Commission file number:333-77499333-77499-01
Charter Communications Holdings, LLC
Delaware | 43-1843179 | |
Delaware | 43-1843177 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
[ ] [X] Report of Independent Registered Public Accounting Firm Charter Operating. Distributions by Charter’s subsidiaries to a parent company (including Charter and Charter Holdco) for payment of principal on operations. pretax gain recorded as a gain on sale of assets in the Company’s consolidated statements of operations. six months ended June 30, 2005 primarily represents a gain realized on an exchange of the Company’s interest in an equity investee for an investment in a larger enterprise. redemption was approximately $122 million and was funded through borrowings under the Charter Operating credit facilities. The redemption resulted in a loss on extinguishment of debt for the six months ended June 30, 2005 of approximately $5 million. Following such redemption, CC V Holdings, LLC and its subsidiaries (other than non-guarantor subsidiaries) guaranteed the Charter Operating credit facilities and granted a lien on all of their assets as to which a lien can be perfected under the Uniform Commercial Code by the filing of a financing statement. 2004, respectively. 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). tax expense as well as increases to the deferred tax liabilities of certain of the Company’s indirect corporate subsidiaries. investigation. of an employee’s outstanding options, if an employee would have received more than 400 shares of restricted stock in exchange for tendered 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 (vested and unvested) 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. annually from February 2000 (the 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. term was for 25 years and Charter agreed to use the Digeo portal exclusively for six years. Before the portal product was delivered to Charter, Digeo terminated development of the portal product. June 30, 2005, respectively. Ms. Jo Allen Patton is a director and the President of Vulcan Programming. Mr. Lance Conn is a Vice President of Vulcan Programming. Marc Nathanson has an indirect beneficial interest of less than 1% in Oxygen. Effective January 1, 2005, we ceased recognizing minority interest in earnings or losses of CC VIII, LLC for financial reporting purposes until the resolution of the dispute between Charter and Mr. Allen regarding the preferred membership units in CC VIII, LLC is determinable or other events occur. discussed above. " The increase was offset by approximately $23 million as a result of a decrease in analog video customers. Operating Expenses.Operating expenses increased tactics. We expect marketing expenditures to increase for the remainder of 2005. expenditures. 123, investee for an investment in a larger enterprise. funds under our credit facilities, our access to the debt markets, the timing of possible asset sales and our ability to generate cash flows from operating activities. We governmental securities pledged as security for the operations. facility. Notes. Notes. facilities. used during the payments for debt issuance costs and in net repayments of long-term debt. " " covenants. " The Charter Operating credit facilities and the indentures governing the senior notes, senior discount notes and senior second-lien notes issued by subsidiaries of Charter Holdings contain restrictive covenants that limit the ability of such subsidiaries to make distributions or other payments to Charter Further, if Charter Holdings made such payments by causing a subsidiary to have briefing schedules been set. See "Part II, Item 1. Legal Proceedings." costs and the diversion of management’s attention, and could adversely affect our ability to execute our business and financial strategies. In addition, as we expand our telephone offerings, we will face considerable competition from established telephone companies. repayment of borrowings under those credit facilities and indentures. Because such credit facilities and notes are obligations of Charter Holdings’ subsidiaries, the credit facilities and the notes would have to be repaid by Charter Holdings’ subsidiaries before their assets could be available to Charter Holdings or its parent " Item 3.Quantitative and Qualitative Disclosures about Market Risk.þ [X] NOoo [ ] NOþMay 11,August 5, 2005: 100Page 4 —- Charter Communications Holdings, LLC and Subsidiaries 5 6 7 8 2726 48 4448 PART II. OTHER INFORMATION 49 51 4452 46495051Letter re Unaudited Interim Financial StatementsCertificate of Interim CEO Pursuant to Rule 13a-14(a)/Rule 15d-14(a)Certificate of Interim CFO Pursuant to Rule 13a-14(a)/Rule 15d-14(a)Certification Pursuant to Section 906 (Interim CEO)Certification Pursuant to Section 906 (Interim CFO)53March 31,June 30, 2005. The Securities and Exchange Commission (“SEC”("SEC") allows us to “incorporate"incorporate by reference”reference" information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this quarterly report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this quarterly report. In this quarterly report, “we,” “us”"we," "us" and “our”"our" refer to Charter Communications Holdings, LLC and its subsidiaries.“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 of Operations”Operations" and “Liquidity"Liquidity and Capital Resources”Resources" sections under Part I, Item 2. “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" in this quarterly report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Certain"Certain Trends and Uncertainties”Uncertainties" under Part I, Item 2. “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" in this quarterly report. Many of the forward-looking statements contained in this quarterly report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” “intend,” “estimated”"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 this quarterly report are set forth in this quarterly report and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to: • ·the availability of funds to meet interest payment obligations under our and our parent company’s debt and to fund our operations and necessary capital expenditures, either through cash flows from operating activities, further borrowings or other sources; • ·our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed data, telephonyInternet, telephone 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 comply with all covenants in our and our parent company’s 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 and our parent company’s ability to pay or refinance debt as it becomes due; • reaching (and then implementing) a final approved settlement with respect to the putative class action, the unconsolidated state action, and derivative shareholders litigation against Charter Communications, Inc., our indirect parent, on the terms of the stipulations of settlement;• ·our ability to obtain programming at reasonable prices or to pass programming 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.3 accompanying interim condensed consolidated balance sheet of Charter Communications Holdings, LLC and subsidiaries (the “Company”"Company") as of March 31,June 30, 2005, the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2005 and 2004, and the related condensed consolidated statements of operations and cash flows for the three-monthsix-month periods ended March 31,June 30, 2005 and 2004. These interim condensed consolidated financial statements are the responsibility of the Company’s management. accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.May 2, 2005 March 31, December 31, 2005 2004 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 27 $ 546 Accounts receivable, less allowance for doubtful accounts of $12 and $15, respectively 137 186 Prepaid expenses and other current assets 21 20 Total current assets 185 752 INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment, net of accumulated depreciation of $5,656 and $5,142, respectively 6,075 6,110 Franchises 9,846 9,878 Total investment in cable properties, net 15,921 15,988 OTHER NONCURRENT ASSETS 334 344 Total assets $ 16,440 $ 17,084 CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,145 $ 1,112 Payables to related party 148 19 Total current liabilities 1,293 1,131 LONG-TERM DEBT 17,972 18,474 LOANS PAYABLE – RELATED PARTY 161 29 DEFERRED MANAGEMENT FEES – RELATED PARTY 14 14 OTHER LONG-TERM LIABILITIES 453 493 MINORITY INTEREST 659 656 MEMBER’S DEFICIT: Member’s deficit (4,106 ) (3,698 ) Accumulated other comprehensive loss (6 ) (15 ) Total member’s deficit (4,112 ) (3,713 ) Total liabilities and member’s deficit $ 16,440 $ 17,084 CURRENT ASSETS: Cash and cash equivalents $ 24 $ 546 Accounts receivable, less allowance for doubtful accounts of $14 and $15, respectively 180 186 Prepaid expenses and other current assets 17 20 Total current assets 221 752 INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment, net of accumulated depreciation of $6,026 and $5,142, respectively 6,033 6,110 Franchises, net 9,839 9,878 Total investment in cable properties, net 15,872 15,988 OTHER NONCURRENT ASSETS 349 344 Total assets $ 16,442 $ 17,084 CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,126 $ 1,112 Payables to related party 137 19 Total current liabilities 1,263 1,131 LONG-TERM DEBT 18,384 18,474 LOANS PAYABLE - RELATED PARTY 62 29 DEFERRED MANAGEMENT FEES - RELATED PARTY 14 14 OTHER LONG-TERM LIABILITIES 477 493 MINORITY INTEREST 662 656 MEMBER’S DEFICIT: Member’s deficit (4,415 ) (3,698 ) Accumulated other comprehensive loss (5 ) (15 ) Total member’s deficit (4,420 ) (3,713 ) Total liabilities and member’s deficit $ 16,442 $ 17,084 Three Months Ended March 31, 2005 2004 REVENUES $ 1,271 $ 1,214 COSTS AND EXPENSES: Operating (excluding depreciation and amortization) 559 512 Selling, general and administrative 237 239 Depreciation and amortization 381 370 Asset impairment charges 31 — (Gain) loss on sale of assets, net 4 (106 ) Option compensation expense, net 4 14 Special charges, net 4 10 1,220 1,039 Income from operations 51 175 OTHER INCOME AND EXPENSES: Interest expense, net (424 ) (381 ) Gain (loss) on derivative instruments and hedging activities, net 27 (7 ) Gain on extinguishment of debt 6 — Other, net 1 (1 ) (390 ) (389 ) Loss before minority interest and income taxes (339 ) (214 ) MINORITY INTEREST (3 ) (3 ) Loss before income taxes (342 ) (217 ) INCOME TAX EXPENSE (6 ) (1 ) Net loss $ (348 ) $ (218 ) REVENUES $ 1,323 $ 1,239 $ 2,594 $ 2,453 COSTS AND EXPENSES: Operating (excluding depreciation and amortization) 569 515 1,128 1,027 Selling, general and administrative 256 244 493 483 Depreciation and amortization 378 364 759 734 Asset impairment charges 8 -- 39 -- (Gain) loss on sale of assets, net -- 2 4 (104 ) Option compensation expense, net 4 12 8 26 Special charges, net (2 ) 87 2 97 1,213 1,224 2,433 2,263 Income from operations 110 15 161 190 OTHER INCOME AND EXPENSES: Interest expense, net (431 ) (399 ) (855 ) (780 ) Gain (loss) on derivative instruments and hedging activities, net (1 ) 63 26 56 Gain (loss) on extinguishment of debt (2 ) (21 ) 4 (21 ) Gain on investments 20 1 21 -- (414 ) (356 ) (804 ) (745 ) Loss before minority interest and income taxes (304 ) (341 ) �� (643 ) (555 ) MINORITY INTEREST (3 ) (6 ) (6 ) (9 ) Loss before income taxes (307 ) (347 ) (649 ) (564 ) INCOME TAX EXPENSE (2 ) (3 ) (8 ) (4 ) Net loss $ (309 ) $ (350 ) $ (657 ) $ (568 ) 1. Organization and Basis of Presentation(“("Charter Holdings”Holdings") is a holding company whose primary assets at March 31,June 30, 2005 are equity interests in its operating subsidiaries. Charter Holdings is a subsidiary of Charter Communications Holding Company, LLC (“("Charter Holdco”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 wholly owneddirect and indirect subsidiaries where the underlying operations reside, collectively referred to herein as the “Company.”"Company." All significant intercompany accounts and transactions among consolidated entities have been eliminated. The Company is a broadband communications company operating in the United States. The Company offers its customers traditional cable video programming (analog and digital video) as well as high-speed dataInternet services and, in some areas, advanced broadband services such as high definition television, video on demand and telephony.telephone. The Company sells its cable video programming, high-speed dataInternet and advanced broadband services on a subscription basis. The Company also sells local advertising on satellite-delivered networks.(“SEC”("SEC"). Accordingly, certain information and footnote disclosures typically included in Charter Holdings’ Annual Report on Form 10-K have been condensed or omitted for this quarterly report. The accompanying condensed consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.taxestaxes; and contingencies. Actual results could differ from those estimates.2. Liquidity and Capital Resources$348$309 million and $218$350 million for the three months ended March 31,June 30, 2005 and 2004, respectively, and $657 million and $568 million for the six months ended June 30, 2005 and 2004, respectively. The Company’s net cash flows from operating activities were $142$164 million and $71$147 million for the threesix months ended March 31,June 30, 2005 and 2004, respectively.Company’sCompany's long-term financing as of March 31,June 30, 2005 consists of $5.1$5.4 billion of credit facility debt and $12.9 billion accreted value of high-yield notes. For the remainder of 2005, $23$15 million of the Company’s debt matures, and in 2006, an additional $30 million of the Company’s debt matures. In 2007 and beyond, significant additional amounts will become due under the Company’s remaining long-term debt obligations.threesix months ended March 31,June 30, 2005, the Company generated $142$164 million of net cash flows from operating activities, after paying cash interest of $243$707 million. In addition, the Company used approximately $211$542 million for purchases of8CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)$471 $214 million, which included, among other things, approximately $628$705 million in repayment of borrowings under the Company’s revolving credit facility through a series of transactions in February 2005.facility. This repayment was the primary reason cash on hand decreased by $519$522 million to $27$24 million at March 31,June 30, 2005.infor the remainder of 2005. Cash flows from operating activities and amounts available under the Company’s credit facilities may not be sufficient to fund the Company’s operations and satisfy its and Charter’s principal repayment obligations that come due in 2006 and, the Company believes, will not be sufficient to fund its operations and satisfy such repayment obligations thereafter.(“("Charter Operating”Operating") credit facilities. These credit facilities, along with the Company’s indentures, contain certain restrictive covenants, some of which require the Company to maintain specified financial ratios and meet financial tests and to provide audited financial statements with an unqualified opinion from the Company’s independent auditors. As of March 31,June 30, 2005, the Company was in compliance with the covenants under its indentures and credit facilities and the Company expects to remain in compliance with those covenants for the next twelve months. As of March 31,June 30, 2005, the Company had borrowing availability under the credit facilities of $1.2 billion,$870 million, none of which was restricted due to covenants. Continued access to the Company’s credit facilities is subject to the Company remaining in compliance with the covenants of these credit facilities, including covenants tied to the Company’s operating performance. If the Company’s operating performance results in non-compliance with these covenants, or if any of certain other events of non-compliance under these credit facilities or indentures governing the Company’s debt occurs, funding under the credit facilities may not be available and defaults on some or potentially all of the Company’s debt obligations could occur. An event of default under 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 could have a material adverse effect on the Company’s consolidated financial condition or results of operations.Company’sCompany's business and have a material adverse effect on the Company’s business and results of operations.$122$25 million and $863 million, respectively, will depend on its ability to raise additional capital and/or on receipt of payments or distributions from Charter Holdco or its subsidiaries, including Charter Holdings, CCH II, LLC (“("CCH II”II"), CCO Holdings, LLC (“("CCO Holdings”Holdings") and9CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions) Charter Holdings notes, CCH II notes, CCO Holdings notes, and Charter Operating notes, unless under their respective indentures there is no default and a specified leverage ratio test is met at the time of such event. During the threesix months ended March 31,June 30, 2005, Charter Holdings distributed $60 million to Charter Holdco. As of March 31,June 30, 2005, Charter Holdco was owed $161$62 million in intercompany loans from its subsidiaries, which amount was available to pay interest and principal on Charter’sCharter's convertible senior notes. In addition, Charter has $145$122 million of governmental securities pledged as security for the first sixnext five semi-annual interest payments on Charter’s 5.875% convertible senior notes.is incurringpaid or will pay liquidated damages at a rate from 0.25% per annumtotaling $0.5 million through July 14, 2005, the day prior to the effective date of the accreted principal amountregistration statement. In addition, in accordance with the share lending agreement entered into in connection with the initial sale of theits 5.875% convertible notes. The rate will increase to 0.50% from and after July 20, 2005 if thesenior notes have not been registered by that date. The liquidated damages will be payable by Charter in cash so long as the convertible notes remain unregistered, but not to exceed a maximum period of two years from the original issuance date. In addition,due 2009, Charter was required to register by April 1, 2005 150 million shares of its Class A common stock that Charter expectswas obligated to lend to Citigroup Global Markets Limited pursuant to a share lending agreement.("CGML") at CGML’s request. Because this registration statement was not declared effective by such date, Charter is incurringpaid or will pay liquidated damages totaling $11 million from April 2, 2005 untilthrough July 17, 2005, the day before the effective date of the registration statement. TheseThe liquidated damages can be paidwere recorded as interest expense in cash or additional principal on a monthly basis. These liquidated damages accrue as incurred at a rateCharter’s condensed consolidated statements of 0.25% per month of the accreted principal amount of the convertible notes for the first 60 days of the default and 0.50% per month of the accreted principal amount of the convertible notes thereafter (or 0.375% and 0.75% per month respectively, if in lieu of paying such liquidated damages in cash, Charter elects to pay such damages by adding to the outstanding principal amount of the notes). In April 2005, the first liquidated damage payment was made in cash. Such amounts will accrue so long as the convertible notes remain unregistered, but not to exceed a maximum period of two years from the original issuance date. at Charter HoldingsMarch 31,June 30, 2005, there was no default under Charter Holdings’ indentures and other specified tests were met. However, Charter Holdings did not meet the leverage ratio of 8.75 to 1.0 based on March 31,June 30, 2005 financial results. As a result, distributions from Charter Holdings to Charter or Charter Holdco are currently restricted and will continue to be restricted until that test is met. During this restriction period, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments in Charter Holdco or Charter, up to an amount determined by a formula, as long as there is no default under the indentures.3. Sale of AssetsMarch 31,June 30, 2005, the Company has concluded it is probable that twothree pending cable asset sales, representing approximately 28,00033,000 customers, are probable of closingwill close within the next twelve months thus meeting the criteria for assets held for sale under Statement of Financial Accounting Standards (“SFAS”("SFAS") No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. As such the assets were written down to fair value less estimated costs to sell resulting in asset impairment charges induring the first quarter ofthree and six months ended June 30, 2005 of approximately $31 million.$8 million and $39 million, respectively. At March 31,June 30, 2005 assets held for sale, included in investment in cable properties, are approximately $33$40 million.$104$106 million10CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)Subject to post-closing contractual adjustments, theThe total net proceeds from the sale of all of these systems were approximately $733$735 million. The proceeds were used to repay a portion of amounts outstanding under the Company’s revolving credit facilities.4. Franchisesfacility.Goodwilltelephonytelephone to the potential customers (service marketing rights). Fair value is determined based on estimated discounted future cash flows using assumptions consistent with internal forecasts. The franchise after-tax cash flow is calculated as the after-tax cash flow generated by the potential customers obtained and the new services added to those customers in future periods. The sum of the present value of the franchises’ after-tax cash flow in years 1 through 10 and the continuing value of the after-tax cash flow beyond year 10 yields the fair value of the franchise.telephonytelephone to these customers. The present value of these after-tax cash flows yieldyields the fair value of the customer relationships. Substantially all acquisitions occurred prior to January 1, 2002. The Company did not record any value associated with the customer relationship intangibles related to those acquisitions. For acquisitions subsequent to January 1, 2002 the Company did assign a value to the customer relationship intangible, which is amortized over its estimated useful life.11CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)March 31,June 30, 2005 and December 31, 2004, indefinite-lived and finite-lived intangible assets are presented in the following table: March 31, 2005 December 31, 2004 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Franchises with indefinite lives $ 9,814 $ — $ 9,814 $ 9,845 $ — $ 9,845 Goodwill 52 — 52 52 — 52 $ 9,866 $ — $ 9,866 $ 9,897 $ — $ 9,897 Franchises with finite lives $ 37 $ 5 $ 32 $ 37 $ 4 $ 33 Franchises with indefinite lives $ 9,806 $ -- $ 9,806 $ 9,845 $ -- $ 9,845 Goodwill 52 -- 52 52 -- 52 $ 9,858 $ -- $ -- $ 9,897 Franchises with finite lives $ 39 $ 6 $ 33 $ 4 $ 33 $31$39 million as a result of the asset impairment charges recorded related to twothree pending cable asset sales (see Note 3). Franchise amortization expense for each of the three and six months ended March 31,June5. Accounts Payable and Accrued ExpensesMarch 31,June 30, 2005 and December 31, 2004: March 31, December 31, 2005 2004 Accounts payable — trade $ 72 $ 140 Accrued capital expenditures 76 60 Accrued expenses: Interest 429 310 Programming costs 284 278 Franchise-related fees 42 67 State sales tax 43 47 Other 199 210 $ 1,145 $ 1,112 12 Accounts payable - trade $ 82 $ 140 Accrued capital expenditures 108 60 Accrued expenses: Interest 332 310 Programming costs 285 278 Franchise-related fees 54 67 Compensation 65 47 Other 200 210 $ 1,126 $ 1,112 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)6. Long-Term DebtMarch 31,June 30, 2005 and December 31, 2004: March 31, 2005 December 31, 2004 Accreted Face Accreted Face Value Value Value Value Charter Holdings: 8.250% senior notes due 2007 167 167 451 451 8.625% senior notes due 2009 1,244 1,243 1,244 1,243 9.920% senior discount notes due 2011 1,108 1,108 1,108 1,108 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 450 450 450 448 10.750% senior notes due 2009 874 874 874 874 11.125% senior notes due 2011 500 500 500 500 13.500% senior discount notes due 2011 675 608 675 589 9.625% senior notes due 2009 640 638 640 638 10.000% senior notes due 2011 710 708 710 708 11.750% senior discount notes due 2011 939 825 939 803 12.125% senior discount notes due 2012 330 267 330 259 CCH II, LLC: 10.250% senior notes due 2010 1,601 1,601 1,601 1,601 CCO Holdings, LLC: 8 3/4% senior notes due 2013 500 500 500 500 Senior floating rate notes due 2010 550 550 550 550 Charter Operating: 8% senior second lien notes due 2012 1,100 1,100 1,100 1,100 8 3/8% senior second lien notes due 2014 671 671 400 400 Renaissance Media Group LLC: 10.000% senior discount notes due 2008 114 116 114 116 CC V Holdings: 11.875% senior discount notes due 2008 — — 113 113 Charter Operating 5,088 5,088 5,515 5,515 $ 18,219 $ 17,972 $ 18,772 $ 18,474 Charter Holdings: 8.250% senior notes due 2007 $ 105 $ 105 $ 451 $ 451 8.625% senior notes due 2009 1,244 1,243 1,244 1,243 9.920% senior discount notes due 2011 1,108 1,108 1,108 1,108 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 450 450 450 448 10.750% senior notes due 2009 874 874 874 874 11.125% senior notes due 2011 500 500 500 500 13.500% senior discount notes due 2011 675 629 675 589 9.625% senior notes due 2009 640 638 640 638 10.000% senior notes due 2011 710 708 710 708 11.750% senior discount notes due 2011 939 851 939 803 12.125% senior discount notes due 2012 330 275 330 259 CCH II, LLC: 10.250% senior notes due 2010 1,601 1,601 1,601 1,601 CCO Holdings, LLC: 8¾% senior notes due 2013 500 500 500 500 Senior floating rate notes due 2010 550 550 550 550 Charter Operating: 8% senior second lien notes due 2012 1,100 1,100 1,100 1,100 8 3/8% senior second lien notes due 2014 733 733 400 400 Renaissance Media Group LLC: 10.000% senior discount notes due 2008 114 116 114 116 CC V Holdings: 11.875% senior discount notes due 2008 -- -- 113 113 Charter Operating 5,445 5,445 5,515 5,515 $ 18,576 $ 18,384 $ 18,772 $ 18,474 the Company’s subsidiary, Charter Operating consummated exchange transactions with a small number of institutional holders of Charter Holdings 8.25% senior notes due 2007 pursuant to which Charter Operating issued, in a private placement,placements, approximately $271$333 million principal amount of new notes with terms identical to Charter Operating’sOperating's 8.375% senior second lien notes due 2014 in exchange for approximately $284$346 million of the Charter Holdings 8.25% senior notes due 2007. The exchanges resulted in a loss on extinguishment of debt of approximately $1 million for the three months ended June 30, 2005 and a gain on extinguishment of debt of approximately $10 million for the six months ended June 30, 2005. The Charter Holdings notes received in the exchange were thereafter distributed to Charter Holdings and cancelled. The exchanges resulted in a net gain on extinguishment of debt of approximately $11 million.the Company’sCharter’s subsidiary, CC V Holdings, LLC, redeemed all of its 11.875% notes due 2008, at 103.958% of principal amount, plus accrued and unpaid interest to the date of redemption. The total cost of13CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)7. Minority Interest(“("CC VIII”VIII"), an indirect subsidiary of Charter Holdco. As more fully described in Note 17, this preferred interest arises from the approximately $630 million of preferred membership units issued by CC VIII in connection with an acquisition in February 2000 and continues to be the subject of a dispute between Charter and Mr. Allen.Paul G. Allen, Charter’s Chairman and controlling shareholder. Generally, operating earnings or losses are allocated to the minority owner based on its ownership percentage, thereby increasing or decreasing the Company’s net loss, respectively. To the extent they relate to CC VIII, the allocations of earnings or losses are subject to adjustment based on the ultimate resolution of this disputed ownership. Due to the uncertainties related to the ultimate resolution, effective January 1, 2005, the Company ceased recognizing minority interest in earnings or losses of CC VIII for financial reporting purposes until such time as the resolution of the matter is determinable or other events occur. For the three and six months ended March 31,June 30, 2005, the Company’s results include income of $9$8 million and $17 million, respectively, attributable to CC VIII.8. Comprehensive LossMarch 31,June 30, 2005 and 2004 was $339$308 million and $216$323 million, respectively.9. Accountingrespectively, and $647 million and $539 million for Derivative Instrumentsthe six months ended June 30, 2005 and Hedging ActivitiesMarch 31,June 30, 2005 and 2004, net gain (loss) on derivative instruments and hedging activities includes gains of $0 and $3 million, respectively, and for the six months ended June 30, 2005 and 2004, net gain (loss) on derivative instruments and hedging activities includes gains of $1 million and losses of $1$2 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 comprehensive loss. For the three months ended March 31,June 30, 2005 and 2004, a gain of $0 and $27 million, respectively, and for the six months ended June 30, 2005 and 2004, a gain of $9 million and $2$29 million, respectively, related to derivative instruments designated as cash flow hedges, was recorded in accumulated other14CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)March 31,June 30, 2005 and 2004, net gain (loss) on derivative instruments and hedging activities includes losses of $1 million and gains of $26$60 million, respectively, and for the six months ended June 30, 2005 and 2004, net gain (loss) on derivative instruments and heding activities includes gains of $25 million and losses of $6$54 million, respectively, for interest rate derivative instruments not designated as hedges.March 31,June 30, 2005 and December 31, 2004, the Company had outstanding $2.2 billion and $2.7 billion and $20 million and $20 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.10. RevenuesMarch 31,June 30, 2005 and 2004: Three Months Ended March 31, 2005 2004 Video $ 842 $ 849 High-speed data 215 168 Advertising sales 64 59 Commercial 65 56 Other 85 82 $ 1,271 $ 1,214 11. Operating Expenses Video $ 861 $ 846 $ 1,703 $ 1,695 High-speed Internet 226 181 441 349 Advertising sales 76 73 140 132 Commercial 69 58 134 114 Other 91 81 176 163 $ 1,323 $ 1,239 $ 2,594 $ 2,453 March 31,June 30, 2005 and 2004: Three Months Ended March 31, 2005 2004 Programming $ 358 $ 334 Advertising sales 25 23 Service 176 155 $ 559 $ 512 15 Programming $ 351 $ 329 $ 709 $ 663 Advertising sales 25 25 50 48 Service 193 161 369 316 $ 569 $ 515 $ 1,128 $ 1,027 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)12. Selling, General and Administrative ExpensesMarch 31,June 30, 2005 and 2004: Three Months Ended March 31, 2005 2004 General and administrative $ 202 $ 208 Marketing 35 31 $ 237 $ 239 General and administrative $ 225 $ 208 $ 427 $ 416 Marketing 31 36 66 67 $ 256 $ 244 $ 493 $ 483 13. Special Charges Three Months Ended March 31, 2005 2004 Balance at January 1, $ 6 $ 14 Special Charges 4 1 Payments (4 ) (8 ) Balance at March 31, $ 6 $ 7 Beginning Balance Special Charges Payments Balance at June 30, March 31,June 30, 2005, special charges were offset by approximately $2 million related to an agreed upon discount in respect of the portion of the settlement consideration payable under the Stipulations of Settlement of the consolidated Federal Class Action and the Federal Derivative Action allocable to plaintiff’s attorney fees and Charter’s insurance carrier as a result of the election to pay such fees in cash (see Note 15).includeincludes approximately $85 million, which represents the aggregate value of the Charter Class A common stock and warrants to purchase Charter Class A common stock contemplated to be issued as part of the terms set forth in memoranda of understanding regarding settlement of the consolidated Federal Class Action and Federal Derivative Action. For the six months ended June 30, 2004, special charges includes approximately $9 million which representsof litigation costs related to the tentative settlement of athe South Carolina national class action suit, subject to final documentation and court approval (see Note 15).14. Income TaxesMarch 31,June 30, 2005 and December 31, 2004, the Company had net deferred income tax liabilities of approximately $213$214 million and $208 million, respectively. The net deferred income tax liabilities relate to certain of the Company’s indirect subsidiaries, which file separate income tax returns.March 31,June 30, 2005, the Company recorded $2 million and $8 million of income tax expense, respectively, and during the three and six months ended June 30, 2004 the Company recorded $6$3 million and $1$4 million of income tax expense, respectively. The income tax expense is recognized through current federal and state income16CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions) 1999, 2000, 2002 and 2003. The results of the Company (excluding the indirect corporate subsidiaries) for these years are subject to this examination. Management does not expect the results of this examination to have a material adverse effect on the Company’s financial condition or results of operations.15. Contingencies
Securities Class Actions and Derivative Suits‘‘Federal"Federal Class Actions’’Actions") were filed against Charter and certain of its former and present officers and directors in various jurisdictions allegedly on behalf of all purchasers of Charter’s securities during the period from either November 8 or November 9, 1999 through July 17 or July 18, 2002. Unspecified damages were sought by the plaintiffs. In general, the lawsuits alleged that Charter utilized misleading accounting practices and failed to disclose these accounting practices and/or issued false and misleading financial statements and press releases concerning Charter’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”) 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. The Panel’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 the Panel’s transfer order. StoneRidge subsequently filed a Consolidated Amended Complaint. The Court subsequently consolidated the Federal Class Actions into a single action (the “Consolidated"Consolidated Federal Class Action”Action") for pretrial purposes. On June 19, 2003, following a status and scheduling 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 were 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 Actions 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 July 12, 2004, the parties submitted a joint motion to again extend the stay, this time until September 10, 2004. The Court granted that extension on July 20, 2004. On August 5, 2004, Stoneridge,the plaintiff’s representatives, Charter and the individual defendants who were the subject of the suit entered into a Memorandum of Understanding setting forth agreements in principle to settle the Consolidated Federal Class Action. These parties subsequently entered into Stipulations of Settlement dated as of January 24, 2005 (described more fully below) which incorporate the terms of the August 5, 2004 Memorandum of Understanding.“State"State Derivative Action”Action") was filed in the Circuit Court of the City of St. Louis, State of Missouri (the “Missouri"Missouri State Court”Court"), against Charter and its then current 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. Unspecified damages, allegedly on Charter’s behalf, were sought by the plaintiffs.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 in that case alleged that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly on Charter’s behalf, were sought by plaintiffs.On March 12, 2004, an action substantively identical to the State Derivative Action was filed in Missouri State Court against Charter and certain of its current and former directors, as well as its former auditors. On July 14, 2004, the Court consolidated this case with the State Derivative Action.17CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)‘‘Federal"Federal Derivative Action’’Action"), was filed against Charter and its then current directors in the United States District Court for the Eastern District of Missouri. The plaintiff in that suit alleged 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 on Charter’s behalf, were sought by the plaintiffs.“Actions”"Actions"). Charter and various other defendants in those actions subsequently entered into Stipulations of Settlement dated as of January 24, 2005, setting forth a settlement of the Actions in a manner consistent with the terms of the Memorandum of Understanding. The Stipulations of Settlement, along with various supporting documentation, were filed with the Court on February 2, 2005. TheOn May 23, 2005 the United States District Court for the Eastern District of Missouri conducted the final fairness hearing for the Actions, and on June 30, 2005, the Court issued its final approval of the settlements. Members of the class had 30 days from the issuance of the June 30 order approving the settlement to file an appeal challenging the approval. Two notices of appeal were filed relating to the settlement, but Charter does not yet know the specific issues presented by such appeals, nor have briefing schedules been set.wouldwill include the fees and expenses of plaintiffs’ counsel. Of this amount, $64 million would be paid in cash (by Charter’s insurance carriers) and the $80 million balance wouldwas to be paid (subject to Charter’s right to substitute cash therefor described below) in shares of Charter Class A common stock having an aggregate value of $40 million and ten-year warrants to purchase shares of Charter Class A common stock having an aggregate warrant value of $40 million, with such values in each case being determined pursuant to formulas set forth in the Stipulations of Settlement. The warrants would have an exercise price equalHowever, Charter had the right, in its sole150%substitute cash for some or all of the fair market value (as defined)aforementioned securities on a dollar for dollar basis. Pursuant to that right, Charter elected to fund the $80 million obligation with 13.4 million shares of Charter Class A common stock as(having an aggregate value of approximately $15 million pursuant to the dateformula set forth in the Stipulations of Settlement) with the entryremaining balance (less an agreed upon $2 million discount in respect of the order of final judgment approving the settlement.that portion allocable to plaintiffs’ attorneys’ fees) to be paid in cash. In addition, Charter wouldhad agreed to issue additional shares of its Class A common stock to its insurance carrier having an aggregate value of $5 million. Under this formula,million; however, by agreement with its carrier Charter expects (basedhas paid $4.5 million in cash in lieu of issuing such shares. Charter delivered the settlement consideration to the claims administrator on recent trading prices of Charter’s Class A common stock) that the number of shares issuedJuly 8, 2005, and it will be determined based on a per share value equal to the average closing price over the thirty calendar day period immediately preceding the final valuation date (which is the laterheld in escrow pending any appeals of the date on which a final judgment is entered orapproval. On July 14, 2005, the dateCircuit Court for the City of entry of an order approvingSt. Louis dismissed with prejudice the award of fees and costs to the class action plaintiffs’ counsel). Warrants are expected to become exercisable approximately one year from the date of the final judgment and will have an exercise price equal to 150% of the volume weighted average price of Charter’s Class A common stock over the thirty day period immediately preceding the final valuation date. The warrants will be valued based on a Black Scholes valuation method. Accordingly, any further declines in Charter’s stock price prior to the final valuation date could result in more shares and warrants being issued to the plaintiffs in the settlement. In the event that the valuation formula in the Stipulations provides for a per share value of less than $2.25, Charter may elect to terminate the settlement. State Derivative Actions. a result, in the second quarter of 2004, the Company recorded a $149 million litigation liability within other long-term liabilities and a $64 million insurance receivable as part of other non-current assets on its consolidated balance sheet and an $85 million special charge on its consolidated statement of operations. Additionally, as part of the settlements, Charter will also commithas committed to a variety of corporate governance changes, internal practices and public disclosures, some of which have already been undertaken and none of which are inconsistent with measures Charter is taking in connection with the recent conclusion of the SEC investigation described below. Documents related to the settlement of the Actions have now been executed and filed. On February 15, 2005, the United States District Court for the Eastern District of Missouri gave preliminary approval to the settlement of the Actions. The settlement of each of the lawsuits remains conditioned upon, among other things, final judicial approval of the settlements following notice to the class, and dismissal, with prejudice, of the consolidated derivative actions now pending in Missouri State Court, which are related to the Federal Derivative Actions. The hearing to consider final approval of the settlement is scheduled for May 23, 2005.has publicly stated that Charter iswas not a target of the investigation. Charter was also advised by the U.S. Attorney’s Office that no current officer or member of its board of directors iswas 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-18CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)topset-top terminal suppliers and inflated customer account numbers. Each of the indicted former officers pled guilty to single conspiracy counts related to the original mail and wire fraud charges and were sentenced on April 22, 2005. Charter has advised the Company that it has fully cooperated with the investigation, and following the sentencings, the U.S. Attorney’s Office for the Eastern District of Missouri announced that its investigation was concluded and that no further indictments would issue.On November 4, 2002, received an informal, non-public inquiry from the staff of the SEC. The SEC issued a formal order of investigation dated January 23, 2003, and subsequently served document and testimony subpoenas on Charter and a number of its former employees. The investigation and subpoenas generally concerned Charter’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. On July 27, 2004, the SEC and Charter reached a final agreement to settle the investigation. In the Settlement Agreement and Cease and Desist Order, Charter agreed to entry of an administrative order prohibiting any future violations of United States securities laws and requiring certain other remedial internal practices and public disclosures. Charter neither admitted nor denied any wrongdoing, and the SEC assessed no fine against Charter.Charter iswas generally required to indemnify, under certain conditions, 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, thea now-settled SEC investigation and the above-described lawsuits, some of Charter’s current and former directors and current and former officers have been advanced certain costs and expenses incurred in connection with their defense. On February 22, 2005, Charter filed suit against four of its former officers who were indicted in the course of the grand jury investigation. These suits seek to recover the legal fees and other related expenses advanced to these individuals byindividuals. One of these former officers has counterclaimed against Charter alleging, among other things, that Charter owes him additional indemnification for legal fees that Charter did not pay and another of these former officers has counterclaimed against Charter for the grand jury investigation, SEC investigation and class action and related lawsuits.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 (the ‘‘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.’’ A substantively identical case was filed in the Superior Court of Athens – Clarke County, Georgia by Emma S. Tobar on March 26, 2002 (the “Georgia Class Action”), alleging a nationwide class for these claims. Charter Holdco removed the South Carolina Class Action 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 ruled that until a final judgment was entered against Charter Holdco, they lacked 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 to both the Georgia and South Carolina Class Actions participated in a mediation. The mediator made a proposal to the parties to settle the lawsuits. In May 2004, the parties accepted the mediator’s proposal and reached a tentative settlement, subject to final documentation and court approval. As a result of the tentative settlement, the Company recorded a special charge of $9 million in its consolidated statement of operations in the first quarter of 2004 (see Note 13). On July 8, 2004, the Superior Court of Athens – Clarke County, Georgia granted a motion to amend the Tobar complaint to add Nicholls, Barber and April Jones as plaintiffs in the Georgia Class Action and to add any potential19CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)class members in South Carolina. The court also granted preliminary approval of the proposed settlement on that date. On August 2, 2004, the parties submitted a joint request to the South Carolina Court of Common Pleas to stay the South Carolina Class Action pending final approval of the settlement and on August 17, 2004, that court granted the parties’ request. On November 10, 2004, the court granted final approval of the settlement, rejecting positions advanced by two objectors to the settlement. On December 13, 2004 the court entered a written order formally approving that settlement. On January 11, 2005, certain class members appealed the order entered by the Georgia court. Those objectors voluntarily dismissed their appeal with prejudice on February 8, 2005. On February 9, 2005, the South Carolina Court of Common Pleas entered a court order of dismissal for the South Carolina Class Action. Additionally, one of the objectors to this settlement recently filed a similar, but not identical, lawsuit.16. Stock Compensation Plans(“APB”("APB") Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, as–- 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. The ongoing effect on consolidated results of operations or financial condition will depend on future stock-based compensation awards granted by Charter.amountamounts that would have been reported using the fair value method under SFAS No. 123 for the periods presented: Three Months Ended March 31, 2005 2004 Net loss $ (348 ) $ (218 ) $ (309 ) $ (350 ) $ (657 ) $ (568 ) Add back stock-based compensation expense related to stock options included in reported net loss 4 14 4 12 8 26 Less employee stock-based compensation expense determined under fair value based method for all employee stock option awards (4 ) (12 ) (4 ) (10 ) (8 ) (31 ) Effects of unvested options in stock option exchange — 48 -- -- -- 48 Pro forma $ (348 ) $ (168 ) $ (348 ) $ (657 ) $ (525 ) 20CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)(“LTIP”("LTIP"), which is a program administered under the 2001 Stock Incentive Plan. Under the LTIP, employees of Charter and its subsidiaries whose pay classifications exceeda certain level are eligible to receive stock options, and more senior level employees are eligible to receive stock options and performance shares. The stock options vest 25% on each of the first four anniversaries of the date of grant. The performance units vest on the third anniversary of the grant date and shares of Charter Class A common stock are issued, conditional upon Charter’s performance against financial performance targets established by Charter’s management and approved by its board of directors. Charter granted 6.9 million performance shares in January 2004 under this program and the Company recognized expense of $3 million inand $6 million during the first quarter of 2004.three and six months ended June 30, 2004, respectively. However, in the fourth quarter of 2004, the Company reversed the $8 million of expense recorded in the first three quarters of 2004 based on the Company’s assessment of the probability of achieving the financial performance measures established by Charter and required to be met for the performance shares to vest. In March and April 2005, Charter granted 2.52.8 million performance shares and 5.3 million options under the LTIP. The impact of such grants were de minimis to the Company’s results of operations for the three and six months ended March 31,June 30, 2005.17. Related Party TransactionsVIII.VIII“CC"CC VIII interest”interest") with a value and an initial capital account of approximately $630 million to certain sellers affiliated with AT&T Broadband, subsequently owned by Comcast Corporation (the “Comcast sellers”"Comcast sellers"). While held by the Comcast sellers, the CC VIII interest was entitled to a 2% priority return on its initial capital account and such priority return was entitled to preferential distributions from available cash and upon liquidation of CC VIII. While held by the Comcast sellers, the CC VIII interest generally did not share in the profits and losses of CC VIII. Mr. Allen granted the Comcast sellers the right to sell to him the CC VIII interest for approximately $630 million plus 4.5% interest21CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)“Comcast"Comcast put right”right"). In April 2002, the Comcast sellers exercised the Comcast put right in full, and this transaction was consummated on June 6, 2003. Accordingly, Mr. Allen has become the holder of the CC VIII interest, 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 on number of membership interests outstanding) of profits or losses of CC VIII. In the event of a liquidation of CC VIII, Mr. Allen would be entitled to a priority distribution with respect to the 2% priority return (which will continue to accrete). Any remaining distributions in liquidation would be distributed to CC V Holdings, LLC and Mr. Allen in proportion to CC V Holdings, LLC’sLLC's capital account and Mr. Allen’sAllen's capital account (which will equal the initial capital account of the Comcast sellers of approximately $630 million, increased or decreased by Mr. Allen’sAllen's pro rata share of CC VIII’s profits or losses (as computed for capital account purposes) after June 6, 2003). The limited liability company agreement of CC VIII does not provide for a mandatory redemption of the CC VIII interest.“scrivener’s error”"scrivener’s error" had occurred in February 2000 in connection with the preparation of the last-minute revisions to the Bresnan transaction documents and that, as a result, Charter should seek the reformation of the Charter Holdco limited liability company agreement, or alternative relief, in order to restore and ensure the obligation that the CC VIII interest be automatically exchanged for Charter Holdco units. The Special Committee further determined that, as part of such contract reformation or alternative relief, Mr. Allen should be required to contribute the CC VIII interest to Charter Holdco in exchange for 24,273,943 Charter Holdco membership units. The Special Committee also recommended to the board of directors of Charter that, to the extent the contract reformation is achieved, the board of directors should consider whether the CC VIII interest should ultimately be held by Charter Holdco or Charter Holdings or another entity owned directly or indirectly by them.22CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)(“TechTV”("TechTV") operated a cable television network that offered programming mostly related to technology. Pursuant to an affiliation agreement that originated in 1998 and that terminates in 2008, TechTV has provided the Company with programming for distribution via Charter’s cable systems. The affiliation agreement provides, among other things, that TechTV must offer Charter certain terms and conditions that are no less favorable in the affiliation 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.March 31,June 30, 2005 and 2004, the Company recognized approximately $0.3 million and $0.6 million, respectively, of the Vulcan Programming payment as an offset to programming expenseexpense. For the three and six months ended June 30, 2005, the Company paid approximately $0.5 million and $0.2$1 million, respectively, to Tech TVand for the three and six months ended June 30, 2004, the Company paid approximately $0.4 million and $0.6 million, respectively, under the affiliation agreement.(“("Charter Ventures”Ventures"), and Vulcan Ventures Incorporated formed DBroadband Holdings, LLC for the sole purpose of purchasing equity interests in Digeo, Inc. (“Digeo”("Digeo"), an entity controlled by Paul Allen. In connection with the execution of the broadband carriage agreement, DBroadband Holdings, LLC purchased an equity interest in Digeo funded by contributions from Vulcan Ventures Incorporated. The equity interest is subject to a priority return of capital to Vulcan Ventures up to the amount contributed by Vulcan Ventures on Charter Ventures’ behalf. After Vulcan Ventures recovers its amount contributed and any cumulative loss allocations, Charter Ventures has a 100% profit interest in DBroadband Holdings, LLC. Charter Ventures is not required to make any capital contributions, including capital calls, to Digeo. DBroadband Holdings, LLC is therefore not included in the Company’s consolidated financial statements. Pursuant to an amended version of this arrangement, in 2003, Vulcan Ventures contributed a total of $29 million to Digeo, $7 million of which was contributed on Charter Ventures’ behalf, subject to Vulcan Ventures’ aforementioned priority return. Since the formation of DBroadband Holdings, LLC, Vulcan Ventures has contributed approximately $56 million on Charter Ventures’ behalf.(“("Digeo Interactive”Interactive"), a wholly owned subsidiary of Digeo. The carriage agreement provided that Digeo Interactive would provide to Charter a “portal”"portal" product, which would function as the television-based Internet portal (the initial point of entry to the Internet) for Charter’s customers who received Internet access from Charter. The agreement23CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)“Wink”"Wink" interactive television services, known as Charter Interactive Channels (“i-channels”("i-channels"). In order to provide the i-channels, Digeo Interactive sublicensed certain Wink technologies to Charter. Charter is entitled to share in the revenues generated by the i-channels. Currently, the Company’s digital video customers who receive i-channels receive the service at no additional charge.“toolkit”"toolkit" to enable Charter to develop interactive local content. Furthermore, Charter could request that Digeo Interactive manage local content for a fee. The amendment provided for Charter to pay for development of the Basic i-TV service as well as license fees for customers who would receive the service, and for Charter and Digeo to split certain revenues earned from the service. The Company paid Digeo Interactive approximately $2$1 million and $0.7$1 million for the three and six months ended June 30, 2005, respectively, and $1 million and $1 million for the three and six months ended June 30, 2004, respectively, for customized development of the i-channels and the local content tool kit for the three months ended March 31, 2005 and 2004, respectively.kit. This amendment expired pursuant to its terms on December 31, 2003. Digeo Interactive is continuing to provide the Basic i-TV service on a month-to-month basis.(“DVR”("DVR") units. The software for these DVR units is being supplied by Digeo Interactive, LLC 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 Charter deployed from a maximum of 10 headends through year-end 2004. This maximum number of headends was increased from 10 to 15 pursuant to a letter agreement executed on June 11, 2004 and the date for entering into license agreements for units deployed was extended to June 30, 2005. The number of headends was increased from 15 to 20 pursuant to a letter agreement dated August 4, 2004, from 20 to 30 pursuant to a letter agreement dated September 28, 2004 and from 30 to 50 headends by a letter agreement in February 2005. The license granted for each unit deployed under the agreement is valid for five years. In addition, Charter will pay certain other fees including a per-headend license fee and maintenance fees. Maximum license and maintenance fees during the term of the agreement are expected to be approximately $7 million. The agreement provides that Charter 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. The CompanyCharter paid approximately $0.9$0.1 million and $0.2 million in license and maintenance fees for the three and six months ended March 31, 2005.Digeo’sDigeo's proprietary software on terms substantially similar to the terms of the license agreement described above. In November 2004, Charter Holdco and Digeo Interactive executed the license agreement and in December 2004, the parties executed the purchase agreement, each on terms substantially similar to the binding term sheet. Product development and testing are continuing.has been completed. Total purchase price and license and maintenance fees during the term of the definitive agreements are expected to be approximately $41 million. The definitive agreements are terminable at no penalty to Charter in certain circumstances.2451%60% equity interest in Digeo, Inc., on a fully-converted non-diluted basis. Mr. Allen, is a directorLance Conn and Jo Allen Patton, directors of Charter, are directors of Digeo, and Mr. Vogel was a director of Digeo in 2004. During 2004 and 2005, Mr. Vogel held options to purchase 10,000 shares of Digeo common stock.LLC.LLC(“Oxygen”("Oxygen") provides programming content aimed at the female audience for distribution over cable systems and satellite. On July 22, 2002, Charter Holdco entered into a carriage agreement with Oxygen, whereby the Company agreed to carry programming content from Oxygen. Under the carriage agreement, the Company currently makes Oxygen programming available to approximately 5 million of its video customers. The term of the carriage agreement was retroactive to February 1, 2000, the date of launch of Oxygen programming by the Company, and runs for a period of five years from that date. For the three and six months ended March 31,June 30, 2005, the Company paid Oxygen approximately $2 million and $5 million, respectively, and for the three and six months ended June 30, 2004, the Company paid Oxygen approximately $3 million and $4$7 million, respectively, for programming content. In addition, Oxygen pays the Company marketing support fees for customers launched after the first year of the term of the carriage agreement up to a total of $4 million. The Company recorded approximately $0.1 million and $0.4 million related to these launch incentives as a reduction of programming expense for each ofthe six months ended June 30, 2005, and $0.4 million and $0.7 million for the three and six months ended March 31, 2005 andJune 30, 2004, respectively.(“("Oxygen Media”Media"), granted a subsidiary of Charter Holdco a warrant to purchase 2.4 million shares of Oxygen Media common stock for an exercise price of $22.00 per share. In February 2005, this warrant expired unexercised. Charter Holdco was also to receive unregistered shares of Oxygen Media common stock with a guaranteed fair market value on the date of issuance of $34 million, on or prior to February 2, 2005, with the exact date to be determined by Oxygen Media, but this commitment was later revised as discussed below.threesix months ended March 31,June 30, 2005, the Company recorded approximately $2 million, as a reduction of programming expense and for the three and six months ended June 30, 2004, the Company recorded approximately $1$3 million and $4$7 million, respectively, as a reduction of programming expense.respectively. The carrying value of the Company’s investment in Oxygen was approximately $33 million and $32 million as of March 31,June 30, 2005 and December 31, 2004, respectively.March 31,June 30, 2005, through Vulcan Programming, Mr. Allen owned an approximate 31% interest in Oxygen assuming no exercises of outstanding warrants or conversion or exchange of convertible or exchangeable securities.25CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(dollars in millions)26(“("Charter Holdings”Holdings") is a holding company whose principal assets as of March 31,June 30, 2005 are equity interests in its operating subsidiaries. Charter Holdings is a subsidiary of Charter Communications Holding Company, LLC (“("Charter Holdco”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. We are a broadband communications company operating in the United States. We offer our customers traditional cable video programming (analog and digital video) as well as high-speed dataInternet services and in some areas advanced broadband services such as high definition television, video on demand, telephonytelephone and interactive television. We sell our cable video programming, high-speed dataInternet and advanced broadband services on a subscription basis.dataInternet and residential telephonytelephone as of March 31,June 30, 2005 and 2004: Approximate as of March 31, March 31, 2005 (a) 2004 (a) Residential (non-bulk) analog video customers (b) 5,732,600 5,953,200 Multi-dwelling (bulk) and commercial unit customers (c) 252,200 238,800 Analog video customers (b)(c) 5,984,800 6,192,000 Digital video customers (d) 2,694,600 2,657,400 Residential high-speed data customers (e) 1,978,400 1,653,000 Telephony customers (f) 55,300 26,300 Residential (non-bulk) analog video customers (b) 5,683,400 5,892,600 Multi-dwelling (bulk) and commercial unit customers (c) 259,700 240,600 Total analog video customers (b)(c) 5,943,100 6,133,200 Digital video customers (d) 2,685,600 2,650,200 Residential high-speed Internet customers (e) 2,022,200 1,711,400 Telephone customers (f) 67,800 31,200 (a) “Customers”"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, 2005. 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,At June 30, 2005 and 2004, “customers”"customers" include approximately 43,10045,100 and 53,10058,700 persons whose accounts were over 60 days past due in payment, approximately 7,0008,200 and 5,8006,300 persons whose accounts were over 90 days past due in payment, and approximately 3,6004,500 and 2,2002,000 of which were over 120 days past due in payment, respectively. (b) “"Residential (non-bulk) analog video customers”customers" include all customers who receive video services, except for complimentary accounts (such as our employees). (c) Included within “video customers”"video customers" are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit (“EBU”("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.27(d) “"Digital video customers”customers" include all households that have one or more digital set-top terminals. Included in “digital"digital video customers”customers" on March 31,June 30, 2005 and 2004 are approximately 10,0009,700 and 12,00011,400 customers, respectively, that receive digital video service directly through satellite transmission.(e) All"High-speed Internet customers" represent those customers who subscribe to our high-speed Internet service. At June 30, 2005 and 2004, approximately 1,787,600 and 1,543,000 of these high-speed Internet customers, alsorespectively, receive video serviceservices from us and are included in thewithin our video statistics above. However, the video statistics do not include approximately 229,400 and 142,700 of these customers at March 31, 2005 and 2004, respectively, who were residential high-speed data only customers. (f) “Telephony customers”"Telephone customers" include all households receivingwho subscribe to our telephone service.asset impairment charges)of franchises) will remain significant, and we therefore expect to continue to report net losses for the foreseeable future.March 31,June 30, 2005 and 2004, our income from operations, which includes depreciation and amortization expense and asset impairment charges but excludes interest expense, was $51$110 million and $175$15 million, respectively, and for the six months ended June 30, 2005 and 2004, our income from operations was $161 million and $190 million, respectively. We had operating margins of 4%8% and 14%1% for the three months ended March 31,June 30, 2005 and 2004, respectively, and 6% and 8% for the six months ended June 30, 2005 and 2004, respectively. The increase in income from operations and operating margins from the three months ended June 30, 2004 compared to 2005 was principally due to approximately $85 million recorded in special charges for the three months ended June 30, 2004 as part of the terms set forth in memoranda of understanding regarding settlement of the consolidated Federal Class Action and Federal Derivative Action which did not recur in 2005. See "— Legal Proceedings." The decrease in income from operations and operating margins from the six months ended June 30, 2004 compared to 2005 was principally due to the one-time gain as a result of the sale of certain cable systems in Florida, Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC of approximately $108$106 million, recognized in the threesix months ended March 31,June 30, 2004, and asset impairmentoffset by $85 million recorded in special charges of $31 million recognized in the three months ended March 31, 2005.$23$15 million of our debt matures during the remainder of 2005, which we expect to fund through borrowings under our revolving credit facility. See “—"— Liquidity and Capital Resources.”“Item"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" in our 2004 Annual Report on Form 10-K.28March 31,June 30, 2005 Compared to Three Months Ended March 31,June 30, 2004 Three Months Ended March 31, 2005 2004 Revenues $ 1,271 100 % $ 1,214 100 % Costs and expenses: Operating (excluding depreciation and amortization) 559 44 % 512 42 % Selling, general and administrative 237 19 % 239 20 % Depreciation and amortization 381 30 % 370 31 % Asset impairment charges 31 3 % — — (Gain) loss on sale of assets, net 4 — (106 ) (9 )% Option compensation expense, net 4 — 14 1 % Special charges, net 4 — 10 1 % 1,220 96 % 1,039 86 % Income from operations 51 4 % 175 14 % Interest expense, net (424 ) (381 ) Gain (loss) on derivative instruments and hedging activities, net 27 (7 ) Gain on extinguishment of debt 6 — Other, net 1 (1 ) (390 ) (389 ) Loss before minority interest and income taxes (339 ) (214 ) Minority interest (3 ) (3 ) Loss before income taxes (342 ) (217 ) Income tax expense (6 ) (1 ) Net loss $ (348 ) $ (218 ) Revenues $ 1,323 100 % $ 1,239 100 % Costs and expenses: Operating (excluding depreciation and amortization) 569 43 % 515 42 % Selling, general and administrative 256 19 % 244 20 % Depreciation and amortization 378 29 % 364 29 % Asset impairment charges 8 1 % -- -- Loss on sale of assets, net -- -- 2 -- Option compensation expense, net 4 -- 12 1 % Special charges, net (2 ) -- 87 7 % 1,213 92 % 1,224 99 % Income from operations 110 8 % 15 1 % Interest expense, net (431 ) (399 ) Gain (loss) on derivative instruments and hedging activities, net (1 ) 63 Loss on extinguishment of debt (2 ) (21 ) Gain on investments 20 1 (414 ) (356 ) Loss before minority interest and income taxes (304 ) (341 ) Minority interest (3 ) (6 ) Loss before income taxes (307 ) (347 ) Income tax expense (2 ) (3 ) Net loss $ (309 ) $ (350 ) $57$84 million, or 5%7%, from $1.2 billion for the three months ended March 31,June 30, 2004 to $1.3 billion for the three months ended March 31,June 30, 2005. This increase is principally the result of an increase of 325,400310,800 high-speed Internet and 37,200 high-speed data and35,400 digital video customers, respectively, as well as price increases for video and high-speed dataInternet services, and is offset partially by a decrease of 207,200190,100 analog video customers. The cable system sales to Atlantic Broadband Finance, LLC, which closed in March and April 2004 (referred to herein as the “System Sales”) reduced the increase in revenues by $29 million. Our goal is to increase revenues by improving customer service which we believe will stabilize our analog video customer base, implementing price increases on certain services and packages and increasing the number of customers who purchase high-speed dataInternet services, digital video and advanced products and services such as voice-over-Internet protocol (“VOIP”) telephony,telephone, video on demand (“VOD”("VOD"), high definition television and digital video recorder service.$70.75$73.94 for the three months ended March 31,June 30, 2005 from $65.31$67.02 for the three months ended March 31,June 30, 2004 primarily as a result of incremental revenues from advanced services and price increases. Average monthly revenue per analog video customer represents total annualquarterly revenue, divided by twelve,three, divided by the average number of analog video customers during the respective period.29 Three Months Ended March 31, 2005 2004 2005 over 2004 % of % of Revenues Revenues Revenues Revenues Change % Change Video $ 842 66 % $ 849 70 % $ (7 ) (1 )% High-speed data 215 17 % 168 14 % 47 28 % Advertising sales 64 5 % 59 5 % 5 8 % Commercial 65 5 % 56 4 % 9 16 % Other 85 7 % 82 7 % 3 4 % $ 1,271 100 % $ 1,214 100 % $ 57 5 % Video $ 861 65 % $ 846 68 % 2 % High-speed Internet 226 17 % 181 15 % 45 25 % Advertising sales 76 6 % 73 6 % 3 4 % Commercial 69 5 % 58 5 % 11 19 % Other 91 7 % 81 6 % 10 12 % $ 1,323 100 % $ 1,239 100 % $ 84 7 %
Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers. Video revenues decreasedincreased by $7$15 million, or 1%2%, from $849$846 million for the three months ended March 31,June 30, 2004 to $842$861 million for the three months ended March 31,June 30, 2005. Approximately $21$35 million of the decreaseincrease was the result of the System Sales and approximately an additional $24 million related to a decline in analog video customers. The decreases were offset by increases of approximately $33 million resulting from price increases and incremental video revenues from existing customers and approximately $5$3 million resulting fromwas the result of an increase in digital video customers.dataInternet services provided to our non-commercial customers increased $47$45 million, or 28%25%, from $168$181 million for the three months ended March 31,June 30, 2004 to $215$226 million for the three months ended March 31,June 30, 2005. Approximately $35$34 million of the increase related to the increase in the average number of customers receiving high-speed dataInternet services, whereas approximately $15$11 million related to the increase in average price of the service. The increase in high-speed data revenues was reduced by approximately $3 million as a result of the Systems Sales.$5$3 million, or 8%4%, from $59$73 million for the three months ended March 31,June 30, 2004 to $64$76 million for the three months ended March 31,June 30, 2005, primarily as a result of an increase in newlocal advertising sales customers and in advertising rates. The increase was offset by a decrease of $1 million as a result of the System Sales.decline in national advertising sales. For each of the three months ended March 31,June 30, 2005 and 2004, we received $3 million in advertising sales revenues from vendors.dataInternet services to our commercial customers. Commercial revenues increased $9$11 million, or 16%19%, from $56$58 million for the three months ended March 31,June 30, 2004 to $65$69 million for the three months ended March 31,June 30, 2005, primarily as a result of an increase in commercial high-speed dataInternet revenues. The increase was reduced by approximately $2 million as a result of the Systems Sales.telephonytelephone revenue, equipment rental, customer installations, home shopping, dial-up Internet service, late payment fees, wire maintenance fees and other miscellaneous revenues. Other revenues increased $3$10 million, or 4%12%, from $82$81 million for the three months ended March 31,June 30, 2004 to $85$91 million for the three months ended March 31,June 30, 2005. The increase was primarily the result of an increase in telephone revenue of $4 million, franchise fees of $3 million and installation revenue telephony revenue and franchise fees and was partially offset by approximatelyof $2 million as a resultmillion.$47$54 million, or 9%10%, from $512$515 million for the three months ended March 31,June 30, 2004 to $559$569 million for the three months ended March 31,June 30, 2005. The increase in operating expenses was reduced by approximately $12 million as a result of the System Sales. Programming costs included in the accompanying condensed consolidated statements of operations were $358$351 million and $334$329 million, representing 29% and 32%27% of total costs and expenses for the three months ended March 31,June 30, 2005 and 2004, respectively. Key expense components as a percentage of revenues were as follows (dollars in millions): Three Months Ended March 31, 2005 2004 2005 over 2004 % of % of % Expenses Revenues Expenses Revenues Change Change Programming $ 358 28 % $ 334 27 % $ 24 7 % Advertising sales 25 2 % 23 2 % 2 9 % Service 176 14 % 155 13 % 21 14 % $ 559 44 % $ 512 42 % $ 47 9 % Programming $ 351 26 % $ 329 27 % $ 22 7 % Advertising sales 25 2 % 25 2 % -- -- Service 193 15 % 161 13 % 32 20 % $ 569 43 % 42 % $ 54 10 %
Programming costs consist primarily of costs paid to programmers for analog, premium, digital channels, VOD and pay-per-view programming. The increase in programming costs of $24$22 million, or 7%, for the three months ended March 31,June 30, 2005 over the three months ended March 31,June 30, 2004, was a result of price increases, particularly in sports programming, an increased number of channels carried on our systems, and an increase in digital video customers, partially offset by a decrease in analog video customers. Programming costs for the three months ended June 30, 2005, also include an $8 million reduction related to changes in estimates of programming related liabilities associated with contract renewals. Additionally, the increase in programming costs was reduced by $9 million as a result of the Systems Sales. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $9 million and $14 million for the three months ended March 31,June 30, 2005 and 2004, respectively.programming coststhey will continue to increase at a higher rate than in 2004. These costs will be determined in part on the outcome of programming negotiations in 2005 and will likely be subject to offsetting events or otherwise affected by factors similar to the ones mentioned in the preceding paragraph. Our increasing programming costs will result in declining operating margins for our video services 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 video services with revenue from advanced video services, increased high-speed dataInternet revenues, advertising revenues and commercial service revenues. General and administrative $ 225 17 % 17 % $ 17 8 % Marketing 31 2 % 36 3 % (5 ) (14 )% $ 256 19 % $ 244 20 % $ 12 5 %
General and administrative expenses consist primarily of salaries and benefits, rent expense, billing costs, call center costs, internal network costs, bad debt expense and property taxes. The increase in general and administrative expenses of $17 million, or 8%, resulted primarily from increases in salaries and benefits of $9 million, property taxes of $8 million and professional fees of $8 million offset by decreases in bad debt expense of $5 million. Revenues $ 2,594 100 % $ 2,453 100 % Costs and expenses: Operating (excluding depreciation and amortization) 1,128 44 % 1,027 42 % Selling, general and administrative 493 19 % 483 19 % Depreciation and amortization 759 29 % 734 30 % Asset impairment charges 39 2 % -- -- (Gain) loss on sale of assets, net 4 -- (104 ) (4 )% Option compensation expense, net 8 -- 26 1 % Special charges, net 2 -- 97 4 % 2,433 94 % 2,263 92 % Income from operations 161 6 % 190 8 % Interest expense, net (855 ) (780 ) Gain on derivative instruments and hedging activities, net 26 56 Gain (loss) on extinguishment of debt 4 (21 ) Gain on investments 21 -- (804 ) (745 ) Loss before minority interest and income taxes (643 ) (555 ) Minority interest (6 ) (9 ) Loss before income taxes (649 ) (564 ) Income tax expense (8 ) (4 ) Net loss $ (657 ) $ (568 ) Video $ 1,703 66 % $ 1,695 69 % $ 8 -- High-speed Internet 441 17 % 349 14 % 92 26 % Advertising sales 140 5 % 132 5 % 8 6 % Commercial 134 5 % 114 5 % 20 18 % Other 176 7 % 163 7 % 13 8 % $ 2,594 100 % $ 2,453 100 % $ 141 6 %
Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers. Video revenues increased by $8 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. Approximately $68 million of the increase was the result of price increases and incremental video revenues from existing customers and approximately $8 million resulted from an increase in digital video customers. The increases were offset by decreases of approximately $21 million resulting from the System Sales and approximately an additional $47 million related to a decrease in analog video customers. Programming 28 % $ 663 27 % $ 46 7 % Advertising sales 50 2 % 48 2 % 2 4 % Service 369 14 % 316 13 % 53 17 % 44 % $ 1,027 42 % $ 101 10 %
Programming costs consist primarily of costs paid to programmers for analog, premium, digital channels, VOD and pay-per-view programming. The increase in programming costs of $46 million, or 7%, for the six months ended June 30, 2005 over the six months ended June 30, 2004 was a result of price increases, particularly in sports programming, partially offset by decreases in analog video customers. Additionally, the increase in programming costs was reduced by $9 million as a result of the System Sales. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $18 million and $28 million for the six months ended June 30, 2005 and 2004, respectively. Programming costs for the six months ended June 30, 2004 also include a $4 million reduction related to the settlement of a dispute with TechTV, Inc. See Note 17 to the condensed consolidated financial statements.9%4%, primarily as a result of increased salary, benefit and commission 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 $21$53 million, or 14%17%, resulted primarily from increased labor and maintenance costs to support our infrastructure, increased equipment maintenance, an increase in franchise fees as a result of increased revenues and higher fuel prices. The increase in service costs was reduced by $3 million as a result of the System Sales.31decreasedincreased by $2$10 million, or 1%2%, from $239$483 million for the threesix months ended March 31,June 30, 2004 to $237$493 million for the threesix months ended March 31,June 30, 2005. Included in the decreaseThe increase in selling, general and administrative expenses was reduced by $4 million as a result of the System Sales. Key components of expense as a percentage of revenues were as follows (dollars in millions): Three Months Ended March 31, 2005 2004 2005 over 2004 % of % of Expenses Revenues Expenses Revenues Change % Change General and administrative $ 202 16 % $ 208 17 % $ (6 ) (3 )% Marketing 35 3 % 31 3 % 4 13 % $ 237 19 % $ 239 20 % $ (2 ) (1 )% General and administrative $ 427 16 % $ 416 17 % $ 11 3 % Marketing 66 3 % 67 2 % (1 ) (1 )% $ 493 19 % $ 483 19 % $ 10 2 % decreaseincrease in general and administrative expenses of $6$11 million, or 3%, resulted primarily from increases in professional fees of $15 million and salaries and benefits of $13 million, offset by the System Sales of $4 million and decreases in bad debt expense of $5 million, property taxes of $6 million and salaries and benefits of $4 million offset by increases in costs associated with our commercial business of $3 million and professional fees of $6$10 million.increased $4decreased $1 million, or 13%1%, as a result of an increased investmenta decrease in expenditures as a result of disciplined spending and more targeted marketing and branding campaigns.$11$25 million, or 3%, from $370$734 million for the threesix months ended March 31,June 30, 2004 to $381$759 million for the threesix months ended March 31,June 30, 2005. The increase in depreciation was related to an increase in capital expenditures, which was offset by lower depreciation as the result of the Systems Sales.threesix months ended March 31,June 30, 2005 represent the write-down of assets related to twothree pending cable asset sales to fair value less costs to sell. See Note 3 to the condensed consolidated financial statements.The lossLoss on sale of assets of $4 million for the threesix months ended March 31,June 30, 2005 primarily represents the loss recognized on the disposition of plant and equipment. Gain on sale of assets of $106$104 million for the threesix months ended March 31,June 30, 2004 primarily represents the pretax gain realized on the sale of cable systems to Atlantic Broadband Finance, LLC which closed inon March 1 and April 30, 2004.$4$8 million for the threesix months ended March 31,June 30, 2005 primarily represents options expensed in accordance with Statement of Financial Accounting Standards (“SFAS”)SFAS No. 123,Accounting for Stock-Based Compensation. Option compensation expense of $14$26 million for the threesix months ended March 31,June 30, 2004 includesprimarily represents the expense of approximately $6$8 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 threesix months ended March 31,June 30, 2004, we recognized approximately $3$6 million related to the optionsperformance shares granted under the Charter Long-Term Incentive Program and approximately $5$12 million related to options granted and expensed in accordance with SFASfollowing the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123.$4$2 million for the threesix months ended March 31,June 30, 2005 represents $4 million of severance and related costs of our management realignment.realignment offset by approximately $2 million related to an agreed upon cash discount on settlement of the consolidated Federal Class Action and Federal Derivative Action. See "— Legal Proceedings." Special charges of $10$97 million for the threesix months ended March 31,June 30, 2004 represents approximately $85 million as part of the terms set forth in memoranda of understanding regarding settlement of the consolidated Federal Class Action and Federal Derivative Action and approximately $9 million of litigation costs related to the tentative settlement of the South Carolina national class action suit, which settlements are subject to$1$3 million of severance and related costs of our workforce reduction.$43$75 million, or 11%10%, from $381$780 million for the threesix months ended March 31,June 30, 2004 to $424$855 million for the threesix months ended March 31,June 30, 2005. The increase in net interest expense was a result of an increase in our average borrowing rate from 8.3%8.61% in the first quarter ofsix months ended June 30, 2004 to329.0% 9.04% in the first quarter ofsix months ended June 30, 2005 coupled withand an increase of $616$817 million in average debt outstanding from $17.6 billion for the first quarter ofsix months ended June 30, 2004 compared to $18.2$18.4 billion for the first quarter ofsix months ended June 30, 2005. (Loss) on Derivative Instruments and Hedging Activities, Net.Net gain on derivative instruments and hedging activities increased $34decreased $30 million from a loss of $7$56 million for the threesix months ended March 31,June 30, 2004 to a gain of $27$26 million for the threesix months ended March 31,June 30, 2005. The increasedecrease is primarily thea result of an increasea decrease in gains on interest rate agreements, thatwhich do not qualify for hedge accounting under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,which increaseddecreased from a loss of $6$54 million for the threesix months ended March 31,June 30, 2004 to a gain of $26$25 million for the threesix months ended March 31,June 30, 2005.Extinguishmentextinguishment of Debt.debt. Gain on extinguishment of debt of $6$4 million for the threesix months ended March 31,June 30, 2005 primarily represents approximately $11$10 million related to the issuance of Charter Communications Operating LLC (“Charter Operating”) notes in exchange for Charter Holdings notes offset by approximately $5 million of losses related to the redemption of our subsidiary’s, CC V Holdings, LLC, 11.875% notes due 2008. See Note 6 to the condensed consolidated financial statements.Other, Net.Net other income Loss on extinguishment of $1 million and net other expensedebt of $1$21 million for the threesix months ended March 31,June 30, 2004 represents the write-off of deferred financing fees and third party costs related to the Charter Operating refinancing in April 2004. and 2004, respectively, primarily represents gains and lossesa gain realized on an exchange of our interest in an equity investments.the first quarter of 2004, the pro rata share of the profits and losses of CC VIII, LLC. Effective January 1, 2005, the Companywe ceased recognizing minority interest in earnings or losses of CC VIII for financial reporting purposes until the dispute between the CompanyCharter and Mr. Allen regarding the preferred membership interests in CC VIII is resolved. See Note 7 to the condensed consolidated financial statements.$6$8 million and $1$4 million was recognized for the threesix months ended March 31,June 30, 2005 and 2004, respectively. Income tax expense represents increases in the deferred tax liabilities and current federal and state income tax expenses of certain of our indirect corporate subsidiaries.$130$89 million, or 60%16%, from $218$568 million for the threesix months ended March 31,June 30, 2004 to $348$657 million for the threesix months ended March 31,June 30, 2005 as a result of the factors described above.$23$15 million of our debt matures, and in 2006, an additional $30 million matures. In 2007 and beyond, significant additional amounts will become due under our remaining long-term debt obligations.threesix months ended March 31,June 30, 2005, we generated $142$164 million of net cash flows from operating$243$707 million. In addition, we used approximately $211$542 million for purchases of property, plant and equipment. Finally, we had net cash flows used in financing activities of $471$214 million, which included, among other things, approximately $628$705 million in repayment of borrowings under the Charter Operating revolving credit facility through a series of transactions in February 2005.facility. This repayment was the primary reason cash on hand decreased by $519$522 million to $27$24 million at March 31,June 30, 2005. We expect that our mix of sources of funds will continue to change in the future based on overall needs relative to our cash flow and on the availability of33do not presently consider future asset sales as a significant source of liquidity. However, we continue to explore asset dispositions as one of several possible actions that we could take in the future to improve our liquidity, but we do not presently consider future asset sales as a significant source of liquidity.infor the remainder of 2005. Cash flows from operating activities and amounts available under our credit facilities may not be sufficient to permit us to fund our operations and satisfy our and Charter’s principal repayment obligations that come due in 2006 and, we believe, such amounts will not be sufficient to fund our operations and satisfy such repayment obligations thereafter.March 31,June 30, 2005, we were in compliance with the covenants under our indentures and credit facilities and we expect to remain in compliance with those covenants for the next twelve months. As of March 31,June 30, 2005, we had borrowing availability under our credit facilities of $1.2 billion,$870 million, none of which was restricted due to covenants. Continued access to our credit facilities is subject to our remaining in compliance with the covenants of these credit facilities, including covenants tied to our operating performance. If our operating performance results in non-compliance with these covenants, or if any of certain other events of non-compliance under these credit facilities or indentures governing our debt occurs, funding under the credit facilities may not be available and defaults on some or potentially all of our debt obligations could occur. An event of 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 debt obligations, which could have a material adverse effect on our consolidated financial condition and results of operations.million and wasmillion. We funded the redemption with borrowings under the Charter Operating credit facilities.$122$25 million and $863 million, respectively, will depend on its ability to raise additional capital and/or on receipt of payments or distributions from Charter Holdco or its subsidiaries, including Charter Holdings, CCH II, LLC (“CCH II”), CCO Holdings LLC (“CCO Holdings”) and Charter Operating. Distributions by Charter’s subsidiaries to a parent company (including Charter and Charter Holdco) for payment of principal on Charter’s convertible senior notes, however, are restricted by the indentures governing the Charter Holdings notes, CCH II notes, CCO Holdings notes, and Charterthreesix months ended March 31,June 30, 2005, Charter Holdings distributed $60 million to Charter Holdco. As of March 31,June 30, 2005, Charter Holdco was owed $161$62 million in intercompany loans from its subsidiaries, which wereamount was available to pay interest and principal on Charter’sCharter's convertible senior notes. In addition, Charter has $145$122 million of34first sixnext five semi-annual interest payments on Charter’sCharter's 5.875% convertible senior notes.is incurringpaid or will pay liquidated damages at a rate from 0.25% per annumtotaling $0.5 million through July 14, 2005, the day prior to the effective date of the accreted principal amountregistration statement. In addition, in accordance with the share lending agreement entered into in connection with the initial sale of theCharter’s 5.875% convertible notes. The rate will increase to 0.50% from and after July 20, 2005 if thesenior notes have not been registered by that date. The liquidated damages will be payable by Charter in cash so long as the convertible notes remain unregistered, but not to exceed a maximum period of two years from the original issuance date. In addition,due 2009, Charter was required to register by April 1, 2005 150 million shares of its Class A common stock that Charter expectswas obligated to lend to Citigroup Global Markets Limited pursuant to a share lending agreement.("CGML") at CGML’s request. Because this registration statement was not declared effective by such date, Charter is incurringpaid or will pay liquidated damages totaling $11 million from April 2, 2005 untilthrough July 17, 2005, the day before the effective date of the registration statement. TheseThe liquidated damages can be paidwere recorded as interest expense in cash or additional principal on a monthly basis. These liquidated damages accrue as incurred at a rateCharter’s condensed consolidated statements of 0.25% per month of the accreted principal amount of the convertible notes for the first 60 days of the default and 0.50% per month of the accreted principal amount of the convertible notes thereafter (or 0.375% and 0.75% per month respectively, if in lieu of paying such liquidated damages in cash, Charter elects to pay such damages by adding to the outstanding principal amount of the notes). In April 2005, the first liquidated damage payment was made in cash. Such amounts will accrue so long as the convertible notes remain unregistered, but not to exceed a maximum period of two years from the original issuance date. at Charter HoldingsHoldings’Holdings' indentures and other specified tests are met. For the quarter ended March 31,June 30, 2005, there was no default under Charter Holdings’Holdings' indentures and other specified tests were met. However, Charter Holdings did not meet the leverage ratio of 8.75 to 1.0 based on March 31,June 30, 2005 financial results. As a result, distributions from Charter Holdings to Charter or Charter Holdco are currently restricted and will continue to be restricted until that test is met. During this restriction period, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments in Charter Holdco or Charter, up to an amount determined by a formula, as long as there is no default under the indentures.or equity financings, we would consider: • ·issuing debt or equity at the Charter or Charter Holdco level, the proceeds of which could be loaned or contributed to us; • ·issuing debt securities that may have structural or other priority over our existing notes; • ·further reducing our expenses and capital expenditures, which may impair our ability to increase revenue; • ·selling assets; or • ·requesting waivers or amendments with respect to our credit facilities, the availability and terms of which would be subject to market conditions. 35Subject to post-closing contractual adjustments, theThe total net proceeds from the sale of all of these systems were approximately $733$735 million. The proceeds were used to repay a portion of amounts outstanding under our revolving credit facilities.March 31,June 30, 2005 and December 31, 2004, long-term debt totaled approximately $18.0$18.4 billion and $18.5 billion, respectively. This debt was comprised of approximately $5.1$5.4 billion and $5.5 billion of credit facility debt and $12.9 billion and $13.0 billion accreted value of high-yield notes, respectively. As of March 31,June 30, 2005 and December 31, 2004, the weighted average interest rate on the credit facility debt was approximately 7.0%7.2% and 6.8%, respectively, and the weighted average interest rate on the high-yield notes was approximately 9.9% and 9.9%, respectively, resulting in a blended weighted average interest rate of 9.1% and 9.0%, respectively. The interest rate on approximately 81%79% and 82% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate hedge agreements as of March 31,June 30, 2005 and December 31, 2004, respectively.Notesa private placement, approximately $271$333 million principal amount of its 8.375% Senior Second Liensenior second lien Notes due 2014 in exchange for approximately $284$346 million of the Charter Holdings 8.25% Senior Notessenior notes due 2007. The Charter Holdings notes received in the exchange were thereafter distributed to Charter Holdings and cancelled.Notes$27$24 million in cash and cash equivalents as of March 31,June 30, 2005 compared to $546 million as of December 31, 2004. The decrease in cash and cash equivalents reflects the repayment of approximately $628$705 million of borrowings under our revolving credit facilities through a series of transactions in February 2005.$71$17 million, or 100%12%, from $71$147 million for the threesix months ended March 31,June 30, 2004 to $142$164 million for the threesix months ended March 31,June 30, 2005. For the threesix months ended March 31,June 30, 2005, net cash provided by operating activities increased primarily as a result of changes in operating assets and liabilities that provided $125used $84 million moreless cash during the threesix months ended March 31,June 30, 2005 than the corresponding period in 2004 combined with an increase in revenue over cash costs year over year partially offset by an increase in cash interest expense of $70$108 million over the corresponding prior period.threesix months ended March 31,June 30, 2005 was $190$472 million and net cash provided by investing activities for the threesix months ended March 31,June 30, 2004 was $531$300 million. Investing activities used $721$772 million more cash during the threesix months ended March 31,June 30, 2005 than the corresponding period in 2004 primarily as a result of proceeds from the sale of certain cable systems to Atlantic Broadband Finance, LLC in 2004 offset byand increased cash used for capital expenditures in 2005.$144$230 million from $615$444 million for the threesix months ended March 31,June 30, 2004 to $471$214 million for the threesix months ended March 31,June 30, 2005. The decrease in cash36threesix months ended March 31,June 30, 2005 as compared to the corresponding period in 2004, was primarily the result of an increasea decrease in borrowings from related parties.$211$542 million and $187$380 million for the threesix months ended March 31,June 30, 2005 and 2004, respectively. In addition, Charter Holdco transferred $139 million of property, plant and equipment to us. Capital expenditures increased as a result of increased spending on support capital related to our investment in service improvements andimprovements; scalable infrastructure related to telephonytelephone services, VOD and digital simulcast offset by a decrease in the purchase ofsimulcast; and customer premise equipment.equipment primarily related to the continued demand for advanced digital set-tops. See the table below for more details.dataInternet services, VOD, interactive services, additional channels and tiers, and expanded pay-per-view options to a larger customer base. Our capital expenditures are funded primarily from cash flows from operating activities, the issuance of debt and borrowings under credit facilities. In addition, during the threesix months ended March 31,June 30, 2005 and 2004, our liabilities related to capital expenditures increased $16$48 million and decreased $7$38 million, respectively.telephonytelephone services and deployment of advanced digital boxes. We expect that the nature of these expenditures will continue to be composed primarily of purchases of customer premise equipment, support capital and for scalable infrastructure costs. We expect to fund capital expenditures for 2005 primarily from cash flows from operating activities and borrowings under our credit facilities.(“NCTA”("NCTA"). The disclosure is intended to provide more consistency in the reporting of operating statistics in capital expenditures and customers 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.March 31,June 30, 2005 and 2004 (dollars in millions): Three Months Ended March 31, 2005 2004 Customer premise equipment (a) $ 86 $ 112 Scalable infrastructure (b) 42 19 Line extensions (c) 29 25 Upgrade/Rebuild (d) 10 12 Support capital (e) 44 19 Total capital expenditures (f) $ 211 $ 187 Customer premise equipment (a) $ 142 $ 105 $ 228 $ 217 Scalable infrastructure (b) 47 14 89 33 Line extensions (c) 48 35 77 60 Upgrade/Rebuild (d) 12 6 22 18 Support capital (e) 82 33 126 52 Total capital expenditures (f) $ 331 $ 193 $ 542 $ 380 (a) Customer premise equipment includes 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 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 six months ended March 31,June 30, 2005 and 2004, respectively.37“Critical"Critical Accounting Policies and Estimates”Estimates" section of Item 7. “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in our 2004 Annual Report on Form 10-K, that could materially impact our business, results of operations and financial condition.March 31,June 30, 2005, our total debt was approximately $18.0$18.4 billion. For the remainder of 2005, $23$15 million of our debt matures and in 2006, an additional $30 million matures. In 2007 and beyond, significant additional amounts will become due under our remaining obligations. We believe that, as a result of our significant levels of debt and operating performance, our access to the debt markets could be limited when substantial amounts of our current indebtedness become due. 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, fund our other liquidity and capital needs, grow our business or respond to competitive challenges. Further, if we are unable to repay or refinance our debt, as it becomes due, 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 similar transaction, our noteholders might not receive all principal and interest payments to which they are contractually entitled on a timely basis or at all. For more information, see the section above entitled “—"— Liquidity and Capital Resources.”• • • issue equity;• • • • • • “—"— Liquidity and Capital Resources.”38March 31,June 30, 2005, we were in compliance with the covenants under our indentures and credit facilities, and we expect to remain in compliance with those covenants for the next twelve months. If our operating performance results in non-compliance with these covenants, or if any of certain other events of non-compliance under these credit facilities or indentures governing our debt occurs, funding under the credit facilities may not be available and defaults on some or potentially all of our debt obligations could occur. An event of default under the credit facilities or indentures, if not waived, could result in the acceleration of those debt obligations and, consequently, other debt obligations. Such acceleration could result in exercise of remedies by our creditors and could force us to seek the protection of the bankruptcy laws, which could materially adversely impact our ability to operate our business and to make payments under our debt instruments. As of March 31,June 30, 2005, we had borrowing availability under our credit facilities of $1.2 billion,$870 million, none of which was restricted due to covenants• • • • • “—"— Liquidity and Capital Resources.”March 31,June 30, 2005, Charter had approximately $122$25 million and $863 million aggregate principal amount of convertible senior notes outstanding, which mature in 2006 and 2009, respectively. Charter will need to raise additional capital or receive distributions or payments from us in order to satisfy its debt obligations.of $122 million and $863 million, respectively, will depend on its ability to raise additional capital and/or on receipt of payments or distributions from Charter Holdco or its subsidiaries, including Charter Holdings, CCH II, LLC ("CCH II"), CCO Holdings, LLC ("CCO Holdings") and Charter Operating. Distributions by Charter’s subsidiaries to a parent company (including Charter and Charter Holdco) for payment of principal on Charter’s convertible senior notes, however, are restricted by the indentures governing the Charter Holdings notes, CCH II notes, CCO Holdings notes, and Charter Operating notes, unless under their respective indentures there is no default and a specified leverage ratio test is met at the time of such event. During the threesix months ended March 31,June 30, 2005, Charter Holdings distributed $60 million to Charter Holdco. As of March 31,June 30, 2005, Charter Holdco was owed $161$62 million in intercompany loans from its subsidiaries, which wereamount was available to pay interest and principal on Charter’sCharter's convertible senior notes. In addition, Charter has $145$122 million of governmental securities pledged as security for the first sixnext five semi-annual interest payments on Charter’s 5.875% convertible senior notes.Charter was required to register for resale by April 21, 2005 its 5.875% convertible senior notes due 2009, issued in November 2004. Since these convertible notes were not registered by that date, Charter is incurring liquidated damages, at a rate from 0.25% per annum of the accreted principal amount of the convertible notes. The rate will increase to 0.50% from and after July 20, 2005 if the notes have not been registered by that date. The liquidated damages will be payable by Charter in cash so long as the convertible notes remain unregistered, but not to exceed a maximum period of two years from the original issuance date. In addition, Charter was required to register by April 1, 2005 150 million shares of its Class A common stock that Charter expects to lend to Citigroup Global Markets Limited pursuant to a share lending agreement. Because this registration statement was not declared effective by such date, Charter is incurring liquidated damages from April 2, 2005 until the effective date of the registration statement. These liquidated damages can be paid in cash or additional principal on a monthly basis. These39liquidated damages accrue as incurred at a rate of 0.25% per month of the accreted principal amount of the convertible notes for the first 60 days of the default and 0.50% per month of the accreted principal amount of the convertible notes thereafter (or 0.375% and 0.75% per month respectively, if in lieu of paying such liquidated damages in cash, Charter elects to pay such damages by adding to the outstanding principal amount of the notes). In April 2005, the first liquidated damage payment was made in cash. Such amounts will accrue so long as the convertible notes remain unregistered, but not to exceed a maximum period of two years from the original issuance date.Holdings’Holdings' indentures and other specified tests are met. For the quarter ended March 31,June 30, 2005, there was no default under Charter Holdings’Holdings' indentures and other specified tests were met. However, Charter Holdings did not meet the leverage ratio of 8.75 to 1.0 based on March 31,June 30, 2005 financial results. As a result, distributions from Charter Holdings to Charter or Charter Holdco are currently restricted and will continue to be restricted until that test is met. During this restriction period, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments in Charter Holdco or Charter, up to an amount determined by a formula, as long as there is no default under the indentures.and Charter Operating notes and Charter’s convertible senior notes and would trigger the cross-default provision of the Charter Operating credit agreement. Any default under any of our credit facilities or notes might adversely affect the holders of our notes 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.March 31,June 30, 2005, our total debt was approximately $18.0$18.4 billion, of which $9.6$10.0 billion was structurally senior to the 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 holders of Charter Holdings’ notes.HoldingsHoldings.enabledeclare all amounts borrowed, together with accrued and unpaid interest and other fees, to be due and payable. An acceleration or certain payment events of default under our credit facilities would cause a cross-default in the indentures governing the Charter Holdings notes, CCH II notes, CCO Holdings notes, Charter Operating notes and Charter’s convertible senior notes. Similarly, such a default or acceleration under any of these notes would cause a cross-default under the notes of the parent entities of the relevant entity. If the amounts outstanding under the credit facilities or notes are accelerated, all of the debt and liabilities of Charter Holdings’ subsidiaries would be payable from the subsidiaries’ assets, prior to make paymentsany distribution of the subsidiaries’ assets to pay the interest and principal amounts on itsCharter Holdings’ notes. In addition, ifthe lenders under our credit facilities and noteholders under our Charter Holdings caused a subsidiary to make a distribution to enable it to make paymentsOperating notes could foreclose on its notes, and such transfer were deemed a fraudulent transfer or an unlawful distribution, the40holders oftheir collateral, which includes equity interests in Charter Holdings’ subsidiaries, and they could exercise other rights of secured creditors. Any default under any of our credit facilities or notes could be requiredforce us to returnexamine all options, including seeking the payment to (or forprotection of the benefit of) the creditors of its subsidiaries.bankruptcy laws. In the event of the bankruptcy, liquidation or dissolution of a subsidiary, following payment by such subsidiary of its liabilities, such subsidiarythe 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 holders of Charter Holdings notes from any of Charter Holdings’ subsidiaries’ assets. Such subsidiaries may not have sufficient assets remaining to make any payments to Charter Holdings as an equity holder or otherwise and may be restricted by bankruptcy and insolvency laws from making any such payments.Litigation and Government Investigations.Litigation. A number of putative federal class action lawsuits were filed against Charter and certain of its former and present officers and directors alleging violations of securities laws, which have been consolidated for pretrial purposes. In addition, a number of shareholder derivative lawsuits have beenwere filed against Charter in the same and other jurisdictions. A shareholders derivative suit was filed in the U.S. District Court for the Eastern District of Missouri against Charter and its then current directors. Also, three shareholders derivative suits were filed in Missouri state court against Charter, its then current directors and its former independent auditor. These state court actions have been consolidated. The federal shareholders derivative suit and the consolidated derivative suit each alleged that the defendants breached their fiduciary duties. recently entered into Stipulations of Settlement setting forth proposed terms of settlement for the above-described class actions and derivative suits. The settlement of each of the lawsuits remains conditioned upon, among other things, final judicial approval of the settlements following notice to the class, and dismissal with prejudice of the consolidated derivative actions now pending in Missouri state court, which are related to the Federal Derivative Action. Additionally, a portion of the settlement is to be paid in shares of Charter’s Class A common stock with a value of $45 million (including shares issuable to insurance carriers) and warrants to purchase Charter’s Class A common stock valued at $40 million, with such values in each case determined by formulas set forth in the Stipulations of Settlement. If the price of Charter’s common stock declines, additional shares will be required in order to fulfill this commitment. Charter has the right but not the obligation to terminate the settlements if the value of its common stock (under the above-described formula) is less than $2.25. On May 9,23, 2005 the last reported sale price of Charter’s Class A common stock on the Nasdaq National Market was $1.16 per share. The hearing to consider final approval of the settlement is scheduled for May 23, 2005. See “Part II, Item 1. Legal Proceedings.”In August 2002, Charter became aware of a grand jury investigation being conducted by the U.S. Attorney’s OfficeUnited States District Court for the Eastern District of Missouri into certain ofconducted the final fairness hearing for the Actions, and on June 30, 2005, the Court issued 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’s Office has publicly stated that Charter is not a targetfinal approval of the investigation. Charter was also advised by the U.S. Attorney’s Office that no current officer or member of its board of directors is a targetsettlements. Members 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 revenueclass had 30 days from digital set-top terminal suppliers and inflated customer account numbers. Eachthe issuance of the indicted former officers pled guiltyJune 30 order approving the settlement to single conspiracy counts relatedfile an appeal challenging the approval. Two notices of appeal were filed relating to the original mail and wire fraud charges and were sentenced on April 22, 2005.settlement, but Charter has advised us that it fully cooperated withdoes not yet know the investigation, and following the sentencings, the U.S. Attorney’s Office for the Eastern District of Missouri announced that its investigation was concluded and that no further indictments would issue.On November 4, 2002, Charter received an informal, non-public inquiry from the staff of the SEC. The SEC issued a formal order of investigation dated January 23, 2003, and subsequently served document and testimony subpoenas on Charter and a number of its former employees. The investigation and subpoenas generally concerned Charter’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. On July 27, 2004, the SEC and Charter reached a final agreement to settle the investigation. In the Settlement Agreement and Cease and Desist Order, Charter agreed to entry of an administrative order prohibiting any future violations of United States securities laws and requiring certain other remedial internal practices and public disclosures. Charter neither admittedspecific issues presented by such appeals, nor denied any wrongdoing, and the SEC assessed no fine against Charter.due toinvestigations, (ii) the remaining conditions to the finalization of our anticipated settlements, (iii) the possibility of appeals and objections to the settlements and (iv) the need for us to comply with, and/or otherwise implement certain covenants, conditions, undertakings, procedures and other obligations that would be or have been imposed under the terms of the settlements, Charter cannot predict with certainty the ultimate outcome of these proceedings. An unfavorable outcome in the lawsuits described above could result in substantial potential liabilities and have a material adverse effect on our consolidated financial condition and results of operations or our liquidity. Further, these proceedings, and our actions in response to these proceedings, could result in substantial additional defense41serviceserve a higher concentration of such areas than those of other major cable service providers.telephonytelephone and high-bandwidth Internet access services, to residential and business customers. Some of these telephone companies have obtained, and are now seeking, franchises or alternative authorizations that are less burdensome than existing Charter franchises. The subscription television industry also faces competition from free broadcast television and from other communications and entertainment media. Further loss of customers to DBS or other alternative video and data services could have a material negative impact on the value of our business and its performance.highspeed datahigh-speed Internet service over cable systems. Telephone companies (which already have telephone lines into the household, an existing customer base and other operational functions in place) and other companies offer DSL service. local exchange carrierstelephone companies 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.companiescompany may not have the ability to raise the funds necessary to fulfill our obligations under our and our parent companies’company’s senior and senior discount notes and our credit facilities following a change of control. Under the indentures governing our parent companies’company’s notes, upon the occurrence of specified change of control events, including certain specified dispositions of Charter’s stock by Mr. Allen, each such issuer is required to offer to repurchase all of its outstanding notes. However, our parent companiescompany may not have sufficient funds at the time of the change of control event to make the required repurchase of the applicable notes and all of the notes issuers are limited in their ability to make distributions or other payments to their respective parent companiescompany to fund any required repurchase. In addition, a change of control under our credit facilities and indentures governing their and our notes wouldcould require the42companiescompany to repurchase Charter Holdings’ and its parents’parent company’s notes. Any failure to make or complete a change of control offer would place the applicable issuer or borrower in default under its notes. The failure of Charter Holdings’ subsidiaries to make a change of control offer or repay the amounts outstanding under their credit facilities would place them in default under these agreements and could result in a default under the indentures governing the Charter Holdings and its parent companies’company’s notes. See “—"— Certain Trends and Uncertainties — Liquidity.”March 31,June 30, 2005, excluding the effects of hedging, approximately 31%33% 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 of March 31,June 30, 2005 and December 31, 2004, the weighted average interest rate on the credit facility debt was approximately 7.0%7.2% and 6.8%, respectively, and the weighted average interest rate on the high-yield notes was approximately 9.9% and 9.9%, respectively, resulting in a blended weighted average interest rate of 9.1% and 9.0%, respectively. The interest rate on approximately 81%79% and 82% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate hedge agreements as of March 31,June 30, 2005 and December 31, 2004, respectively.dataInternet services, digital video, bundled service packages, and to a lesser extent various commercial services that take advantage of cable’s broadband capacity. 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, 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. If it is determined that the product or service being utilized infringes on the rights of others, we may be sued or be precluded from using the technology.March 31,July 7, 2005 approximately 10%9% of our current programming contracts were expired, and approximately another 34%21% are scheduled to expire at or before the end of 2005. There can be no assurance that these agreements will be renewed on favorable or comparable terms. To the extent that we are unable to reach agreement with certain programmers on terms that we believe are reasonable we may be forced to remove such programming channels from our line-up, which could result in a further loss of customers.43 There have been recent calls to impose indecency restrictions on cable networks.onin February 10, 2005, confirming an earlier ruling against mandating either dual carriage or multicast carriage, that decision has been appealed. In addition, the FCC could reverse its own ruling or Congress could legislate additional carriage obligations.There is also uncertainty whetherfranchising authorities, state regulators,or federal authorities. The Supreme Court held that the FCC or the U.S. Congress will impose obligations on cable operators to provide unaffiliatedwas correct in classifying cable-provided 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“information service” and remanded for further proceedings. The Ninth Circuit held that cable modem"information service, is not “cable service” but is part “telecommunications service” and part “information" rather than a "telecommunications service.” The decision has been appealed" This favorable regulatory classification limits the ability of various governmental authorities to the United States Supreme Court. However, if it is not reversed, the decision may lead to our having to contribute additional funds to the federal government’s universal service fund, to comply withimpose open access requirements and to subject our high-speed data operations generally to other common carrier regulations. As we offer other advanced services over our cable system, we are likely to face additional calls for regulationon cable-provided Internet service. Given the recency of our capacity and operation. These regulations, if adopted,the Brand X decision, however, the nature of any legislative or regulatory response remains uncertain. The imposition of open access requirements could adverselymaterially affect our operations.business.44March 31,June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.45“Federal"Federal Class Actions”Actions") were filed against Charter and certain of its former and present officers and directors in various jurisdictions allegedly on behalf of all purchasers of Charter’s securities during the period from either November 8 or November 9, 1999 through July 17 or July 18, 2002. Unspecified damages were sought by the plaintiffs. In general, the lawsuits alleged that Charter utilized misleading accounting practices and failed to disclose these accounting practices and/or issued false and misleading financial statements and press releases concerning Charter’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”) 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. The Panel’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 the Panel’s transfer order. StoneRidge subsequently filed a Consolidated Amended Complaint. The Court subsequently consolidated the Federal Class Actions into a single action (the “Consolidated"Consolidated Federal Class Action”Action") for pretrial purposes. On June 19, 2003, following a status and scheduling 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 were 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 Actions 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 July 12, 2004, the parties submitted a joint motion to again extend the stay, this time until September 10, 2004. The Court granted that extension on July 20, 2004. On August 5, 2004, Stoneridge,the plaintiff’s representatives, Charter and the individual defendants who were the subject of the suit entered into a Memorandum of Understanding setting forth agreements in principle to settle the Consolidated Federal Class Action. These parties subsequently entered into Stipulations of Settlement dated as of January 24, 2005 (described more fully below) which incorporate the terms of the August 5, 2004 Memorandum of Understanding. • ·In re Charter Communications, Inc. Securities Litigation, MDL Docket No. 1506 (All Cases), StoneRidge Investments Partners, LLC, Individually and On Behalf of All Others Similarly Situated, v. Charter Communications, Inc., Paul Allen, Jerald L. Kent, Carl E. Vogel, Kent Kalkwarf, David G. 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. “State"State Derivative Action”Action") was filed in the Circuit Court of the City of St. Louis, State of Missouri (the “Missouri"Missouri State Court”Court"), against Charter and its then current directors, as well as its former auditors. The plaintiffs allegealleged that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly on Charter’s behalf, were sought by the plaintiffs. • ·Kenneth 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, and Charter Communications, Inc. the Missouri State Court against Charter and certain of its current and former directors, as well as its former auditors. The plaintiffs in46
that case alleged that the individual defendants breached their fiduciary duties by failing to establish and maintain adequate internal controls and procedures. Unspecified damages, allegedly on Charter’s behalf, were sought by plaintiffs. On July 14, 2004, the Court consolidated this case with the State Derivative Action.
| 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. |
| Arthur 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. |
47
dismissal with prejudice of the consolidated derivative actions now pending in Missouri State Court, which are related to the Federal Derivative Actions. The hearing to consider final approval of the settlement is scheduled for May 23, 2005.
On November 4, 2002,
Indemnification
Charter iswas generally required to indemnify, under certain conditions, 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, thea now-settled SEC investigation and the above-described lawsuits, some of Charter’s current and former directors and current and former officers have been advanced certain costs and expenses incurred in connection with their defense. On February 22, 2005, Charter filed suit against four of its former officers who were indicted in the course of the grand jury investigation. These suits seek to recover the legal fees and other related expenses advanced to these individuals byindividuals. One of these former officers has counterclaimed against Charter alleging, among other things, that Charter owes him additional indemnification for legal fees that Charter did not pay and another of these former officers has counterclaimed against Charter for the grand jury investigation, SEC investigation and class action and related lawsuits.
accrued sick leave.
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 (the “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.” A substantively identical case was filed in the Superior Court of Athens — Clarke County, Georgia by Emma S. Tobar on March 26, 2002 (the “Georgia Class Action”), alleging a nationwide class for these claims. Charter Holdco removed the South Carolina Class Action 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
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Supreme Court, but those courts ruled that until a final judgment was entered against Charter Holdco, they lacked 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 to both the Georgia and South Carolina Class Actions participated in a mediation. The mediator made a proposal to the parties to settle the lawsuits. In May 2004, the parties accepted the mediator’s proposal and reached a tentative settlement, subject to final documentation and court approval. As a result of the tentative settlement, we recorded a special charge of $9 million in our consolidated statement of operations in the first quarter of 2004. On July 8, 2004, the Superior Court of Athens — Clarke County, Georgia granted a motion to amend the Tobar complaint to add Nicholls, Barber and April Jones as plaintiffs in the Georgia Class Action and to add any potential class members in South Carolina. The court also granted preliminary approval of the proposed settlement on that date. On August 2, 2004, the parties submitted a joint request to the South Carolina Court of Common Pleas to stay the South Carolina Class Action pending final approval of the settlement and on August 17, 2004, that court granted the parties’ request. On November 10, 2004, the court granted final approval of the settlement, rejecting positions advanced by two objectors to the settlement. On December 13, 2004 the court entered a written order formally approving that settlement. On January 11, 2005, certain class members appealed the order entered by the Georgia court. Those objectors voluntarily dismissed their appeal with prejudice on February 8, 2005. On February 9, 2005, the South Carolina Court of Common Pleas entered a court order of dismissal for the South Carolina Class Action. Additionally, one of the objectors to this settlement recently filed a similar, but not identical, lawsuit.
The South Carolina Class Action was entitled:
The Georgia Class Action was entitled:
Outcome
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SIGNATURES
| Dated: August 4, 2005 | By: | |||||||
| Name: | ||||||||
| Title: | Senior Vice President, | |||||||
Interim Chief Financial Officer, | ||||||||
Principal Accounting Officer and | ||||||||
Corporate Controller | ||||||||
(Principal Financial Officer and | ||||||||
Principal Accounting Officer) | ||||||||
| Dated: August 4, 2005 | By: /s/ Paul E. Martin | |||||||
| Name: | Paul E. Martin | |||||||
| Title: | Senior Vice President, | |||||||
Interim Chief Financial Officer, | ||||||||
Principal Accounting Officer and | ||||||||
Corporate Controller | ||||||||
(Principal Financial Officer and | ||||||||
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EXHIBIT INDEX
Principal Accounting Officer) |
| Exhibit | ||
| Number | Description of Document | |
| 3.1 | Certificate of Formation of Charter Communications Holdings, LLC (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)). | |
| 3.2 | Amended and Restated Limited Liability Company Agreement of Charter Communications Holdings, LLC, dated as of October 30, 2001 (incorporated by reference to Exhibit 3.2 to the annual report on Form 10-K of Charter Communications Holdings, LLC and Charter Communications Holding Capital Corporation on March 29, 2002 (File No. 333-77499)). | |
| 3.3 | Certificate of Incorporation of Charter Communications Holdings Capital Corporation (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)). | |
| 3.4(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 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation on March 29, 2002 (File No. 333-77499)). | |
| 4.1 | Indenture relating to the 8.250% Senior Notes due 2007, dated as of March 17, 1999, between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.1(a) 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)). | |
| 4.2 | Indenture relating to the 8.625% Senior Notes due 2009, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.2(a) 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)). | |
| 4.3 | Indenture relating to the 9.920% Senior Discount Notes due 2011, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.3(a) 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)). | |
| 4.4 | Indenture relating to the 10.00% Senior Notes due 2009, dated as of January 12, 2000, between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.1(a) to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on January 25, 2000 (File No. 333-95351)). | |
| 4.5 | Indenture relating to the 10.25% Senior Notes due 2010, dated as of January 12, 2000, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.2(a) to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on January 25, 2000 (File No. 333-95351)). | |
| 4.6 | Indenture relating to the 11.75% Senior Discount Notes due 2010, dated as of January 12, 2000, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.3(a) to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on January 25, 2000 (File No. 333-95351)). | |
| 4.7 | Indenture dated as of January 10, 2001 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 10 | |
| 4.8 | Indenture dated as of January 10, 2001 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 11 | |
| 4.9 | Indenture dated as of January 10, 2001 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 13 | |
| 4.10(a) | Indenture dated as of May 15, 2001 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 9.625% Senior Notes due | |
| 4.10(b) | First Supplemental Indenture dated as of January 14, 2002 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 9.625% Senior Notes due 2009 (incorporated by reference to Exhibit 10.2(a) to the current report on Form 8-K filed by Charter Communications, Inc. on January 15, 2002 (File No. 000-27927)). | |
| 4.10(c) | Second Supplemental Indenture dated as of June 25, 2002 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 9.625% Senior Notes due 2009 (incorporated by reference to Exhibit 4.1 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 6, 2002 (File No. 000-27927)). | |
| 4.11(a) | Indenture dated as of May 15, 2001 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 10.000% Senior Notes due | |
| 4.11(b) | First Supplemental Indenture dated as of January 14, 2002 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 10.000% Senior Notes due 2011 (incorporated by reference to Exhibit 10.3(a) to the current report on Form 8-K filed by Charter Communications, Inc. on January 15, 2002 (File No. 000-27927)). | |
| 4.11(c) | Second Supplemental Indenture dated as of June 25, 2002 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 10.000% Senior Notes due 2011 (incorporated by reference to Exhibit 4.2 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 6, 2002 (File No. 000-27927)). | |
| 4.12 | Indenture dated as of May 15, 2001 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 11.750% Senior Discount Notes due | |
| 4.13(a) | Indenture dated as of January 14, 2002 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 12.125% Senior Discount Notes due 2012 (incorporated by reference to Exhibit 10.4(a) to the current report on Form 8-K filed by Charter Communications, Inc. on January 15, 2002 (File No. 000-27927)). | |
| 4.13(b) | First Supplemental Indenture dated as of June 25, 2002 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 12.125% Senior Discount Notes due 2012 (incorporated by reference to Exhibit 4.3 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 6, 2002 (File No. 000-27927)). | |
| 10.1 (a) | Stipulation of Settlement, dated as of January 24, 2005, regarding settlement of Consolidated Federal Class Action entitled In Re Charter Communications, Inc. Securities | |
| 10.1 (b) | ||
| Amendment to Stipulation of Settlement, | ||
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| Employment Agreement dated as of April 1, 2005, by and between Michael J. Lovett and Charter Communications, Inc. | ||
| 10.3+ | Letter Agreement, dated April 15, 2005, by and between Charter Communications, Inc. and Paul E. Martin (incorporated by reference to Exhibit 99.1 to the current report on Form 8-K of Charter Communications, Inc. filed April 19, 2005 (File No. 0000-27927)). | |
| 10.4+ | 2005 Executive Cash Award Plan dated as of June 9, 2005 (incorporated by reference to Exhibit 99.1 to the current report on Form 8-K of Charter Communications, Inc. filed June 15, 2005 (File No. 0000-27927)). | |
| 10.5+ | Restricted Stock Agreement, dated as of July 13, 2005, by and between Robert P. May and Charter Communications, Inc. (incorporated by reference to Exhibit 99.1 to the current report on Form 8-K of Charter Communications, Inc. filed July 13, 2005 (File No. 000-27927)). | |
| 10.6+ | Restricted Stock Agreement, dated as of July 13, 2005, by and between Michael J. Lovett and Charter Communications, Inc. (incorporated by reference to Exhibit 99.2 to the current report on Form 8-K of Charter Communications, Inc. filed July 13, 2005 (File No. 000-27927)). | |
| 15.1* | Letter re Unaudited Interim Financial Statements. | |
| 31.1* | Certificate of Interim Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934. | |
| 31.2* | Certificate of Interim 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 (Interim 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 (Interim Chief Financial Officer). |
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