs of$18$5 million, or13%3%, resulted primarily from additional activity associated withon-goingongoing infrastructure maintenance.29SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.26
Selling, General and Administrative Expenses.Selling, general and administrative expenses
decreasedincreased by$8$4 million, or3%2%, from$243 million for the three months ended September 30, 2002 to$235 million for the three months endedSeptember 30, 2003.March 31, 2003 to $239 million for the three months ended March 31, 2004. Key components of expense as a percentage of revenuesarewere as follows (dollars in millions):
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------------- 2003 2002 2003 OVER 2002 ---------------------------- ----------------------------- ----------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES CHANGE ------------ ------------ ------------ ------------ ------------ ------------General and administrative $ 204 17% $ 201 17% $ 3 1% Marketing 31 2% 42 4% (11) (26)% ----------- ------------- ----------- ------------ ----------- $ 235 19% $ 243 21% $ (8) (3)% =========== ============= =========== ============ ===========
Three Months Ended March 31, 2004 2003 2004 over 2003 % of % of Expenses Revenues Expenses Revenues Change % Change General and administrative $ 208 17 % $ 215 18 % $ (7 ) (3 )% Marketing 31 3 % 20 2 % 11 55 %
$ 239 20 % $ 235 20 % $ 4 2 %
General and administrative expenses consist primarily of salaries and benefits, rent expense, billing costs,
bad debt expense and property taxes. The increase in general and administrative expenses of $3 million, or 1%, resulted primarily from small increases in several expense categories. These increases were partially offset by a decrease in bad debt expense of $7 million as we continue to realize benefits from our strengthened credit policies. Marketing expenses decreased $11 million, or 26%, due to reduced promotional activity related to our service offerings including reductions in advertising, telemarketing and direct sales activities. We expect marketing expenses to increase in subsequent quarters. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased by $12 million, or 3%, from $374 million for the three months ended September 30, 2002 to $362 million for the three months ended September 30, 2003. This decrease was due primarily to a decrease in depreciation expense related to the recording of a gain on sales of certain assets. OPTION COMPENSATION EXPENSE, NET. Option compensation expense remained constant at approximately $1 million for the three months ended September 30, 2003 and 2002. Option compensation expense represents expense related to exercise prices on certain options that were issued prior to Charter's initial public offering in 1999 that were less than the estimated fair values of Charter's common stock at the time of grant. Compensation expense is being accrued over the vesting period of such options and will continue to be recorded until the last vesting period lapses in April 2004. On January 1, 2003, we adopted SFAS No. 123 "Accounting for Stock-Based Compensation" using the prospective method under which we recognize compensation expense of a stock-based award to an employee over the vesting period based on the fair value of the award on the grant date. SPECIAL CHARGES, NET. Special charges of $8 million for the three months ended September 30, 2003 primarily represents severance, leasecall center costs,and other related costs of our on-going initiative to reduce our workforce. We expect to continue to record additional special charges in 2003 related to the continued reorganization of our operations. INTEREST EXPENSE, NET. Net interest expense increased by $9 million, or 3%, from $359 million for the three months ended September 30, 2002 to $368 million for the three months ended September 30, 2003. The increase in net interest expense was a result of a $0.9 billion increase in average debt outstanding to $17.7 billion for the third quarter of 2003 compared to $16.8 billion for the third quarter of 2002, partially offset by a decrease in our average borrowing rate from 8.27% in the third quarter of 2002 to 8.10% in the third quarter of 2003. The increased debt was primarily used for capital expenditures. GAIN (LOSS) ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, NET. Net gain on derivative instruments and hedging activities increased $107 million from a loss of $76 million for the three months ended September 30, 2002 to a gain of $31 million for the three months ended September 30, 2003. The increase is primarily due to an increase in gains on interest rate agreements, which do not qualify for hedge accounting under Statement of Financial Accounting Standards (SFAS) No. 133, which increased from a loss of $79 million for the three months ended September 30, 2002 to a gain of $31 million for the three months ended September 30, 2003. 30GAIN ON DEBT EXCHANGE, NET. Net gain on debt exchange of $187 million for the three months ended September 30, 2003 represents the gain realized on the purchase of an aggregate of $1.3 billion principal amount of Charter Holdings' senior notes and senior discount notes in consideration for an aggregate of $1.1 billion principal amount of 10.25% notes due 2010 issued by CCH II, LLC (CCH II). The gain is net of the write-off of deferred financing costs associated with the retired debt of $18 million. OTHER, NET. Net other expense increased by $1 million from $1 million for the three months ended September 30, 2002 to $2 million for the three months ended September 30, 2003. This increase is primarily due to an increase in loss on investments. MINORITY INTEREST. Minority interest expense represents the 2% accretion of the preferred membership interests in CC VIII, LLC (CC VIII) and since June 6, 2003, the pro rata share of the profits of CC VIII. INCOME TAX BENEFIT (EXPENSE). Income tax expense of $1 million was recognized for the three months ended September 30, 2003. The income tax expense is realized through increases in deferred tax liabilities and federal and state income taxes related to our indirect subsidiaries. The income tax benefit of $13 million recognized for the three months ended September 30, 2002 was the result of changes in deferred taxes related to the differences in accounting for franchises. NET LOSS. Net loss decreased by $296 million, from $336 million for the three months ended September 30, 2002 to $40 million for the three months ended September 30, 2003 as a result of the factors described above. 31NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 The following table sets forth the percentages of revenues that items in the accompanying condensed consolidated statements of operations constitute for the periods presented (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------- 2003 2002 ---------------------------- -------------------------- (RESTATED)Revenues $ 3,602 100% $ 3,377 100 % --------------- --------- -------------- ------- Costs and expenses: Operating (excluding depreciation and amortization and other items listed below) 1,457 41% 1,330 39% Selling, general and administrative 702 19% 708 21% Depreciation and amortization 1,118 31% 1,061 32% Option compensation expense, net 1 - 4 - Special charges, net 18 1% 1 - --------------- --------- -------------- ------- 3,296 92% 3,104 92% --------------- --------- -------------- ------- Income from operations 306 8% 273 8% --------------- -------------- Interest expense, net (1,103) (1,054) Gain (loss) on derivative instruments and hedging activities, 35 (106) net Gain on debt exchange, net 187 - Other, net (3) (5) --------------- -------------- (884) (1,165) --------------- -------------- Loss before minority interest, income taxes and cumulative effect of accounting change (578) (892) Minority interest (11) (11) --------------- -------------- Loss before income taxes and cumulative effect of accounting change (589) (903) Income tax benefit (expense) (3) 27 --------------- -------------- Loss before cumulative effect of accounting change (592) (876) Cumulative effect of accounting change, net of tax - (540) --------------- -------------- Net loss $ (592) $ (1,416) =============== ==============REVENUES. Revenues increased by $225 million, or 7%, from $3.4 billion for the nine months ended September 30, 2002 to $3.6 billion for the nine months ended September 30, 2003. This increase is principally the result of increases in the number of high-speed data and digital video customers as well as price increases for video and data services, and is offset somewhat by the decline in analog customers. At September 30, 2003, we had approximately 135,200 analog video customers, 121,000 digital video customers and 103,800 high-speed data customers that were obtained through promotional programs and are in free service periods. These free service periods generally expire in November 2003. We believe this strategy will reposition our services to these consumers and build a foundation for expected increases in revenues in the future. We have instituted specific retention programs in the fourth quarter for customers added from these promotional offers which include offering additional incremental services such as video on demand, subscription video on demand and increased speed and broadband content for our high-speed data platform. Our goal is to increase revenues by reversing our analog customer losses, implementing limited price 32increases on certain services and packages and increasing revenues from incremental high-speed data services, digital video and commercial services to new and existing customers. Average monthly revenue per customer relationship increased from $55.49 for the nine months ended September 30, 2002 to $61.02 for the nine months ended September 30, 2003. Average monthly revenue per customer relationship represents total revenue for the nine months ended September 30, divided by nine, divided by the average number of customer relationships. In the third quarter of 2003, we changed our revenue classifications. Commercial revenue, which was included within the video, high-speed data, and other revenue line items on our statements of operations, is now broken out as a separate component of revenue. Revenues by service offering are as follows (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------------- 2003 2002 2003 OVER 2002 ---------------------------- ----------------------------- ----------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES CHANGE ------------ ------------ ------------ ------------ ------------ ------------Video $2,607 73% $ 2,553 76% $ 54 2% High-speed data 403 11% 231 7% 172 74% Advertising sales 188 5% 216 6% (28) (13)% Commercial 149 4% 117 3% 32 27% Other 255 7% 260 8% (5) (2)% ------------ ------------ ------------ ------------ ------------ $ 3,602 100% $ 3,377 100% $ 225 7% ============ ============ ============ ============ ============Video revenues consist primarily of revenues from analog and digital services. Video revenues increased by $54 million, or 2%, for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. The increase was primarily due to rate increases and the addition of digital video customers, offset somewhat by the decline in analog video customers. High-speed data revenues increased $172 million, or 74%, from $231 million for the nine months ended September 30, 2002 to $403 million for the nine months ended September 30, 2003. The increase was primarily due to the addition of high-speed data customers. We increased the number of our high-speed data customers within our existing service areas. We were also able to offer this service to more of our customers, as the estimated percentage of homes passed that could receive high-speed data service increased from 75% as of September 30, 2002 to 85% as of September 30, 2003 as a result of our system upgrades. Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors. Advertising sales decreased $28 million, or 13%, from $216 million for the nine months ended September 30, 2002 to $188 million for the nine months ended September 30, 2003. For the nine months ended September 30, 2003 and 2002, we received $10 million and $49 million, respectively, in advertising revenue from vendors. Commercial revenues consist primarily of revenues from commercial video and high-speed data services. Commercial revenues increased $32 million, or 27%, from $117 million for the nine months ended September 30, 2002 to $149 million for the nine months ended September 30, 2003 primarily due to an increase in commercial high-speed data revenues. Other revenues consist primarily of revenues from franchise fees, late payment fees, customer installations, wire maintenance fees, home shopping, equipment rental, dial-up Internet service and other miscellaneous revenues. Other revenues decreased $5 million, or 2%, from $260 million for the nine months ended September 30, 2002 to $255 million for the nine months ended September 30, 2003. The decrease was primarily due to a decrease in franchise fees due to a Federal Communications Commission ruling in March 2002, no longer requiring the collection of franchise fees for high-speed data services. 33OPERATING EXPENSES. Operating expenses increased $127 million, or 10%, from approximately $1.3 billion for the nine months ended September 30, 2002 to approximately $1.5 billion for the nine months ended September 30, 2003. Total programming costs paid to programmers were $934 million and $873 million, representing 28% of total costs and expenses for the nine months ended September 30, 2003 and 2002, respectively. Key expense components as a percentage of revenues are as follows (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------------- 2003 2002 2003 OVER 2002 ---------------------------- ----------------------------- ----------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES CHANGE ------------ ------------ ------------ ------------ ------------ ------------Programming costs $ 934 26% $ 873 26% $ 61 7% Advertising sales 65 2% 63 2% 2 3% Service costs 458 13% 394 11% 64 16% ------------ ------------ ------------ ------------ ------------ $ 1,457 41% $ 1,330 39% $ 127 10% ============ ============ ============ ============ ============Programming costs consist primarily of costs paid to programmers for the provision of analog, premium and digital channels and pay-per-view programs. The increase in programming costs of $61 million, or 7%, was primarily due to price increases, particularly in sports programming, and an increased number of channels carried on our systems and an increase in digital video customers, partially offset by decreases in analog video customers. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels against programming costs of $47 million and $42 million for the nine months ended September 30, 2003 and 2002, respectively. Programming costs for the nine months ended September 30, 2003 also included a $9 million reduction related to changes in estimates of programmer-related disputes, which represented 1% of the nine months programming costs. Our cable programming costs have increased, in every year we have operated, in excess of customary inflationary and cost-of-living type increases, and they are expected to continue to increase due to a variety of factors, including additional programming being provided to customers as a result of system rebuilds that increase channel capacity, increased costs to produce or purchase cable programming, increased costs from certain previously discounted programming, and inflationary or negotiated annual increases. Our increasing programming costs will result in declining video product margins to the extent we are unable to pass on cost increases to our customers. We expect to partially offset any resulting margin compression from our traditional core services with revenue from other video services, increased incremental high-speed data revenues, advertising revenues and commercial services revenue. Advertising sales expenses consist of costs related to traditional advertising services, including salaries and benefits and commissions. Advertising sales expenses increased $2 million, or 3%, primarily due to increased sales commissions. Service costs consist primarily of service personnel salaries and benefits, franchise fees, system utilities, Internet service provider fees, maintenance and pole rent expense. The increase in service costs of $64 million, or 16%, resulted primarily from additional activity associated with on-going infrastructure maintenance. 34SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $6 million from $708 million for the nine months ended September 30, 2002 to $702 million for the nine months ended September 30, 2003. Key components of expense as a percentage of revenues are as follows (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------------------- 2003 2002 2003 OVER 2002 ---------------------------- ----------------------------- ----------------------------- % OF % OF % CHANGE AMOUNT REVENUES AMOUNT REVENUES CHANGE ------------ ------------ ------------ ------------ ------------ ------------General and administrative $ 622 17% $ 595 18% $ 27 5% Marketing 80 2% 113 3% (33) (29)% ----------- ------------- ----------- ------------ ----------- $ 702 19% $ 708 21% $ (6) 1% =========== ============= =========== ============ ===========General and administrative expenses consist primarily of salaries and benefits, rent expense, billinginternal network costs, bad debt expense and property taxes. Theincreasedecrease in general and administrative expenses of$27$7 million, or5%3%, resulted primarily from decreases in salary and benefit costs of $11 million and professional fees of $3 million. These decreases were partially offset by increases insalaries and benefits of $13 million,third party call center costs of$16$4 million andlegal fees of $6 million. These increases were partially offset by a decrease inbad debt expense of$22 million as we continue to realize benefits from our strengthened credit policies.$2 million.Marketing expenses
decreased $33increased $11 million, or29%55%,due to reduced promotional activityas a result of introducing the “Get Hooked” national branding campaign related to our serviceofferings including reductions in advertising, telemarketingofferings.Depreciation and
direct sales activities. However, we expect marketing expenses to increase in subsequent quarters. DEPRECIATION AND AMORTIZATION.Amortization.Depreciation and amortization expenseincreased by $57remained constant at $370 millionor 5%, primarily due to anfor the three months ended March 31, 2004 and 2003. The increase indepreciation expense related to additionalcapital expendituresinwas offset by lower depreciation as the result of the System Sales.(Gain) Loss on Sale of Assets, Net.Gain on sale of assets of $106 million for the three months ended March 31, 2004 primarily represents the pretax gain realized on the sale of systems to Atlantic Broadband Finance, LLC which closed on March 1, 2004. The loss on sale of assets of $9 million for the three months ended March 31, 2003
and 2002. OPTION COMPENSATION EXPENSE, NET.represents the loss realized on the sale of fixed assets.Option Compensation Expense, Net. Option compensation expense
decreased byof $14 million for the three months ended March 31, 2004 primarily represents the expense of approximately $6 million related to a stock option exchange program, under which our employees were offered the right to exchange all stock options (vested and unvested) issued under the 1999 Charter Communications Option Plan and 2001 Stock Incentive Plan that had an exercise price over $10 per share for shares of restricted Charter Class A common stock or, in some instances, cash. The exchange offer closed in February 2004. Additionally, during the three months ended March 31, 2004, we recognized approximately $3 millionfor the nine months ended September 30, 2003 as comparedrelated to thenine months ended September 30, 2002. Option compensation expense represents expenseoptions granted under the Charter Long-Term Incentive Program and approximately $5 million related toexercise prices on certainoptionsthat were issued prior to Charter's initial public offering in 1999 that were less thangranted following theestimated fair valuesadoption ofCharter's common stock at the timeStatement ofgrant. Compensation expense is being accrued over the vesting period of such options and will continue to be recorded until the last vesting period lapses in April 2004. On January 1, 2003, we adopted SFASFinancial Accounting Standards (“SFAS”) No. 123,"AccountingAccounting for Stock-BasedCompensation" using the prospective method under which we recognize compensation expense of a stock-based award to an employee over the vesting period based on the fair value of the award on the grant date. SPECIAL CHARGES, NET.Compensation.Special Charges, Net.Special charges of
$18$10 million for theninethree months endedSeptember 30, 2003March 31, 2004 represents$23approximately $9 million of litigation costs related to the tentative settlement of the South Carolina national class action suit, subject to final documentation and court approval and approximately $1 million of severance and related costs of ouron-going initiative to reduceworkforce reduction. Special charges of $2 million for the three months ended March 31, 2003 represents $7 million of severance and related costs of our workforce reduction, partially offset by a $5 million credit from a settlement from the Internet service provider Excite@Home related to the conversion ofaboutapproximately 145,000 high-speed data customers to our Charter Pipeline service in 2001. We expect to continue to record additional special charges in20032004 related to thecontinuedreorganization of our operations.INTEREST EXPENSE, NET.Interest Expense, Net. Net interest expense increased by
$49$11 million, or5%3%, from $370 million for theninethree months endedSeptember 30, 2002 comparedMarch 31, 2003 to $381 million for theninethree months endedSeptember 30, 2003.March 31, 2004. The increase in net interest expense was a result ofa $1.8 billionan increasein average debt outstanding to $17.7 billion for the nine months ended September 30, 2003 compared to $15.9 billion for the nine months ended September 30, 2002, partially offset by a decreasein our average borrowing rate from8.32%8.1% in thenine months ended September 30, 2002first quarter of 2003 to8.14%8.3% in27
the
nine months ended September 30, 2003. The increasedfirst quarter of 2004 coupled with an increase of $0.4 billion in average debtwas primarily usedoutstanding from $17.2 billion forcapital expenditures. GAIN (LOSS) ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, NET.the first quarter of 2003 compared to $17.6 billion for the first quarter of 2004.Gain (Loss) on Derivative Instruments and Hedging Activities, Net.Net gain on derivative instruments and hedging activities
increased $141decreased $21 million from alossgain of$106$14 million for theninethree months endedSeptember 30, 2002March 31, 2003 to againloss of$35$7 million for theninethree months endedSeptember 30, 2003.March 31, 2004. Theincreasedecrease is primarilydue tothe result of an increase ingainslosses on interest rate agreements, which do not qualify for hedge accounting under SFAS No. 133, whichincreaseddecreased from aloss of $103 million for the nine months ended September 30, 2002 to again of$27 million for the nine months ended September 30, 2003. 35GAIN ON DEBT EXCHANGE, NET. Net gain on debt exchange of $187 million for the nine months ended September 30, 2003 represents the gain realized on the purchase of an aggregate of $1.3 billion principal amount of Charter Holdings' senior notes and senior discount notes in consideration for an aggregate of $1.1 billion principal amount of 10.25% notes due 2010 issued by CCH II. The gain is net of the write-off of deferred financing costs associated with the retired debt of $18 million. OTHER, NET. Net other expense decreased by $2 million from$5 million for theninethree months endedSeptember 30, 2002March 31, 2003 to$3a loss of $6 million for theninethree months endedSeptember 30, 2003.March 31, 2004. Thisdecrease is primarily duewas coupled with an increase in losses on interest rate agreements, as a result of hedge ineffectiveness, on designated hedges, which decreased from a gain of $9 million for the three months ended March 31, 2003 to adecrease inloss of $1 million for the three months ended March 31, 2004.Other, Net.Net other expense of $1 million for the three months ended March 31, 2004 primarily represents losses on equity investments.
MINORITY INTEREST.Minority Interest.Minority interest expense represents the 10% dividend on preferred membership units in Charter Holdings’ indirect subsidiary, Charter Helicon, LLC and the 2% accretion of the preferred membership interests in CC VIII and, since June 6, 2003, the pro rata share of the profits of CC
VIII. INCOME TAX BENEFIT (EXPENSE).VIII allocated to Mr. Allen.Income Tax Expense.Income tax expense of
$3$1 million was recognized for each of theninethree months endedSeptember 30,March 31, 2004 and 2003. The income tax expense isrealizedrecognized through increases in current state income tax expense as well as increases to the deferred tax liabilitiesand federal and state income taxes related to ourof certain of Charter Holdings’ indirect corporate subsidiaries.The income tax benefit of $27 million recognized for the nine months ended September 30, 2002 was the result of changes in deferred taxes related to the differences in accounting for franchises. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX. Cumulative effect of accounting change in 2002 represents the impairment charge recorded as a result of adopting SFAS No. 142. NET LOSS.Net Loss. Net loss decreased by
$824$65 million, or58%23%, from$1.4 billion for the nine months ended September 30, 2002 to $592$283 million for theninethree months endedSeptember 30,March 31, 2003 to $218 million for the three months ended March 31, 2004 as a result of the factors described above.LIQUIDITY AND CAPITAL RESOURCES INTRODUCTIONLiquidity and Capital Resources
Introduction
This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to
debtcredit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.The first part of this section, entitled "Overview" provides an overview of these topics. The second part of this section, entitled "Long-Term Debt" provides an overview of long-term debt. The third part of this section, entitled "Historical Operating, Financing and Investing Activities" provides information regarding the cash provided from or used in our operating, financing and investing activities during the nine months ended September 30, 2003 and 2002. The fourth part of this section, entitled "Capital Expenditures" provides more detailed information regarding our historical capital expenditures and our planned capital expenditures going forward. OVERVIEWOverview
Our business requires significant cash to fund capital expenditures, debt service costs and ongoing operations. We have historically funded
theseour operating activities, capital requirements and debt service costs through cash flows from operating activities, borrowings undertheour credit facilities,of our subsidiaries,equity contributions from Charter Holdco, issuances of debt securitiesby us and our subsidiariesand cash on hand. The mix of funding sources changes from period to period, but for theninethree months endedSeptember 30, 2003,March 31, 2004, approximately70%9% of our funding requirementswaswere from cash flows from operating activities, 90% was from proceeds from the sale of cable systems described below and30%1% was from cash on hand. For the three months ended March 31, 2004, net cash flows used in financing activities were $615 million, reflecting a net repayment of debt of $614 million. We expect that our mix of sources of funds will continue to change in the future based onouroverall needs relative to our cash flow and on the availability of funds undertheour credit facilities,of our subsidiaries,our access to the debt markets and our ability to generate cash flows from operating activities.In April 2004, Charter Holdings’ indirect subsidiaries, Charter Communications Operating, LLC (“Charter Operating”) and Charter Communications Operating Capital Corp., sold $1.5 billion of senior second lien notes in a private transaction. Additionally, Charter Operating amended and restated its $5.1 billion credit facilities, among other things, to defer maturities and increase availability under those facilities to approximately $6.5 billion, consisting of a $1.5 billion revolving credit facility, a $2.0 billion six-year term loan facility and a $3.0 billion seven-year term loan facility. Charter Operating used the additional borrowings under the amended and restated credit facilities, together with proceeds from the sale of the Charter Operating senior second lien notes to refinance the credit facilities of its subsidiaries, CC VI Operating Company, LLC (“CC VI Operating”), Falcon Cable
28
Communications, LLC (“Falcon Cable”), and CC VIII Operating, LLC (“CC VIII Operating”), all in one concurrent transaction. The effect of the transaction, among other things, was to substitute Charter Operating as the lender in place of the banks under the subsidiaries’ credit facilities.
On March 1, 2004, we closed the sale of certain cable systems in Florida, Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC. We closed on the sale of an additional cable system in New York to Atlantic Broadband Finance, LLC in April 2004. Subject to post closing contractual adjustments, we expect the total net proceeds from the sale of all of these systems to be approximately $733 million, of which $10 million is currently held in an indemnity escrow account (with the unused portion thereof to be released by March 1, 2005). The proceeds received to date have been used to repay a portion of our credit facilities.
We have a significant level of debt. In 2004, after giving effect to the refinancing in April 2004, $15 million of our debt matures, and
asin each of 2005 and 2006, an additional $30 million will mature. In subsequent years, significant additional amounts will become due under our remaining obligations. As the principal amounts owing under our various debt obligations become due beginning in 2007, sustaining our liquiditymaywill likely dependuponon our ability to access additional sources of capital overtime. Approximately $108 milliontime, which may be affected by our significant amount ofour financing matures during the remainder of 2003, which we expect to fund through availability under our subsidiaries' credit facilities. In subsequent years, substantial additional amounts will 36become due under our remaining obligations. In addition, adebt. A default under the covenants governing any of our debt instruments could result in the acceleration of our payment obligations under that debt and, under certain circumstances, in cross-defaults under our other debtobligations. In November 2003,obligations, which would have a material adverse effect on our financial condition and results of operations.As of March 31, 2004, we
completed a private placementwere and, as of$500 million aggregate principal amountthe date of8.75% senior notes due 2013 by CCO Holdings, LLC (CCO Holdings) to repay (but not to reduce permanently) principal amounts outstandingthis report, we are in compliance with the covenants underthe Company's subsidiaries' bankour credit facilities andfor general corporate purposes. Also, in September 2003, Charter,our indentures, and weand our indirect subsidiary, CCH II completed the purchase of an aggregate of approximately $609 million principal amount of Charter's convertible senior notes and $1.3 billion principal amount of the senior notes and senior discount notes issued by us from institutional investors in a small number of privately negotiated transactions. In consideration for these securities, CCH II issued an aggregate of $1.6 billion principal amount of 10.25% notes due 2010. CCH II also sold an additional $30 million principal amount of 10.25% notes for an equivalent amount of cash and used the proceeds for transaction costs and general corporate purposes. As a result of the transaction, we recorded a $187 million gain and maturities were extended for a majority of the debt exchanged. As an additional means of enhancing our liquidity, on October 1, 2003 we closed on the sale of our Port Orchard, Washington system for approximately $91 million, subject to adjustments. On September 3, 2003, we signed a definitive agreement with Atlantic Broadband Finance, LLC for the sale of various cable television systems in Florida, Pennsylvania, Maryland, Delaware, New York and West Virginia for approximately $765 million, subject to adjustments. The closing of this transaction is expected to occur in the first half of 2004, but closing is subject to the condition that revenues for the applicable systems, as reported in the audited financial statements for the applicable systems, when issued, be not less than 97% of amounts reported in previously-delivered unaudited financial statements, as well as other customary closing conditions. Weexpect to remain in compliance with those covenants throughout 2004. As of March 31, 2004, we held $72 million in cash and cash equivalents. Further, at thecovenantsclosing of the Charter Operating notes offering and the related refinancing, we had total unused availability of approximately $1.0 billion under the amended and restated Charter Operating creditfacilities of our subsidiaries and our indentures and those of our subsidiaries throughout 2003. Wefacilities. As a result, we expect that our cash on hand, cash flows from operating activities and the amounts available under oursubsidiaries'credit facilities should be sufficient to satisfy our liquidity needsthroughfor theend of 2003.foreseeable future. However,we do not expect thatcash flows from operating activities and amounts available under credit facilitieswillmay not be sufficienton their own,to permit us to satisfy our principal repayment obligationswhich are scheduled to come duebeginning infuture years. In addition, our debt levels may limit future2007. Continued access to these credit facilities is subject to our remaining in compliance with thedebt markets. In addition, the maximum allowable leverage ratiosapplicable covenants of these credit facilities, including covenants tied to our operating performance. If there is an event of default under our credit facilities,will decline over timesuch as the failure to maintain the applicable required financial ratios, we would be unable to borrow under these credit facilities, which could materially adversely impact our ability to operate our business andthe total potential borrowing availableto make payments under oursubsidiaries' current credit facilities (subject to covenant restrictions and limitations) will decrease from approximately $9.0 billion as of the end of 2003 to $8.7 billion and $7.7 billion by the end of 2004 and 2005, respectively.debt instruments.Although Mr. Allen and his affiliates have purchased equity from Charter and
Charter Holdcoits subsidiaries in the past,except for the commitment of Vulcan Inc., an affiliate of Mr. Allen, described below (which we expect to terminate as a result of the completion of the offering by CCO Holdings of $500 million of its 8.75% senior notes described above),Mr. Allen and his affiliates are not obligated to purchase equity from,orcontribute to or loan funds tousCharter or toourits subsidiaries in the future.The indentures governing the CCH II, LLC notes, CCO Holdings, LLC notes, and Charter Operating notes restrict those note issuers from making distributions to their parent companies (including Charter and Charter Holdings) for payment of principal on parent company notes, in each case unless there is no default under those indentures and a specified leverage ratio test can be met. Each such issuer currently meets the applicable leverage ratio test, and therefore is not currently prohibited from making any such distributions to its direct parent. 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 test of 8.75 to 1.0, there is no default under Charter Holdings’ indentures and other specified tests are met. However, in the event that Charter Holdings could not incur any additional debt under the 8.75 to 1.0 leverage ratio test, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments in Charter Holdco or Charter, up to its formulaic capacity, if there is no default under the indentures. For the quarter ended March 31, 2004, there were no defaults under the Charter Holdings indentures and other specified tests were met. However, Charter Holdings continued not to meet the leverage ratio test at March 31, 2004. As a result, distributions from Charter Holdings to Charter Holdco or Charter again have been restricted and will continue to be restricted until that test is met. Charter currently has sufficient assets to pay interest due on its outstanding convertible senior notes during 2004. However, Charter’s ability to make interest payments, or principal payments at maturity in 2005 and 2006, on its outstanding
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convertible senior notes is contingent upon it obtaining additional debt and/or equity financing or receiving distributions or other payments from its subsidiaries. Any financial or liquidity problems of Charter would likely cause serious disruption to our business and have a material adverse effect on our business and results of operations.
No assurances can be given that we will not experience liquidity problems because of adverse market conditions, increased competition or other unfavorable events or if we do not obtain sufficient additional financing on a timely
basis.basis as our debt becomes due. If, at any time, additional capital or borrowing capacity is required beyond amounts internally generated or available through existing credit facilities or in traditional debt financings, we would consider:o requesting waivers or amendments with respect to our credit facilities, the availability and terms of which would be subject to market conditions; o further reducing our expenses and capital expenditures, which would likely impair our ability to increase revenue; o selling assets; o issuing debt securities which may have structural or other priorities over our existing notes; or o issuing debt or equity at the Charter or Charter Holdco level, the proceeds of which could be loaned or contributed to us. 37
• further reducing our expenses and capital expenditures, which would likely impair our ability to increase revenue; • selling assets; • issuing debt securities which may have structural or other priorities over our existing notes; • issuing equity at the Charter or Charter Holdco level, the proceeds of which could be loaned or contributed to us; or • requesting waivers or amendments with respect to our credit facilities, the availability and terms of which would be subject to market conditions. If the above strategies
wereare not successful, ultimately, we could be forced to restructure our obligations or seek protection under the bankruptcy laws. In addition, if wefind it necessarywere to engage in a recapitalization or other similar transaction, our noteholders might not receive all principal and interest payments to which they are contractuallyentitled. LONG-TERM DEBTentitled on a timely basis or at all.Long-Term Debt
As of
September 30, 2003March 31, 2004 and December 31,2002,2003, long-term debt totaled approximately$17.7$17.3 billion and$17.3$17.9 billion, respectively. This debt was comprised of approximately$7.6$6.6 billion and$7.8$7.2 billion ofbankdebt under our credit facilities and$10.1$10.7 billion and$9.5$10.6 billion of high-yieldbonds,debt, respectively. As ofSeptember 30, 2003March 31, 2004 and December 31,2002,2003, the weighted average interest rate on the bank debt was approximately 5.6% and 5.4%, respectively, while the weighted average interest rate on the high-yield debt was approximately 10.3%and 10.2%,respectively,resulting in a blended weighted average interest rate of8.2%8.5% and8.1%8.3%, respectively. Approximately78% and 77%81% of our debt was effectively fixed, including the effects of our interest rate hedge agreements, as ofSeptember 30, 2003 andMarch 31, 2004 compared to approximately 79% at December 31,2002, respectively. Our2003.April 2004 Charter Operating Notes.In April 2004, Charter Holdings’ indirect subsidiaries, Charter Operating and Charter Communications Operating Capital Corp., sold $1.1 billion of 8% senior second lien notes due 2012 and $400 million of 8 3/8% senior second lien notes due 2014, for total gross proceeds of $1.5 billion in a private transaction. These notes are structurally senior to the notes of Charter, Charter Holdings, CCH II, LLC and CCO Holdings and rank equally with all other current or future unsubordinated obligations of Charter Operating. The Charter Operating notes are structurally subordinated to all obligations of Charter Operating’s subsidiaries, including Charter Operating amended and restated credit facilities described below.
At any time prior to April 30, 2007, the issuers of the 8% senior second lien notes may redeem, on a pro rata basis, up to 35% of the total original principal amount of these notes with proceeds from public equity sales at a redemption price equal to 108.000% of the principal amount thereof, plus any accrued and unpaid interest. Interest on the $1.1 billion 8% senior second lien notes accrues at 8% per year and is payable semi-annually in arrears on each April 30 and October 30, commencing on October 30, 2004.
At any time prior to April 30, 2007, the issuers of the 8 3/8% senior second lien notes may redeem, on a pro rata basis, up to 35% of the total original principal amount of these notes with proceeds from public equity sales at a redemption price equal to 108.375% of the principal amount thereof, plus any accrued and unpaid interest. In
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addition, Charter Operating may redeem all or any portion of these notes on or after April 30, 2009, at an initial purchase price equal to 104.188% of the outstanding
debtprincipal amount redeemed declining ratably to 100% for redemptions on or after April 30, 2012, plus any accrued andCharter's liquidityunpaid interest. Interest on the $400 million 8 3/8% senior second lien notes accrues at 8 3/8% per year andcorporateis payable semi-annually in arrears on each April 30 and October 30, commencing on October 30, 2004.In the event of specified change of control events, Charter Operating must offer to purchase the outstanding Charter Operating senior second lien notes at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest.
Until the guarantee and pledge date (as defined in the indenture governing the Charter Operating notes, generally the fifth business day after the Charter Holdings leverage ratio is certified to be below 8.75 to 1.0), the Charter Operating notes are secured by a second-priority lien on substantially all of Charter Operating’s direct assets that secure the obligations of Charter Operating under the Charter Operating credit
ratings have been downgradedfacilities. The collateral consists of substantially all of Charter Operating’s direct assets in which security interests may be perfected under the Uniform Commercial Code byMoody's Investors Service Inc.filing a financing statement (including capital stock andStandardintercompany obligations).On and
Poor's Rating Services. Ourafter the guarantee and pledge date, the collateral for the Charter Operating notes will consist of all of Charter Operating’s and its subsidiaries’ assets that secure the obligations of Charter Operating or any subsidiaryentered into a commitment letterof Charter Operating withVulcan Inc., whichrespect to the Charter Operating credit facility and the related obligations or certain other indebtedness on such date. It isan affiliatecurrently contemplated that, as ofPaul Allen, pursuant to which Vulcan Inc. agreed to lend, or cause an affiliate to lendthe guarantee and pledge date, such collateral will consist of the capital stock of Charter Operating held by CCO Holdings, all of the intercompany obligations owing to CCO Holdings by Charter Operating or any subsidiary of Charter Operating, and substantially all of Charter Operating’s and the guarantors’ assets (other than the assets of CCO Holdings) in which security interests may be perfected under the Uniform Commercial Code by filing a financing statement (including capital stock and intercompany obligations).In addition, within a time frame specified under the Charter Operating credit facilities, Charter Operating will be required to redeem or cause to be redeemed in full the notes outstanding under the CC V Holdings, LLC
an aggregateindenture. In addition, when Charter Operating or its subsidiaries exercise any option to redeem in full the notes outstanding under the Renaissance Media Group, LLC (“Renaissance”) or CC V Holdings, LLC indentures, then, provided that the leverage ratio test remains satisfied, the Renaissance or CC V Holdings, LLC entities will then be required to guarantee the Charter Operating credit facilities and the related obligations and to secure those guarantees with first-priority liens, and to guarantee the notes and to secure the Charter Operating senior second lien notes with second-priority liens, on substantially all of their assets in which security interests may be perfected under the Uniform Commercial Code by filing a financing statement (including capital stock and intercompany obligations).Amended and Restated Charter Operating Credit Facilities.In April 2004, the Charter Operating credit facilities were amended and restated concurrently with the sale of $1.5 billion senior second lien notes described above, among other things, to defer maturities and increase availability under these facilities and to enable Charter Operating to acquire the interests of the lenders under the CC VI Operating, CC VIII Operating and the Falcon Cable credit facilities. The amended and restated Charter Operating credit facilities increase the availability from $5.1 billion to $6.5 billion and provide for two term facilities, one with a total principal amount of $2.0 billion, of which 12.5% matures in 2007, 30% matures in 2008, 37.5% matures in 2009 and 20% matures in 2010 (Term A); and one with a total principal amount of $3.0 billion, which is repayable in 27 equal quarterly installments aggregating in each loan year to approximately $30 million, with the remaining balance due at final maturity in 2011 (Term B). The amended and restated Charter Operating credit facilities also provide for a revolving credit facility, in a total amount of $1.5 billion, with a maturity date in 2010. Amounts under the amended and restated Charter Operating credit facilities bear interest, at Charter Operating’s election, at a base rate or the Eurodollar rate, as defined, plus a margin for Eurodollar loans of up to
$300 million. As3.0% for the Term A and revolving credit facilities and up to 3.25% for the Term B credit facility, and for base rate loans, up to 2.0% for the Term A and revolving credit facilities and up to 2.25% for the Term B credit facility. A quarterly commitment fee ofSeptember 30, 2003, we have not drawnup to 0.75% is payable on thefacility,unused balance of the revolving credit facility.Obligations under the amended commitment amount of $6.5 billion are secured by a lien on all assets of Charter
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Operating, to the extent such lien can be perfected under the Uniform Commercial Code by filing a financing statement, which assets include capital stock owned by Charter Operating and
we intendintercompany obligations owing toterminateit, including those from its subsidiaries, CC VI Operating, CC VIII Operating and Falcon Cable.Obligations arising under the original commitment amount of $5.1 billion continue to be guaranteed by CCO Holdings and by Charter Operating’s subsidiaries, other than the non-guarantor subsidiaries (defined below). The “non-guarantor subsidiaries,” generally include CC VI Operating, CC VIII Operating, Falcon Cable, and their respective subsidiaries. Obligations arising under the original commitment amount of $5.1 billion continue to be secured by a pledge of the equity interests owned by the subsidiary guarantors and intercompany obligations owing to the subsidiary guarantors, as well as a
resultpledge of CCO Holdings’ equity interests in Charter Operating, and intercompany obligations owing to CCO Holdings by Charter Operating’s subsidiaries.At such time as Charter Holdings’ leverage ratio is determined to be below 8.75 to 1.0: (i) the guarantors’ guarantees will be amended to increase the amount guaranteed to include all of the
recent private placementobligations arising under the amended commitment amount of $6.5 billion; (ii) most of the non-guarantor subsidiaries will become additional subsidiary guarantors of the amended commitment amount of $6.5 billion; and (iii) such guarantees will be secured by a lien on all assets of the subsidiary guarantors to the extent such lien can be perfected under the Uniform Commercial Code by filing a financing statement; provided that the guarantee and pledge of such interests is not otherwise restricted by Charter Holdings’ subsidiaries’ indentures.The amended and restated Charter Operating credit facilities permit Charter Operating and its subsidiaries to make distributions to pay interest on the Charter Operating senior second lien notes, the CCO Holdings senior notes, the CCH II senior notes, the Charter Holdings senior notes and Charter’s convertible senior notes, provided that, among other things, no default has occurred and is continuing under the amended and restated Charter Operating credit facilities. Conditions to future borrowings include the absence of a default or an event of default under the amended and restated Charter Operating credit facilities.
The events of default under the amended and restated Charter Operating credit facilities include those customary for financings of this type, as well as events of default for, among other things: (i) the failure to pay or the occurrence of events that result in the acceleration of other indebtedness owing by certain of CCO Holdings’ direct and indirect parent companies in amounts in excess of $200 million in aggregate principal amount, (ii) Paul Allen and/or certain of his family members and/or their exclusively owned entities ceasing to have power, directly or indirectly, to vote as least 35% of the ordinary voting power of Charter Operating, and (iii) certain of Charter Operating’s direct or indirect parent companies having indebtedness in excess of $500 million aggregate principal amount which remains undefeased three months prior to the final maturity of
8.75%such indebtedness.Charter Operating used the additional borrowings under the amended and restated credit facilities, together with proceeds from the sale of the Charter Operating senior second lien notes
by CCO Holdings.to refinance the credit facilities of its subsidiaries, CC VI Operating, Falcon Cable, and CC VIII Operating, all in one concurrent transaction. Unused availability as of the closing of the amendment and restatement of the Charter Operating credit facilities on April 27, 2004 was approximately $1.0 billion. The effect of the transaction, among other things, was to substitute Charter Operating as the lender in place of the banks under those subsidiaries’ credit facilities.As noted above, our access to capital from
theour credit facilitiesof our subsidiariesis contingent on compliance with a number of restrictive covenants, including covenants tied to our operatingperformance, and there canperformance. We may not beno assurance that we will remain in complianceable to comply with all of these restrictive covenants. If there is an event of default under oursubsidiaries'credit facilities, such as the failure to maintain the applicable required financial ratios, we would be unable to borrow under these credit facilities, which could materially adversely impact our ability to operate our business and to make payments under our debt instruments. In addition, an event of default under certain of our debt obligations, if not waived, may result in the acceleration of those debt obligations, which could in turn result in the acceleration of other debt obligations, and could result in exercise of remedies by our creditors and could force us to seek the protection of the bankruptcy laws.Our significant amount of debt and the interest charges incurred to service debt may adversely affect our ability to obtain financing in the future and react to changes in our business. We may need additional capital
to fund business expansion opportunities, changes in capital needs or debt amortization, orif we do not achieve our projected revenues, or if our operating expenses increase. If we are not able to obtain such capital from32
increases in our cash flows from operating activities, additional borrowings or other sources, we may not be able to fund customer demand for digital video, high-speed data or telephony services, offer certain services in certain of our markets or compete effectively. Consequently, our financial condition and results of operations could suffer materially. See the section
"Liquidityentitled “Liquidity and CapitalResources"Resources” of"Item“Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” included in our20022003 Annual Report on Form 10-K for a description ofour credit facilities and other long-term debt, includingcertain terms, restrictions andcovenants. HISTORICAL OPERATING, FINANCING AND INVESTING ACTIVITIEScovenants in our subsidiaries’ notes other than the Charter Operating notes issued.Historical Operating, Financing and Investing Activities
We held
$52$72 million in cash and cash equivalents as ofSeptember 30, 2003March 31, 2004 compared to$310$85 million as of December 31,2002. OPERATING ACTIVITIES.2003.Operating Activities.Net cash provided by operating activities
increased 17%decreased 53%, from$503$151 million for theninethree months endedSeptember 30, 2002March 31, 2003 to$590$71 million for theninethree months endedSeptember 30, 2003.March 31, 2004. For theninethree months endedSeptember 30, 2003,March 31, 2004, net cash provided by operating activitiesincreaseddecreased primarilydue to increased revenuesas a result of$225 million offset by an increasechanges in operatingexpenses of $127assets and liabilities that used $42 million more cash during theninethree months endedSeptember 30, 2003 compared toMarch 31, 2004 than the corresponding period in2002. INVESTING ACTIVITIES.2003 coupled with an increase in cash interest expense of $23 million over the corresponding prior period.Investing Activities.Net cash provided by investing activities for the three months ended March 31, 2004 was $531 million and net cash used in investing activities for the
ninethree months endedSeptember 30,March 31, 2003and 2002was$592 million and $1.8 billion, respectively.$220 million. Investing activitiesused $1.2 billion lessprovided $751 million more cash during theninethree months endedSeptember 30, 2003March 31, 2004 than the corresponding period in20022003 primarily as a result ofreductionsproceeds from the sale of certain cable systems in38capital expendituresFlorida, Pennsylvania, Maryland, Delaware andacquisitions. Expenditures for property, plant and equipment including capitalized labor and overhead used $1.1 billion less cash during the nine months ended September 30, 2003 than the corresponding period in 2002 as a result of our effortsWest Virginia toreduce capital expenditures and the completion of the majority of our rebuild plan in fiscal 2002. Payments for acquisitions used $140 million less cash during the nine months ended September 30, 2003 than the corresponding period in 2002. FINANCING ACTIVITIES.Atlantic Broadband Finance, LLC.Financing Activities.Net cash used
byin financing activities for theninethree months endedSeptember 30, 2003March 31, 2004 was$256$615 million and net cash provided by financing activities for theninethree months endedSeptember 30, 2002March 31, 2003 was$1.8 billion.$173 million. The decrease in cash provided during theninethree months endedSeptember 30, 2003March 31, 2004 as compared to the corresponding period in20022003 was primarilydue tothe result of an increase in repayments of long-term debt and a decrease in borrowings of long-termdebt and in issuances ofdebt.CAPITAL EXPENDITURESCapital Expenditures
We have
substantialsignificant ongoing capital expenditurerequirements; however, we have experienced a significant decline in such requirements in 2003 as compared to prior years. This decline in 2003 is the result of a substantial reduction in rebuild costs as our network has been upgraded and rebuilt in prior years, consumption of inventories, negotiated savings in contract labor and network components including digital set-top terminals and cable modems, reduced capitalized labor and overhead and reduced volume of installation related activities. Additions to property, plant and equipment, excluding acquisitions of cable systems, totaled $227requirements. Capital expenditures were $187 million and$528$101 million for the three months endedSeptember 30,March 31, 2004 and 2003,and 2002, respectively, and $481 million and $1.6 billion for the nine months ended September 30, 2003 and 2002,respectively. The majority of the capital expendituresrelatesfor the three months ended March 31, 2004 and 2003 related to our customer premiseequipment and rebuild and upgrade program.equipment. See table below for more details.Upgrading our cable systems has enabled us to offer digital television, high-speed data services,
video on demand, high definition television,VOD, interactive services, additional channels and tiers, and expanded pay-per-view options to a larger customer base. Our capital expenditureshave beenare funded primarily from cash flows from operating activities, the issuance of debt and borrowings under credit facilities.DuringIn addition, during the three months endedSeptember 30,March 31, 2004 and 2003,and 2002,our liabilities related to capital expenditures decreased$1$7 million andincreased $21$117 million,respectively, and decreased $102 million and $89 million, respectively, during the nine months ended September 30, 2003 and 2002.respectively.During
2003,2004, we expect to spendapproximately $800a total of $850 million to$925$950 millionin the aggregateon capital expenditures. We expectourthat the nature of these expenditures will continue to shift from upgrade/rebuild costs to customer premise equipment and scalable infrastructure costs. We expect to fund capital expendituresin 2003 will be lower than 2002 levels becausefor 2004 primarily from cash flows from operating activities and borrowings under ourrebuild and upgrade activities are largely completed, as a greater portion of our workforce is focused on maintenance and period related activities, our purchases of digital set-top terminalscredit facilities.We have
declined and the volume of installation related activities has declined. As first reported in our Form 10-Q for the third quarter of 2002, weadopted capital expenditure disclosure guidance, which was developed by eleven publicly traded cable system operators, including Charter,Communications, Inc.,with the support of the National Cable & Telecommunications Association("NCTA"(“NCTA”). The new disclosure is intended to provide more consistency in the reporting of operating statistics in capital expenditures andcustomer relationshipscustomers among peer companies in the cable industry. These disclosure guidelines are not required disclosure under GAAP, nor do they impact our accounting for capital expenditures under GAAP.3933
The following table presents our major capital expenditures categories in accordance with NCTA disclosure guidelines for the three
and ninemonths endedSeptember 30,March 31, 2004 and 2003and 2002(dollars in millions):
Three Months Ended March 31, 2004 2003 Customer premise equipment (a) $ 112 $ 64 Scalable infrastructure (b) 19 8 Line extensions (c) 25 7 Upgrade/Rebuild (d) 12 15 Support capital (e) 19 7
Total capital expenditures (f) $ 187 $ 101
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- -------------------------------- 2003 2002 2003 2002 --------------- -------------- -------------- --------------(a) Customer premise equipment (a) $118 $177 $253 $587includes costs incurred at the customer residence to secure new customers, revenue units and additional bandwidth revenues. It also includes customer installation costs in accordance with SFAS 51 and customer premise equipment (e.g., set-top terminals and cable modems, etc.).(b) Scalable infrastructure (b) 15 60 35 179includes costs, not related to customer premise equipment or our network, to secure growth of new customers, revenue units and additional bandwidth revenues or provide service enhancements (e.g., headend equipment).(c) Line extensions (c) 38 26 69 69include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).(d) Upgrade/ Rebuild (d) 33 214 76 558rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.(e) Support capital (e) 23 51 48 157 --------------- -------------- -------------- -------------- Totalincludes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).(f) Represents all capital expenditures (f) $227 $528 $481 $1,550 =============== ============== ============== ==============made during the three months ended March 31, 2004 and 2003, respectively.(a) Customer premise equipment includes costs incurred at the customer residence to secure new customers, revenue unitsCertain Trends and
additional bandwidth revenues. It also includes customer installation costs in accordance with SFAS 51 and customer premise equipment (e.g., digital set-top terminals and cable modems, etc.). (b) Scalable infrastructure includes costs, not related to customer premise equipment or our network, to secure growth of new customers, revenue units and additional bandwidth revenues or provide service enhancements (e.g., headend equipment). (c) Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering). (d) Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments. (e) Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles). (f) Represents all capital expenditures made during the three and nine months ended September 30, 2003 and 2002, respectively. CERTAIN TRENDS AND UNCERTAINTIESUncertaintiesThe following discussion highlights a number of trends and uncertainties, in addition to those discussed elsewhere in this
Quarterly Reportquarterly report and in theCritical“Critical Accounting Policies andEstimatesEstimates” section of Item 7."Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” in our20022003 Annual Report on Form 10-K, that could materially impact our business, results of operations and financial condition.SUBSTANTIAL LEVERAGE.Substantial Leverage.We
and our subsidiarieshave a significant amount of debt. As ofSeptember 30, 2003,March 31, 2004, our total debt was approximately$17.7$17.3 billion. In 2004, after giving effect to thefourth quarter of 2003, we will be required to repay approximately $66April 2004 debt refinancing, $15 million ofaccreted interest on the CC V bonds.our debt matures, and an additional $30 million matures in each of 2005 and 2006. In subsequent years, substantial additional amounts will become due under oursubsidiaries'remaining obligations.If current debt levels increase, the related risks that we now face will intensify, including a potential further deterioration of our existing credit ratings.We believe that as a result of our significant levels of debt, our access to the debt markets could be limited when substantial amounts of our current indebtedness becomedue.due beginning in 2007. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not available to us from borrowings under our credit facilities or from other sources, we may not be able to repay our debt, grow our business, respond to competitive challenges, or to fund our other liquidity and capital needs. Further, if we are unable to refinance that debt,ultimately,we could be forced to restructure our obligations or seek protection under the bankruptcy laws. If wefind it necessarywere to engage in a recapitalization or other similar transaction, our noteholders might not receive all principal and interest payments to which they are contractuallyentitled.entitled on a timely basis or at all. For more information, see the section above entitled"Liquidity“Liquidity and Capital Resources." RESTRICTIVE COVENANTS. The”Restrictive Covenants.Our credit facilities
of our subsidiariesand the indentures governingtheour publicly held notesof our subsidiariescontain a number of significant covenants that could adversely impact our business. In particular,theour credit facilities and indenturesof our subsidiariesrestrict oursubsidiaries'ability to:40o pay dividends or make other distributions; o make certain investments or acquisitions; o enter into related party transactions; o dispose of assets or merge; o incur additional debt; o issue equity; o repurchase or redeem equity interests and debt; o grant liens; and o pledge assets.
• pay dividends or make other distributions; • make certain investments or acquisitions; 34
• enter into related party transactions; • dispose of assets or merge; • incur additional debt; • issue equity; • repurchase or redeem equity interests and debt; • grant liens; and • pledge assets. Furthermore, our
subsidiaries'credit facilities require our subsidiaries to maintain specified financial ratios and meet financial tests.These financial ratios tighten and may become more difficult to maintain over time.The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenantsor obligationswill result in a default under the applicable debt agreement or instrument and could trigger acceleration of the related debt under the applicable agreement, and in certain cases under other agreements governing our indebtedness. Any default undertheour credit facilities or indenturesapplicable to us or our subsidiariescould adversely affect our growth, our financial condition and our results of operations and the ability to make payments on ourpublicly heldnotes andthose of our subsidiaries,credit facilities. For more information, see the section above entitled “Liquidity andon the credit facilities of our subsidiaries. LIQUIDITY.Capital Resources.”Liquidity.Our business requires significant cash to fund capital expenditures, debt service costs and ongoing operations. Our ongoing operations will depend on our ability to generate cash and to secure financing in the future. We have historically funded liquidity and capital requirements through cash flows from operating activities, borrowings under
theour credit facilities,of our subsidiaries, issuances of debt securities by us or our subsidiaries, loans orequity contributions from Charter Holdco, issuances of debt securities and cash on hand.Our ability to
conduct operations is dependentoperate depends on our continued access to credit under oursubsidiaries'credit facilities.Our total potential borrowing availability under the current credit facilities of our subsidiaries totaled $1.4 billion as of September 30, 2003, although the actual availability per the covenant restrictions at that time was only $735 million.Our access to those funds is subject to our satisfaction of the covenants in those credit facilities and the indentures governing ourand our subsidiaries' publicdebt.Although we have completed a private placement of $500 million aggregate principal amount of 8.75% senior notes by CCO Holdings to improve our ability to satisfy leverage ratio covenants in our subsidiaries' credit facilities, we may not be able to comply with all of the financial ratios and restrictive covenants in our subsidiaries' credit facilities. If there isIn addition, an event of default underour subsidiaries'the credit facilitiessuch asor indentures, if not waived, could result in thefailureacceleration of those debt obligations and, consequently, other debt obligations. Such acceleration could result in exercise of remedies by our creditors and could force us tomaintainseek theapplicable required financial ratios, we would be unable to borrow under these credit facilities,protection of the bankruptcy laws, which could materially adversely impact our ability to operate our business and to make payments under our debt instruments.In addition, an event of default under the credit facilities and indentures, if not waived, could result in the acceleration of those debt obligations, which would in turn result in the acceleration of other debt obligations, and could result in the exercise of remedies by our creditors and could force us to seek the protection of the bankruptcy laws.If, at any time, additional capital or capacity is required beyond amounts internally generated or available through existing credit facilities or
intraditional debtor equityfinancings, we would consider:o requesting waivers or amendments with respect to our credit facilities, the availability and terms of which would be subject to market conditions; o further reducing our expenses and capital expenditures, which would likely impair our ability to increase revenue; o selling assets; o
• further reducing our expenses and capital expenditures, which would likely impair our ability to increase revenue; • selling assets; • issuing debt securities which may have structural or other priorities over our existing notes; • issuing equity at the Charter or Charter Holdco level, the proceeds of which could be loaned or contributed to us; or • requesting waivers or amendments with respect to our credit facilities, the availability and terms of which would be subject to market conditions. If the above strategies were not successful, we could be forced to restructure our obligations or seek protection under the bankruptcy laws. If we were to engage in a recapitalization or other
priorities oversimilar transaction, ourexisting notes;noteholders might not receive all principal and interest payments to which they are contractually entitled on a timely basis oro issuing debt or equityat all. For more information, see the section above entitled “Liquidity and Capital Resources.”Charter
or Charter Holdco level, the proceeds of which could be loaned or contributed to us. 41Charter has a substantial amount of debt. CHARTER LIQUIDITY CONCERNS.Liquidity Concerns.Following completion of the previously described CCH II offering,At March 31, 2004, Charterstill hashad approximately$774$764 million aggregate principal amount of convertible senior notes outstanding, which mature in 2005 and2006, following this debt exchange. Charter's2006. Charter’s ability to make payments on its convertible senior notes is dependent on its ability to obtain additional financing and on us and its other subsidiaries making distributions, loans, or payments to Charter Holdco, and on Charter Holdco paying or distributing such funds to Charter. The indentures governingourthe CCH II,35
LLC notes, CCO Holdings, LLC notes, and Charter Operating notes restrict those notes issuers from making distributions to their parent companies (including Charter and Charter Holdings) for payment of principal on parent company notes, in each case unless there is no default under those indentures and a specified leverage ratio test can be met. Each such issuer currently meets the applicable leverage ratio test, and therefore is not currently prohibited from making any such distributions to its direct parent. The indentures governing the Charter Holdings notes permit
usCharter Holdings to make distributionsup to our formulaic capacityto Charter Holdco for payment of interest or principal on Charter’s convertible senior notes, only if, after giving effect to the distribution,weCharter Holdings can incur additional debt under the leverage ratio test of 8.75 to 1.0, there is no default undertheCharter Holdings’ indentures and other specified tests are met.We did not meet the leverage ratio test at September 30, 2003 and as a result, distributions from us to Charter are subject to certain restrictions.However, in the event thatweCharter Holdings could not incur any additional debt under the 8.75 to 1.0 leverage ratio test, the indentures governingourthe Charter Holdings notes permit usand our subsidiariesto make specified investments in Charter Holdco or Charter, up toits formulaic capacity, ifan amount determined by a formula, as long as there is no default under the indentures. For the quarter ended March 31, 2004, there were no defaults under the Charter Holdings indentures and other specified tests were met. However, Charter Holdings continued not to meet the leverage ratio test at March 31, 2004. As a result, distributions from Charter Holdings to Charter Holdco or Charter again have been restricted and will continue to be restricted until that test is met. Charter currently has sufficient assets to pay interest due on its outstanding convertible senior notes during 2004. However, Charter’s ability to make interest payments, or principal payments at maturity in 2005 and 2006, on its outstanding convertible senior notes is contingent upon it obtaining additional debt and/or equity financing or receiving distributions or other payments from its subsidiaries. Because Charter is oursolemanager, any financial or liquidity problems of Charter would be likely to cause serious disruption to our business and to have a material adverse effect on ouroperationsbusiness andresults.results of operations. Any such event would likely adversely impact our own credit rating, and our relations with customers and suppliers, which could in turn further impair our ability to obtain financing and operate our business. Further, to the extent that any such event results in a change of control of Charter (whether through a bankruptcy, receivership or other reorganization of Charter and/or Charter Holdco, or otherwise), it could result in an event of default under the our credit facilitiesof our subsidiariesand require a change of control repurchase offer under our outstanding notes.ACCELERATION OF INDEBTEDNESS OF OUR SUBSIDIARIES.Acceleration of Our Indebtedness.In the event of a default under our
subsidiaries'credit facilities orpublicnotes, oursubsidiaries'creditors could elect to declare all amounts borrowed, together with accrued and unpaid interest and other fees, to be due and payable. In such event, oursubsidiaries'credit facilities and indentures will not permitourCharter Holdings’ subsidiaries to distribute funds tousCharter Holdings to pay interest or principal onour publicits notes. If the amounts outstanding under such credit facilities orpublicnotes are accelerated, all ofour subsidiaries'the debt and liabilities would be payable fromour subsidiaries'the assets of Charter Holdings’ subsidiaries, prior to any distribution ofour subsidiaries'Charter Holdings’ subsidiaries’ assets to pay the interest and principal amounts onour publicCharter Holdings’ notes. In addition, the lenders under oursubsidiaries'credit facilities could foreclose on their collateral, which includes equity interests inourCharter Holdings’ subsidiaries, and they could exercise other rights of secured creditors. In any such case, we might not be able to repay or make any payments onour publicCharter Holdings’ notes. Additionally, an acceleration or payment default under oursubsidiaries'credit facilities would cause a cross-default in the indentures governing ournotes and would trigger the cross-default provision of the Charter Operating Credit Agreement.notes. Any default under any of oursubsidiaries'credit facilities orpublicnotes might adversely affect the holders of ourpublicnotes and our growth, financial condition and results of operations and could force us to examine all options, including seeking the protection of the bankruptcy laws.SECURITIES LITIGATION AND GOVERNMENT INVESTIGATIONS.Charter Holdings’ Notes are Structurally Subordinated to all Liabilities of Charter Holdings’ Subsidiaries.The borrowers and guarantors under the Charter Operating credit facilities and senior second lien notes are indirect subsidiaries of Charter Holdings. A number of
Federal Class ActionsCharter Holdings’ subsidiaries are also obligors under other debt instruments, including CCH II, CCO Holdings and Charter Operating, which are each a co-issuer of senior notes and/or senior discount notes. As of March 31, 2004, our total debt was approximately $17.3 billion, of which $8.9 billion would have been structurally senior to Charter Holdings’ notes. In a liquidation, the lenders under our credit facilities and the holders of the other debt instruments and all other creditors of Charter Holdings’ subsidiaries would have the right to be paid before Charter Holdings from any of its subsidiaries’ assets.If Charter Holdings caused a subsidiary to make a distribution to enable it to make payments in respect of its notes, and such transfer were deemed a fraudulent transfer or an unlawful distribution, the holders of Charter Holdings’ notes could be required to return the payment to (or for the benefit of) the creditors of Charter Holdings’ subsidiaries. In the event of the bankruptcy, liquidation or dissolution of a subsidiary, following payment by such subsidiary of its liabilities, such subsidiary may not have sufficient assets remaining to make any payments to us as an equity holder or otherwise and may be restricted by bankruptcy and insolvency laws from making any such
36
payments. The foregoing contractual and legal restrictions could limit our ability to make payments to the holders of Charter Holdings’ notes.
Securities Litigation and Government Investigations.A number of putative federal class action lawsuits have been filed against Charter and certain of its former and present officers and directors alleging violations of securities
law. The Federal Class Actionslaws, which have been consolidated for pretrialpurposes into a Consolidated Federal Class Action.purposes. In addition, a number of other lawsuits have been filed against Charter in other jurisdictions. A shareholders derivative suit was filed in theUnited StatesU.S. District Court for the Eastern District of Missouri, and several class action lawsuits were filed in Delaware state court against Charter and certain of itsthen currentdirectors and officers. Finally, two shareholders derivative suits were filed in Missouristate courtState Court against Charter, its then current directors and its former independentauditor; theseauditor. These actions were consolidated during the fourth quarter of 2002. Additionally, on March 12, 2004, an action substantially identical to the Missouri State Court derivative suits was filed in the Missouri State Court. This case has not yet been consolidated with the other Missouri State Court derivative suits, but Charter expects that it will in the future. The federal shareholders derivative suit, the Delaware class actions,andthe consolidated derivative suit and the new Missouri State Court derivative action each allege that the defendants breached their fiduciary duties.In August 2002, Charter became aware of a grand jury investigation being conducted by the
United States Attorney'sU.S. Attorney’s Office for the Eastern District of Missouri into certain of its accounting and reporting practices focusing on how it reported customer numbers, and its reporting of amounts received from digital set-top terminal suppliers for advertising. The U.S.Attorney'sAttorney’s Office has publicly stated that Charter is not currently a target of the investigation. Charter has also been advised by the U.S.Attorney'sAttorney’s Office that no member of its board of directors, including its Chief Executive Officer, is a target of the investigation. On July 24, 2003, a federal grand jury charged four former officers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inflatedsubscribercustomer account numbers. On July 25,422003, one of the former officers who was indicted entered a guilty plea. Charter has advised us that it is fully cooperating with the investigation. InOn November 4, 2002, Charter received an informal, non-public inquiry from the
Staffstaff of theSecurities and Exchange Commission (SEC).SEC. The SEChassubsequently issued a formal order of investigation dated January 23, 2003, and subsequent related document and testimony subpoenas. The investigation and subpoenas generally concernCharter'sCharter’s prior reports with respect totheits determination of the number ofitscustomers and various of itsotheraccounting policies and practices including its capitalization of certain expenses and dealings with certain vendors, including programmers and digital set-top terminal suppliers. Charter has advised us that it is fully cooperating with the SEC staff.Due to the inherent uncertainties of litigation and investigations, Charter
has advised us that itcannot predict the ultimate outcome of these proceedings. An unfavorable outcome in the lawsuits or the government investigations described above could have a material adverse effect on our financial condition and results of operations or our liquidity.In addition,
itsthe restatement of our 2000, 2001 and 2002 financial statements may lead to additional allegations in the pending securities class and shareholders derivative actions against Charter, or to additional claims being filed or to investigations being expanded or commenced. These proceedings, andCharter'sCharter’s actions in response to these proceedings, could result in substantial costs, substantial potential liabilities and the diversion ofmanagement'smanagement’s attention,all of whichand couldaffectadverselythe market price of our publicly-traded notes, as well asaffect our abilityto meet future operating and financial estimates andto execute our business and financial strategies.COMPETITION.Competition.The industry in which we operate is highly competitive. In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater personnel resources, greater brand name recognition and long-established relationships with regulatory authorities and customers. Increasing consolidation in the cable industry and the repeal of certain ownership rules may provide additional benefits to certain of our competitors, either through access to financing, resources or efficiencies of scale.
Our principal competitor for video services throughout our territory is direct broadcast satellite television services, also known as DBS. Competition from DBS, including intensive marketing efforts,
andaggressive pricing, and the ability of DBS to provide certain services that we are in process of developing, has had an adverse impact on our ability to retain customers. Local telephone companies and electric utilities can compete in this area, and they increasingly may do so in the future. The subscription television industry also faces competition from free broadcast television and from other communications and entertainment media. With respect to our Internet access services, we face competition, including intensive marketing efforts and aggressive pricing, from telephone companies and other37
providers of
"dial-up"“dial-up” and digital subscriber line technology, also known as DSL. Further loss of customers to DBS or other alternative video and data services could have a material negative impact on our business.Mergers, joint ventures and alliances among
franchise,franchised, wireless or private cable operators, satellite television providers, local exchange carriers and others, and the repeal of certain ownership rules may provide additional benefits to some of our competitors, either through access to financing, resources or efficiencies of scale, or the ability to provide multiple services in direct competition with us.VARIABLE INTEREST RATES.Variable Interest Rates.At
September 30, 2003,March 31, 2004, excluding the effects of hedging, approximately43%38% of our debt bears interest at variable rates that are linked to short-term interest rates. In addition, a significant portion of our existing debt, assumed debt or debt we might arrange in the future will bear interest at variable rates. If interest rates rise, our costs relative to those obligations will also rise. As ofSeptember 30, 2003March 31, 2004 and December 31,2002,2003, the weighted average interest rate on the bank debt was approximately 5.6% and 5.4%, respectively, while the weighted average interest rate on the high-yield debt was approximately 10.3%and 10.2%,respectively,resulting in a blended weighted average interest rate of8.2%8.5% and8.1%8.3%, respectively. Approximately78% and 77%81% of our debt was effectively fixed, including the effects of our interest rate hedge agreements, as ofSeptember 30, 2003 andMarch 31, 2004 compared to approximately 79% at December 31,2002, respectively. STREAMLINING OF OPERATIONS.2003.Streamlining of Operations.In the past, we experienced rapid growth from acquisitions of a number of smaller cable operators and the rapid rebuild and rollout of advanced services. Our future success will depend in part on our ability to standardize and streamline our operations. The failure to implement a consistent corporate culture and management, operating or financial systems or procedures necessary to standardize and streamline our operations and effectively operate our enterprise could have a material adverse effect on our business, results of operations and financial condition. In addition, our ability to properly manage our operations will be impacted by our ability to
43attract, retain and incentivize experienced, qualified, professional management. SERVICES.Services.We expect that a substantial portion of our
near termnear-term growth will be achieved through revenues from high-speed data services, digital video, bundled service packages, and to a lesser extent, various commercial services that take advantage ofcable'scable’s broadband capacity. The technology involved in our product and service offerings generally requires that we have permission to use intellectual property and that such property not infringe on rights claimed by others. We may not be able to offer these advanced services successfully to our customers or provide adequate customer service and these advanced services may not generate adequate revenues. Also, if the vendors we use for these services are not financially viable over time, we may experience disruption of service and incur costs to find alternative vendors. In addition, if it is determined that the product being utilized infringes on the rights of others, we may be sued or be precluded from using the technology.INCREASING PROGRAMMING COSTS.Increasing Programming Costs.Programming has been, and is expected to continue to be, our largest operating expense item. In recent years, the cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming. This escalation may continue, and we may not be able to pass programming cost increases on to our customers. The inability to fully pass these programming cost increases on to our customers would have an adverse impact on our cash flow and operating margins.
PUBLIC NOTES PRICE VOLATILITY.Notes Price Volatility.The market price of
the publicly-tradedour publicly traded notes issued by usand our subsidiarieshas been and is likely to continue to be highly volatile. We expect that the price of our securities may fluctuate in response to various factors, including the factors described throughout this section and various other factors, which may be beyond our control. These factors beyond our control could include: financial forecasts by securities analysts; new conditions or trends in the cable or telecommunications industry; general economic and market conditions and specifically, conditions related to the cable or telecommunications industry; any further downgrade of our debt ratings; announcement of the development of improved or competitive technologies; the use of new products or promotions by us or our competitors; changes in accounting rules; and new regulatory legislation adopted in the United States.In addition, the securities market in general, and the market for cable television securities in particular, have experienced significant price fluctuations. Volatility in the market price for companies may often be unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our
and our subsidiaries' publicpublicly traded notes, regardless of our operating performance. In the past, securities litigation has often commenced following periods of volatility in the market price of acompany'scompany’s38
securities, and
recently suchseveral purported class action lawsuits were filed againstCharter. ECONOMIC SLOWDOWN; GLOBAL CONFLICT.Charter in 2001 and 2002, following a decline in its stock price.Economic Slowdown; Global Conflict.It is difficult to assess the impact that the general economic slowdown and global conflict will have on future operations. However, the economic slowdown has resulted and could continue to result in reduced spending by customers and advertisers, which could reduce our revenues, and also could affect our ability to collect accounts receivable and maintain customers.
In addition, any prolonged military conflict would materially and adversely affect our revenues from our systems providing services to military installations.If we experience reduced operating revenues, it could negatively affect our ability to make expected capital expenditures and could also result in our inability to meet our obligations under our financing agreements. These developments could also have a negative impact on our financing and variable interest rate agreements through disruptions in the market or negative market conditions.LONG-TERM INDEBTEDNESS - CHANGE OF CONTROL PAYMENTS.Long-Term Indebtedness — Change of Control Payments.We and Charter may not have the ability to raise the funds necessary to fulfill
theour obligations underCharter'sCharter’s convertible senior notes, ourpublic notes or the publicsenior and senior discount notes and our credit facilitiesof our subsidiariesfollowing a change of control. Under the indentures governingCharter'sthe Charter convertible senior notes, upon the occurrence of specified change of control events, including certain specified dispositions ofCharter'sstock by Mr. Allen, Charter is required to offer to repurchase all of the outstanding Charter convertible senior notes. However, Charter may not have sufficient funds at the time of the change of control event to make the required repurchase ofCharter'sthe Charter convertible senior notes, andwe and ourits subsidiaries are limited inourtheir ability to make distributions or other payments to Charter to fund any required repurchase. In addition, a change of control under oursubsidiaries'credit facilities and indentures governingtheir andourpublicnotes would require the repayment of borrowings under those credit facilities and indentures.Because 44suchThese credit facilities andpublic notes are obligations of us and our subsidiaries,thecredit facilities and the publicnotes would have to be repaid byus and ourCharter Holdings’ subsidiaries beforetheassets could be available to Charter to repurchaseCharter'sthe Charter convertible senior notes.Charter'sCharter’s failure to make or complete a change of control offer would place it in default underCharter'sthe Charter convertible senior notes.TheAny failureofby usor our subsidiariesto make a change of control offer or repay the amounts outstanding undertheirour credit facilities would placethemus in default of these agreements and could result in a default under the indentures governingCharter'sthe Charter convertible senior notes.REGULATION AND LEGISLATION.Regulation and Legislation. Cable
systemssystem operations are extensively regulated at the federal, state, and local level, including rate regulation of basic service and equipment and municipal approval of franchise agreements and their terms, such as franchise requirements to upgrade cable plant and meet specified customer service standards. Additional legislation and regulation is always possible. For example, there has been considerable legislative interest recently in requiring cable operators to offer historically bundled programming services on an á la carte basis.Cable operators also face significant regulation of their channel carriage. They currently can be required to devote substantial capacity to the carriage of programming that they would not carry voluntarily, including certain local broadcast signals, local public, educational and government access programming, and unaffiliated commercial leased access programming. This carriage burden could increase in the future, particularly if the
Federal Communications CommissionFCC were to require cable systems to carry both the analog and digital versions of local broadcast signals or multiple channels added by digital broadcasters. TheFederal Communications CommissionFCC is currently conducting a proceeding in which it is considering this channel usage possibility, although itrecentlypreviously issued a tentative decision against such dual carriage. In addition, the carriage of newhigh-definitionhigh definition broadcast and satellite programming services over the next few years may consume significant amounts of system capacity without contributing to proportionate increases in system revenue.There is also uncertainty whether local franchising authorities, state regulators, the
Federal Communications Commission,FCC, or the U.S. Congress will impose obligations on cable operators to provide unaffiliated Internet service providers with regulated access to cable plant. If they were to do so, and the obligations were found to be lawful, it could complicate our operations in general, and our Internet operations in particular, from a technical and marketing standpoint. These open access obligations could adversely impact our profitability and discourage system upgrades and the introduction of new products and services. The United States Court of Appeals for the Ninth Circuit recently vacated in parta Federal Communications Commissionan FCC ruling defining cable modem service as an"information service"“information service” and remanded for further proceedings. The Ninth Circuit held that cable modem service is not"cable service"“cable service” but is part"telecommunications service"“telecommunications service” and part"information“information service."” The decision will likely be appealed, but it may possibly lead to cable operators having to contribute to the federalgovernment'sgovernment’s universal service fund, to open access requirements, and to other common39
carrier regulations. As we offer other advanced services over our cable system, we are likely to face additional calls for regulation of our capacity and operation. These regulations, if adopted, could adversely affect our operations.
A recent court decision concerning the Digital Millenium Copyright Act ("DMCA") has enabled copyright owners to obtain expedited subpoenas compelling disclosure by Internet service providers of the names of customers that are otherwise known only by an Internet protocol, or IP, address or screen name. This has led to a marked increase in the volume of subpoenas received by us, as copyright owners seek to constrain the use of peer-to-peer networks for unauthorized copyingItem 3. Quantitative and
distribution of copyrighted works. Internet service providers also have a DMCA obligation to adopt and implement a policy of terminating the accounts of repeat copyright infringers. The increased activity and responsibilities in this area pose an additional burden on our operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Qualitative Disclosures about Market Risk.No material changes in reported market risks have occurred since the filing of our December 31,
20022003 Annual Report on Form 10-K.ITEMItem 4.
CONTROLS AND PROCEDURES.Controls and Procedures.As of the end of the period covered by this report, management, including our Chief Executive Officer and
interimChief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in thisQuarterly Report.quarterly report. The evaluation was based in part upon reports and affidavits provided by a number of executives. Based upon, and as of the date of that evaluation, our Chief Executive Officer andinterimChief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the45reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission'sCommission’s rules and forms.There was no change in our internal control over financial reporting during the quarter ended
September 30, 2003March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, our management believes that
ourits controlsdoprovide such reasonable assurances.4640
PART II. OTHER INFORMATION.
ITEMItem 1.
LEGAL PROCEEDINGS. SECURITIES CLASS ACTIONS AND DERIVATIVE SUITS.Legal Proceedings.Securities class actions and derivative suits
Fourteen putative federal class action lawsuits (the
"Federal''Federal ClassActions"Actions’’) have been filed against CharterCommunications, Inc.and certain of its former and present officers and directors in various jurisdictions allegedly on behalf of all purchasers ofCharter Communications, Inc.'sCharter’s securities during the period from either November 8 or November 9, 1999 through July 17 or July 18, 2002. Unspecified damages are sought by the plaintiffs. In general, the lawsuits allege that CharterCommunications, Inc.utilized misleading accounting practices and failed to disclose these accounting practices and/or issued false and misleading financial statements and press releases concerningCharter Communications, Inc.'sCharter’s operations and prospects.The Federal Class Actions were specifically and individually identified in prior public filings made by Charter Communications, Inc.In October 2002, CharterCommunications, Inc.filed a motion with the Judicial Panel on Multidistrict Litigation (the"Panel"''Panel’’) to transfer the Federal Class Actions tothe United States District Court forthe Eastern District of Missouri. On March 12, 2003, the Panel transferred the six Federal Class Actions not filed in the Eastern District of Missouri to that district for coordinated or consolidated pretrial proceedings with the eight Federal Class Actions already pending there. ThePanel'sPanel’s transfer order assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a prior court order, StoneRidge Investment Partners LLC became lead plaintiff upon entry of thePanel'sPanel’s transfer order. StoneRidge subsequently filed a Consolidated Amended Complaint. The Court subsequently consolidated the Federal Class Actions into a single consolidated action (the"Consolidated''Consolidated Federal ClassAction"Action’’) for pretrial purposes. On June 19, 2003, following a pretrial conference with the parties, the Court issued a Case Management Order setting forth a schedule for the pretrial phase of the Consolidated Federal Class Action. Motions to dismiss the Consolidated Amended Complaint have been filed. On February 10, 2004, in response to a joint motion made by StoneRidge and defendants, Charter, Vogel and Allen, the court entered an order providing, among other things, that: (1) the parties who filed such motion, engage in a mediation within ninety (90) days; and (2) all proceedings in the Consolidated Federal Class Action were stayed until May 10, 2004. On May 11, 2004, the court extended the stay in the Consolidated Federal Class Action for an additional sixty (60) days.The Consolidated Federal Class Action is entitled:
oIn re Charter Communications, Inc. Securities Litigation, MDL Docket No. 1506 (All Cases),Stoneridge InvestmentStoneRidge Investments Partners, LLC, Individually and On BehalfOfof All Others Similarly Situated, v. Charter Communications, Inc., Paul Allen, Jerald L. Kent, Carl E. Vogel, Kent Kalkwarf, DavidGG. Barford, Paul E. Martin, David L. McCall, Bill Shreffler, Chris Fenger, James H. Smith, III, Scientific-Atlanta, Inc., Motorola, Inc. and Arthur Andersen, LLP, Consolidated Case No. 4:02-CV-1186-CAS.On September 12, 2002, a shareholders derivative suit (the
"State''State DerivativeAction"Action’’) was filed in the Circuit Court of the City of St. Louis, State of Missouristate court(the “Missouri State Court”), against CharterCommunications, Inc.and its then current directors, as well as its former auditors. A substantively identical derivative action was later filed and consolidated into the State Derivative Action. The plaintiffs allege that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly onCharter'sCharter’s behalf, are sought by the plaintiffs.The consolidated State Derivative Action is entitled:
oKenneth Stacey, Derivatively on behalf of Nominal Defendant Charter Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E. Vogel, Larry W. Wangberg, Arthur Andersen, LLP and Charter Communications, Inc.On March 12, 2004, an action substantively identical to the State Derivative Action was filed in the Missouri State Court, against Charter and certain of its current and former directors, as well as its former auditors. The plaintiffs allege that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. This case has not yet been consolidated with the State Derivative Action, but we expect that it will be in the future. Unspecified damages, allegedly on Charter’s behalf, are sought by plaintiffs.
41
This action is entitled:
Thomas Schimmel, Derivatively on behalf on Nominal Defendant Charter Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William D. Savoy, John H. Tory, Carl E. Vogel, Larry W. Wangberg, and Arthur Andersen, LLP, and Charter Communications, Inc.Separately, on February 12, 2003, a shareholders derivative suit (the
"Federal''Federal DerivativeAction"Action’’), was filed against CharterCommunications, Inc.and its then current directors in the United States District Court for the Eastern District of Missouri. The plaintiff alleges that the individual defendants breached their fiduciary duties and grossly mismanaged CharterCommunications, Inc.by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly onCharter'sCharter’s behalf, are sought by the plaintiffs.47The Federal Derivative Action is entitled:
oArthur Cohn, Derivatively on behalf of Nominal Defendant Charter Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E. Vogel, Larry W. Wangberg, and Charter Communications, Inc.In addition to the Federal Class Actions, the State Derivative Action, the new Missouri State Court derivative action and the Federal Derivative Action, six putative class action lawsuits have been filed against Charter
Communications, Inc.and certain of its then current directors and officers in the Court of Chancery of the State of Delaware (the"Delaware''Delaware ClassActions"Actions’’). TheDelaware Class Actions are substantively identicallawsuits were filed after the filing of a Schedule 13D amendment by Mr. Allen indicating that he was exploring a number of possible alternatives with respect to restructuring or expanding his ownership interest in Charter. We believe the plaintiffs speculated that Mr. Allen might have been contemplating an unfair bid for shares of Charter or some other sort of going private transaction on unfair terms and generallyallegealleged that the defendants breached their fiduciary duties by participating in or acquiescinginto such apurported and threatened attempt by Defendant Paul Allen to purchase shares and assets of Charter Communications, Inc. at an unfair price.transaction. The lawsuits were brought on behalf ofCharter Communications, Inc.'sCharter’s securities holders as of July 29, 2002, and seek unspecified damages and possible injunctive relief.NoThe Delaware Class Actions are substantively identical. Charter has informed us that no suchpurported or threatenedtransaction by Mr. Allen has been presented. Orders of dismissal without prejudice have been entered in each of the Delaware Class Actions.The Delaware Class Actions consist of:
o Eleanor Leonard, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on August 12, 2002; o Helene Giarraputo, on behalf of herself and all others similarly situated, v. Paul G. Allen, Carl E. Vogel, Marc B. Nathanson, Ronald L. Nelson, Nancy B. Peretsman, William Savoy, John H. Tory, Larry W. Wangberg, and Charter Communications, Inc., filed on August 13, 2002; o Ronald D. Wells, Whitney Counsil and Manny Varghese, on behalf of themselves and all others similarly situated, v. Charter Communications, Inc., Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E. Vogel, Larry W. Wangberg, filed on August 13, 2002; o Gilbert Herman, on behalf of himself and all others similarly situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on August 14, 2002; o Stephen Noteboom, on behalf of himself and all others similarly situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on August 16, 2002; and o John Fillmore on behalf of himself and all others similarly situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on October 18, 2002.
• Eleanor Leonard, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on August 12, 2002; • Helene Giarraputo, on behalf of herself and all others similarly situated, v. Paul G. Allen, Carl E. Vogel, Marc B. Nathanson, Ronald L. Nelson, Nancy B. Peretsman, William Savoy, John H. Tory, Larry W. Wangberg, and Charter Communications, Inc., filed on August 13, 2002; • Ronald D. Wells, Whitney Counsil and Manny Varghese, on behalf of themselves and all others similarly situated, v. Charter Communications, Inc., Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E. Vogel, Larry W. Wangberg, filed on August 13, 2002; • Gilbert Herman, on behalf of himself and all others similarly situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on August 14, 2002; • Stephen Noteboom, on behalf of himself and all others similarly situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, and Charter Communications, Inc., filed on August 16, 2002; and • John Fillmore on behalf of himself and all others similarly situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William Savoy, 42
and Charter Communications, Inc., filed on October 18, 2002. All of the lawsuits discussed above are each in preliminary stages. No reserves have been established for potential losses or related insurance recoveries on these matters because Charter
Communications, Inc.is unable to predict the outcome. Charter has advised us that it intends to vigorously defend the lawsuits.GOVERNMENT INVESTIGATIONS.Government investigations
In August
of2002, CharterCommunications, Inc.became aware of a grand jury investigation being conducted by the U.S.Attorney'sAttorney’s Office for the Eastern District of Missouri into certain of its accounting and reporting practices, focusing on howitCharter reported customer numbers, and its reporting of amounts received from digital set-top terminal suppliers for advertising. The U.S.Attorney'sAttorney’s Office has publicly stated that Charter is not currently a target of the investigation. Charter has also been advised by theU.S. Attorney's OfficeU. S. Attorney’s office that no member of its board of directors, including its Chief Executive Officer, is a target of the investigation. On July 24, 2003, a federal grand jury charged four former officers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inflatedsubscribercustomer account numbers. On July 25, 2003 one of the former officers who was indicted entered a guilty plea. Charter has advised us that it is fully cooperating with the investigation.48On November 4, 2002, Charter
Communications, Inc.received an informal, non-public inquiry from theStaffstaff of theSecurities and Exchange Commission.SEC. The SEC has subsequently issued a formal order of investigation dated January 23, 2003, and subsequent document and testimony subpoenas. The investigation and subpoenas generally concernCharter Communications, Inc.'sCharter’s prior reports with respect to its determination of the number of customers, and various of its accounting policies and practices including its capitalization of certain expenses and dealings with certain vendors, including programmers and digital set-top terminal suppliers. Charter has advised us that it is fully cooperating with the SECStaff. OUTCOME.staff.Indemnification
Charter is generally required to indemnify each of the named individual defendants in connection with the matters described above pursuant to the terms of its bylaws and (where applicable) such individual defendants’ employment agreements. In accordance with these documents, in connection with the pending grand jury investigation, SEC investigation and the above described lawsuits, some of its current and former directors and Charter’s current and former officers have been advanced certain costs and expenses incurred in connection with their defense.
Insurance
Charter has
advised usliability insurance coverage that it believes is available for the matters described above, where applicable, subject to the terms, conditions and limitations of the respective policies. There is no assurance that current coverage will be sufficient for all claims described above or any future claims that may arise.Other litigation
In October 2001, two customers, Nikki Nicholls and Geraldine M. Barber, filed a class action suit against Charter Holdco in South Carolina Court of Common Pleas (''South Carolina Class Action’’), purportedly on behalf of a class of Charter Holdco’s customers, alleging that Charter Holdco improperly charged them a wire maintenance fee without request or permission. They also claimed that Charter Holdco improperly required them to rent analog and/or digital set-top terminals even though their television sets were ''cable ready.’’ Charter Holdco removed this case to the United States District Court for the District of South Carolina in November 2001, and moved to dismiss the suit in December 2001. The federal judge remanded the case to the South Carolina Court of Common Pleas in August 2002 without ruling on the motion to dismiss. The plaintiffs subsequently moved for a default judgment, arguing that upon return to state court, Charter Holdco should have but did not file a new motion to dismiss. The state court judge granted the plaintiff’s motion over Charter Holdco’s objection in September 2002. Charter Holdco immediately appealed that decision to the South Carolina Court of Appeals and the South Carolina Supreme Court, but those courts have ruled that until a final judgment is entered against Charter Holdco, they lack jurisdiction to hear the appeal.
43
In January 2003, the Court of Common Pleas granted the plaintiffs’ motion for class certification. In October and November 2003, Charter Holdco filed motions (a) asking that court to set aside the default judgment, and (b) seeking dismissal of plaintiffs’ suit for failure to state a claim. In January 2004, the Court of Common Pleas granted in part and denied in part Charter Holdco’s motion to dismiss for failure to state a claim. It also took under advisement Charter Holdco’s motion to set aside the default judgment. In April 2004, the parties participated in a mediation with respect to this and related litigation. The mediator made a proposal to the parties. In May 2004, the parties to this and the related litigation accepted the mediator’s proposal and reached a tentative settlement. The tentative settlement remains subject to final documentation and court approval. As a result of the tentative settlement, we have recorded a special charge of $9 million in our condensed consolidated statement of operations for the three months ended March 31, 2004.
The South Carolina Class Action is entitled:
Nikki Nicholls and Geraldine M. Barber, on behalf of themselves and all others similarly situated v. Charter Communications Holding Company, LLC and City of Spartanburg filed on October 29, 2001.Outcome
Charter is unable to predict the outcome of the lawsuits and the government investigations described above. An unfavorable outcome in
theany of these lawsuits or the government investigationsdescribed abovecould have a material adverse effect onitsCharter’s and our financial condition, results of operationsand financial condition. INDEMNIFICATION. Charter is generally requiredor liquidity.In addition to
indemnify each of the named individual defendants in connection with these matters pursuant to the terms of our Bylaws and (where applicable) such individual defendants' employment agreements. Pursuant to the terms of certain employment agreements and in accordance with the Bylaws of Charter Communications, Inc., in connection with the pending grand jury investigation, SEC investigation and the above described lawsuits, Charter's current directors and its current and former officers have been advanced certain costs and expenses incurred in connection with their defense. Certain of the individual defendants also serve or have served as our officers and directors. The limited liability company agreements of the Company and its limited liability company subsidiaries, and the bylaws of its corporate subsidiary, may require each such entity to indemnify Charter and the individual named defendants in connection withthe matters set forthabove. INSURANCE.above, CharterCommunications, Inc. has directors'andofficers' liability insurance coveragethe Company are also party to other lawsuits and claims thatit believes is available forarose in the ordinary course of conducting its business. In the opinion of management, after taking into account recorded liabilities, the outcome of thesematters, where applicable,other lawsuits andsubjectclaims are not expected to have a material adverse effect on our financial condition, results of operations or liquidity.Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS
The index to the
terms, conditions and limitationsexhibits begins on page 46 ofthe respective policies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 23, 2003, at the annual meeting of Charter Communications Holdings Capital Corp., the sole shareholder voted 1 share (100% of outstanding shares) in favor of electing Carl E. Vogel as the sole director. ITEM 6. EXHIBITS ANDthis quarterly report.(b) REPORTS ON FORM
8-K. (A) EXHIBITS Exhibit Number Description of Document ------ ----------------------- 2.1 Purchase Agreement, dated May 29, 2003, by and between Falcon Video Communications, L.P. and WaveDivision Holdings, LLC (Incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.'s current report on Form8-Kfiled on May 30, 2003 (File No. 000-27927)). 2.2 Asset Purchase Agreement, dated September 3, 2003, by and between Charter Communications VI, LLC, The Helicon Group, L.P., Hornell Television Service, Inc., Interlink Communications Partners, LLC, Charter Communications Holdings, LLC and Atlantic Broadband Finance, LLC (Incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.'s current report on Form 8-K/A filed on September 3, 2003 (File No. 000-27927)). 3.1(a) Certificate of Formation of Charter Communications Holdings, LLC (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)). 3.2 Second Amended and Restated Limited Liability Company Agreement of Charter Communications Holdings, LLC, dated as of June 30, 2003 (Incorporated by reference to Exhibit 3.2 to the quarterly report on Form 10-Q filed by Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation on August 12, 2003 (File No. 333-77499)). 3.3 Certificate of Incorporation of Charter Communications Holdings Capital Corporation (Incorporated by reference to Exhibit 3.3 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on 49June 22, 1999 (File No. 333-77499)). 3.4(a) By-Laws of Charter Communications Holdings Capital Corporation (Incorporated by reference to Exhibit 3.4 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)). 3.4(b) Amendment to By-Laws of Charter Communications Holdings Capital Corporation, dated as of October 30, 2001. (Incorporated by reference to Exhibit 3.4(b) to the annual report on Form 10-K filed by Charter Communications Holding Company on March 29, 2002 (File No. 333-77499)). 4.1 Indenture, dated as of September 23, 2003, by and among CCH II, LLC, CCH II Capital Corp. and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 10.1 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.2 Exchange and Registration Rights Agreement, dated as of September 23, 2003, by and between CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.2 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.3 CCH II Note Purchase Agreement, dated as of September 18, 2003, by and between CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.3 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.4 CCI Senior Notes Exchange Agreement, dated as of September 18, 2003, by and between Charter Communications, Inc., CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.4 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.5 Holdings Senior Notes Exchange Agreement, dated as of September 18, 2003, by CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.5 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.6 Indenture, dated as of November 10, 2003, by and among CCO Holdings, LLC, CCO Holdings Capital Corp. and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.1 to Charter Communications, Inc.'s current report on Form 8-K filed on November 12, 2003 (File No. 000-27927)). 4.7 Exchange and Registration Rights Agreement, dated as of November 10, 2003, by and between CCO Holdings, LLC and CCO Holdings Capital Corp. (Incorporated by reference to Exhibit 4.2 to Charter Communications, Inc.'s current report on Form 8-K filed on November 12, 2003 (File No. 000-27927)). 4.8 Purchase Agreement, dated as of November 4, 2003, by and between CCO Holdings, LLC and CCO Holdings Capital Corp. (Incorporated by reference to Exhibit 4.3 to Charter Communications, Inc.'s current report on Form 8-K filed on November 12, 2003 (File No. 000-27927)). 10.1 Second Amended and Restated Credit Agreement, dated as of March 18, 1999, as amended and restated as of January 3, 2002 and as further amended and restated as of June 19, 2003, among Charter Communications Operating, LLC, Charter Communications Holdings, LLC and several financial institutions or entities named therein (Incorporated by reference to Exhibit 10.1 to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.2 Amended and Restated Limited Liability Company Agreement of Charter Communications Operating, LLC, dated as of June 19, 2003 (Incorporated by reference to Exhibit 10.2 to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.3a Commitment Letter, dated April 14, 2003, from Vulcan Inc. to Charter Communications VII, LLC (Incorporated by reference to Exhibit 10.3a to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.3b Letter from Vulcan Inc. dated June 30, 2003 amending the Commitment Letter, dated April 14, 2003 (Incorporated by reference to Exhibit 10.3b to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.4 Amended and Restated Management Agreement dated as of June 19, 2003 by and between Charter Communications Operating, LLC and Charter Communications, Inc. (Incorporated by reference to 50Exhibit 10.4 to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.5a Second Amended and Restated Mutual Services Agreement dated as of June 19, 2003 by and between Charter Communications, Inc. and Charter Communications Holding Company, LLC (Incorporated by reference to Exhibit 10.5a to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.5b Letter Agreement regarding Mutual Services Agreement dated June 19, 2003 between Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Holding Company, LLC (Incorporated by reference to Exhibit 10.5b to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). +10.6 Employment Agreement between Charter Communications, Inc. and Margaret A. "Maggie" Bellville, entered into as of April 27, 2003 (Incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on November 3, 2003 (File No. 000-27927)). +10.7 Amendment No. 4 to the Charter Communications, Inc. 2001 Stock Incentive Plan (Incorporated by reference to Exhibit 10.11(e) to the annual report on Form 10-K filed by Charter Communications, Inc. on April 14, 2003 (File No. 000-27927)). +10.8 Amendment No. 5 to the Charter Communications, Inc. 2001 Stock Incentive Plan (Incorporated by reference to Exhibit 10.11(f) to the annual report on Form 10-K filed by Charter Communications, Inc. on April 14, 2003 (File No. 000-27927)). 15.1 Letter re Unaudited Interim Financial Statements. * 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). * 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). * * filed herewith + Management compensatory plan or arrangement (B) REPORTS ON FORM 8-K On July 11, 2003, the registrant filed a current report on Form 8-K dated July 10, 2003 to announce the status of the issue as to whether the documentation was correct and complete with regard to the ultimate ownership of the CC VIII Interest following consummation of the Comcast Put Right. On September 19, 2003, the registrant furnished a current report on Form 8-K dated September 19, 2003 to announce that it and its indirect subsidiary, CCH II, LLC have entered into agreements to exchange certain indebtedness. On September 26, 2003, the registrant filed a current report on Form 8-K dated September 23, 2003 to announce that it and its indirect subsidiary, CCH II, LLC have closed on the exchange of certain indebtedness. 51None.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation have duly caused this
Quarterly Reportquarterly report to be signed on their behalf by the undersigned, thereunto duly authorized.CHARTER COMMUNICATIONS HOLDINGS, LLC Registrant By: CHARTER COMMUNICATIONS, INC., Sole Manager Dated: November 12, 2003 By: /s/ STEVEN A. SCHUMM ---------------------------------------- Name: Steven A. Schumm Title: Executive Vice President and Chief Administrative Officer and Interim Chief Financial Officer (Principal Financial Officer) By: /s/ PAUL E. MARTIN ---------------------------------------- Name: Paul E. Martin Title: Senior Vice President and Corporate Controller (Principal Accounting Officer) CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION Registrant Dated: November 12, 2003 By: /s/ STEVEN A. SCHUMM ---------------------------------------- Name: Steven A. Schumm Title: Executive Vice President and Chief Administrative Officer and Interim Chief Financial Officer (Principal Financial Officer) By: /s/ PAUL E. MARTIN ---------------------------------------- Name: Paul E. Martin Title: Senior Vice President and Corporate Controller (Principal Accounting Officer) 52
CHARTER COMMUNICATIONS HOLDINGS, LLC Registrant By: CHARTER COMMUNICATIONS, INC., Sole Manager
Dated: May 17, 2004 By: /s/ MICHAEL P. HUSEBY Name: Michael P. Huseby Title: Executive Vice President and Chief Financial Officer
(Principal Financial Officer)By: /s/ Paul E. Martin Name: Paul E. Martin Title: Senior Vice President and Corporate Controller
(Principal Accounting Officer)
CHARTER COMMUNICATIONS HOLDINGS CAPITAL
CORPORATIONRegistrant
Dated: May 17, 2004 By: /s/ MICHAEL P. HUSEBY Name: Michael P. Huseby Title: Executive Vice President and Chief Financial Officer
(Principal Financial Officer)By: /s/ Paul E. Martin Name: Paul E. Martin Title: Senior Vice President and Corporate Controller
(Principal Accounting Officer)45
EXHIBIT INDEX
Exhibit Number Description of Document ------ ----------------------- 2.1 Purchase Agreement, dated May 29, 2003, by and between Falcon Video Communications, L.P. and WaveDivision Holdings, LLC (Incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.'s current report on Form 8-K filed on May 30, 2003 (File No. 000-27927)). 2.2 Asset Purchase Agreement, dated September 3, 2003, by and between Charter Communications VI, LLC, The Helicon Group, L.P., Hornell Television Service, Inc., Interlink Communications Partners, LLC, Charter Communications Holdings, LLC and Atlantic Broadband Finance, LLC (Incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.'s current report on Form 8-K/A filed on September 3, 2003 (File No. 000-27927)). 3.1(a) Certificate of Formation of Charter Communications Holdings, LLC (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)). 3.2 Second Amended and Restated Limited Liability Company Agreement of Charter Communications Holdings, LLC, dated as of June 30, 2003 (Incorporated by reference to Exhibit 3.2 to the quarterly report on Form 10-Q filed by Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation on August 12, 2003 (File No. 333-77499)). 3.3 Certificate of Incorporation of Charter Communications Holdings Capital Corporation (Incorporated by reference to Exhibit 3.3 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)). 3.4(a) By-Laws of Charter Communications Holdings Capital Corporation (Incorporated by reference to Exhibit 3.4 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)). 3.4(b) Amendment to By-Laws of Charter Communications Holdings Capital Corporation, dated as of October 30, 2001. (Incorporated by reference to Exhibit 3.4(b) to the annual report on Form 10-K filed by Charter Communications Holding Company on March 29, 2002 (File No. 333-77499)). 4.1 Indenture, dated as of September 23, 2003, by and among CCH II, LLC, CCH II Capital Corp. and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 10.1 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.2 Exchange and Registration Rights Agreement, dated as of September 23, 2003, by and between CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.2 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.3 CCH II Note Purchase Agreement, dated as of September 18, 2003, by and between CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.3 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.4 CCI Senior Notes Exchange Agreement, dated as of September 18, 2003, by and between Charter Communications, Inc., CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.4 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.5 Holdings Senior Notes Exchange Agreement, dated as of September 18, 2003, by CCH II, LLC and CCH II Capital Corp. (Incorporated by reference to Exhibit 10.5 to Charter Communications, Inc.'s current report on Form 8-K filed on September 26, 2003 (File No. 000-27927)). 4.6 Indenture, dated as of November 10, 2003, by and among CCO Holdings, LLC, CCO Holdings Capital Corp. and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 4.1 to Charter Communications, Inc.'s current report on Form 8-K filed on November 12, 2003 (File No. 000-27927)). 4.7 Exchange and Registration Rights Agreement, dated as of November 10, 2003, by and between CCO Holdings, LLC and CCO Holdings Capital Corp. (Incorporated by reference to Exhibit 4.2 to Charter Communications, Inc.'s current report on Form 8-K filed on November 12, 2003 (File No. 53000-27927)). 4.8 Purchase Agreement, dated as of November 4, 2003, by and between CCO Holdings, LLC and CCO Holdings Capital Corp. (Incorporated by reference to Exhibit 4.3 to Charter Communications, Inc.'s current report on Form 8-K filed on November 12, 2003 (File No. 000-27927)). 10.1 Second Amended and Restated Credit Agreement, dated as of March 18, 1999, as amended and restated as of January 3, 2002 and as further amended and restated as of June 19, 2003, among Charter Communications Operating, LLC, Charter Communications Holdings, LLC and several financial institutions or entities named therein (Incorporated by reference to Exhibit 10.1 to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.2 Amended and Restated Limited Liability Company Agreement of Charter Communications Operating, LLC, dated as of June 19, 2003 (Incorporated by reference to Exhibit 10.2 to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.3a Commitment Letter, dated April 14, 2003, from Vulcan Inc. to Charter Communications VII, LLC (Incorporated by reference to Exhibit 10.3a to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.3b Letter from Vulcan Inc. dated June 30, 2003 amending the Commitment Letter, dated April 14, 2003 (Incorporated by reference to Exhibit 10.3b to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.4 Amended and Restated Management Agreement dated as of June 19, 2003 by and between Charter Communications Operating, LLC and Charter Communications, Inc. (Incorporated by reference to Exhibit 10.4 to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.5a Second Amended and Restated Mutual Services Agreement dated as of June 19, 2003 by and between Charter Communications, Inc. and Charter Communications Holding Company, LLC (Incorporated by reference to Exhibit 10.5a to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). 10.5b Letter Agreement regarding Mutual Services Agreement dated June 19, 2003 between Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Holding Company, LLC (Incorporated by reference to Exhibit 10.5b to Charter Communications, Inc. quarterly report on Form 10-Q filed on August 5, 2003 (File No. 000-27927)). +10.6 Employment Agreement between Charter Communications, Inc. and Margaret A. "Maggie" Bellville, entered into as of April 27, 2003 (Incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on November 3, 2003 (File No. 000-27927)). +10.7 Amendment No. 4 to the Charter Communications, Inc. 2001 Stock Incentive Plan (Incorporated by reference to Exhibit 10.11(e) to the annual report on Form 10-K filed by Charter Communications, Inc. on April 14, 2003 (File No. 000-27927)). +10.8 Amendment No. 5 to the Charter Communications, Inc. 2001 Stock Incentive Plan (Incorporated by reference to Exhibit 10.11(f) to the annual report on Form 10-K filed by Charter Communications, Inc. on April 14, 2003 (File No. 000-27927)). 15.1 Letter re Unaudited Interim Financial Statements. * 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. * 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). * 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). * * filed herewith
Exhibit Number Description of Document 2.1 Purchase Agreement, dated May 29, 2003, by and between Falcon Video Communications, L.P. and WaveDivision Holdings, LLC (Incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.’s current report on Form 8-K filed on May 30, 2003 (File No. 000-27927)). 2.2 Asset Purchase Agreement, dated September 3, 2003, by and between Charter Communications VI, LLC, The Helicon Group, L.P., Hornell Television Service, Inc., Interlink Communications Partners, LLC, Charter Communications Holdings, LLC and Atlantic Broadband Finance, LLC (Incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.’s current report on Form 8-K/A filed on September 3, 2003 (File No. 000-27927)). 10.1 Amended and Restated Credit Agreement among Charter Communications Operating, LLC, CCO Holdings, LLC and certain lenders and agents named therein dated April 27, 2004 (Incorporated by reference to Exhibit 10.25 to Amendment No. 2 to the registration statement on Form S-4 of CCH II, LLC filed on May 5, 2004 (File No. 333-111423)). 10.2 Indenture relating to the 8% senior second lien notes due 2012 and 8 3/8% senior second lien notes due 2014, dated as of April 27, 2004, by and among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp. and Wells Fargo Bank, N.A. as trustee (Incorporated by reference to Exhibit 10.32 to Amendment No. 2 to the registration statement on Form S-4 of CCH II, LLC filed on May 5, 2004 (File No. 333-111423)). 10.3 Purchase Agreement, dated April 20, 2004 by and between Charter Communications Operating, LLC and Charter Communications Operating Capital Corp. (Incorporated by reference to Exhibit 10.32 to Amendment No. 2 to the registration statement on Form S-4 of CCH II, LLC filed on May 5, 2004 (File No. 333-111423)). 10.4+ Description of Long-Term Incentive Program to the Charter Communications, Inc. 2001 Stock Incentive Plan. 15.1 Letter re Unaudited Interim Financial Statements. 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). + Management compensatory plan or arrangement
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