Charter 2003 Annual Report Download

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2003
Annual Report
WE STARTED
WITH CABLE
TELEVISION...

Table of contents

  • Page 1
    WE STARTED WITH CABLE TELEVISION...2003 Annual Report

  • Page 2
    ... service in select markets. We plan to continue to roll out these and other advanced services over our state-of-the-art broadband network. Charter also provides business-to-business video, data and Internet protocol (IP) solutions through Charter Business.TM Advertising sales and production services...

  • Page 3
    ... our business is improving as we offer differentiated video services, ubiquitous high-speed Internet products and expanded voice-over-Internet protocol telephony services. Improvements in the Company's performance are already visible. With the vast majority of our network rebuild completed, Charter...

  • Page 4
    ... billing and account management platform better supports all services across our footprint. INTRODUCING NEW DIGITAL FEATURES INCLUDING HDTV AND DVR Products: We continue to see momentum in our high-speed Internet product category, adding 427,500 new customers in 2003, and increasing revenues...

  • Page 5
    ..., Charter's employees continued to advance the cause of choice and empowerment of our customers. Their hard work and personal dedication to their communities and Company is remarkable. To them, we dedicate this report. Carl E. Vogel President and Chief Executive Officer June 23, 2004 Paul G. Allen...

  • Page 6
    ... Year Ended December 31, Revenues Less: Costs and expenses Programming costs Advertising sales Service General and administrative Marketing Operating costs and expenses Adjusted EBITDA Less: Purchases of property, plant and equipment Un-levered free cash ï¬,ow Less: Interest on cash pay obligations...

  • Page 7
    ... 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...

  • Page 8
    06. ORGANIZATIONAL STRUCTURE: The chart below summarizes Charter's organizational structure and that of our direct and indirect subsidiary companies as of June 1, 2004. Public common stock, other equity Paul G. Allen and affiliated entities Charter Communications Inc., ("Charter")(1) 90% common...

  • Page 9
    ... Operations* Corporate Headquarters *Represents approximate location of Charter operations Charter's broadband footprint extends across 37 states, divided into five divisions designed to facilitate efficient operations. Our corporate, operations, sales, marketing and customer care teams work...

  • Page 10
    ...President and Managing Director, Allen & Company, LLC, an investment bank (not affiliated with Paul Allen) David C. Merritt Managing Director, Salem Partners, LLC, an investment banking firm SENIOR MANAGEMENT: CORPORATE LEADERSHIP FIELD LEADERSHIP Carl E. Vogel President, Chief Executive Officer...

  • Page 11
    CHARTER COMMUNICATIONS, INC. TABLE OF CONTENTS Cautionary Statement Regarding Forward-Looking Statements Organizational Structure Our Business Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure ...

  • Page 12
    ..., the pending SEC Division of Enforcement investigation and the putative class action and derivative shareholders litigation against us; ‚ our ability to obtain programming at reasonable prices or pass cost increases on to our customers; ‚ general business conditions, economic uncertainty...

  • Page 13
    ... exchange of options, preferred stock, convertible notes and other convertible or exchangeable securities that occurred after that date. Public common stock and other equity Paul G. Allen and affiliated entities 90% common equity interest, 7% voting interest Charter Communications, Inc. ("Charter...

  • Page 14
    ... Transactions Arising Out of Our Organizational Structure and Mr. Allen's Investment in Charter and Its Subsidiaries Ì Equity Put Rights Ì CC VIII'' in Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov, for additional information. (4) CC V Holdings, LLC, the issuer of $113...

  • Page 15
    ... Out of Our Organizational Structure and Mr. Allen's Investment in Charter Communications, Inc. and Its Subsidiaries Ì Equity Put Rights Ì CC VIII'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov for additional information. (b) Represents ""as converted'' shares...

  • Page 16
    ...2004 Option Exchange'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov for additional information. Charter Communications Holding Company, LLC. Charter Holdco, a Delaware limited liability company that was formed on May 25, 1999, is the direct 100% parent of Charter...

  • Page 17
    ... Holdings and the subsidiaries that conduct all of our cable operations, including the Charter Operating, CC V/CC VIII, CC VI and CC VII Companies described below in ""Operating Subsidiaries.'' CCH II, LLC. CCH II, a Delaware limited liability company formed on March 20, 2003, is a co-issuer of the...

  • Page 18
    ...ber optic cable, we oÃ...er our customers traditional cable video programming (analog and digital, which we refer to as ""video'' service), high-speed cable Internet access (which we refer to as ""high-speed data service''), advanced broadband cable services (such as video on demand (""VOD''), high de...

  • Page 19
    ...from high-speed data services increased 65%. See ""ÃŒ Products and Services'' and ""Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Charter Communications Operating, LLC ReÃ'nancing In April 2004, our subsidiaries, Charter Operating and Charter Communications...

  • Page 20
    ... to improve sales through the use of better trained, more eÇcient and sales-oriented customer service representatives. Products and Services We oÃ...er our customers traditional cable video programming (analog and digital video) as well as highspeed data services and in some areas advanced broadband...

  • Page 21
    ... the New York system, served approximately 230,800 analog video customers, 83,300 digital video customers and 37,800 high-speed data customers. (a) ""Customers'' include all persons our corporate billing records show as receiving service (regardless of their payment status), except for complimentary...

  • Page 22
    ...to the basic channel line-up. ‚ Premium Channels. These channels provide commercial-free movies, sports and other special event entertainment programming. Although we oÃ...er subscriptions to premium channels on an individual basis, we oÃ...er an increasing number of premium channel packages and oÃ...er...

  • Page 23
    ... Video. We oÃ...er digital video to our customers in several diÃ...erent service combination packages. All of our digital packages include a digital set-top terminal, an interactive electronic programming guide, up to 45 channels of digital music, an expanded menu of pay-per-view channels and the option...

  • Page 24
    ... homes passed by year-end. ‚ i-TV Service. We ended 2003 with interactive television service (""i-TV'') available to over 1 million digital video customers. In 2004, we expect to increase availability in strategic competitive markets and we are working on making our i-TV channels local-content...

  • Page 25
    ... the Federal Communications Commission's rules, the prices we charge for cablerelated equipment, such as set-top terminals and remote control devices, and for installation services are based on actual costs plus a permitted rate of return. Although our cable service oÃ...erings vary across the markets...

  • Page 26
    ...providing high quality service. Monitoring previously done by our regional operations centers has been migrated to our national network operations center. Centralized monitoring becomes increasingly important as we increase the number of customers utilizing two-way high-speed data service. Our local...

  • Page 27
    ... services (such as DVR, high deÃ'nition television, VOD and SVOD) with the goal that our customers will view their cable connection as one-stop shopping for video, voice, highspeed data and interactive services; ‚ Promote our bundling of digital video and high-speed data services and pricing...

  • Page 28
    ... in enhanced quality of programming oÃ...ered on digital tiers and provide our video customers more value and more choice. Additionally, as we migrate our programming to our digital tier packages, certain programming that was previously available to all of our customers via an analog signal, may be...

  • Page 29
    ..., information system design and support, internal audit, purchasing, marketing and programming contract administration. The corporate oÇce performs these services on a cost reimbursement basis pursuant to a management services agreement. See ""Certain Relationships and Related Transactions...

  • Page 30
    ... table presents selected consolidated Ã'nancial data for the periods indicated (dollars in millions, except share data): Charter Communications, Inc. Year Ended December 31, 2002(a) 2001(a) 2000(a) 2003 1999(a) Statement of Operations Data: Revenues Costs and Expenses: Operating (excluding...

  • Page 31
    ... statements of Charter Communications, Inc. and subsidiaries as of and for the years ended December 31, 2003, 2002 and 2001. Introduction During 2003, we undertook a number of transition activities including reorganizing our workforce, adjusting our video pricing and packages, completing call center...

  • Page 32
    ...various operating divisions, and we have established a telephone hotline number for employees to call and report misconduct relating to the reporting of customer numbers. We have also elected not to provide guidance on expected customer numbers in our public disclosures. Corporate Compliance Program...

  • Page 33
    ... 31, 2001. Our previously reported net loss increased by $29 million for the year ended December 31, 2000, primarily due to adjustments related to the original accounting for acquisitions and elements of our rebuild and upgrade activities. Net cash Ã-ows from operating activities for the years...

  • Page 34
    ... and acquired 16 cable businesses adding approximately 5 million additional customers. We were faced with integrating these acquisitions, administering the rebuild program and also putting in place processes and new personnel to handle the increased size and complexity of an operation that had grown...

  • Page 35
    ... $48 million for the years ended 2001 and 2000, respectively. Deferred Tax Liabilities/Franchise Assets. Adjustments were made to record deferred tax liabilities associated with the acquisition of various cable television businesses. These adjustments increased amounts assigned to franchise assets...

  • Page 36
    ...We therefore reduced our advertising revenue and decreased our related property, plant and equipment associated with the purchase of set-top terminals. ‚ During 2001 and 2000, certain post-acquisition marketing and customer acquisition costs were charged against purchase accounting reserves in the...

  • Page 37
    ... table sets forth selected consolidated statement of operations information, showing previously reported and restated amounts, for the year ended December 31, 2001 (in millions, except per share and share data): As previously reported As restated Revenues Costs and expenses: Operating (excluding...

  • Page 38
    ...Other Total Acquired Consideration Price Customers Acquisition Date Cash Paid AT&T Systems Cable USA Total 2001 Acquisitions High Speed Access Corp Enstar Limited Partnership Systems Enstar Income Program II-1, L.P Total 2002 Acquisitions Total 2001-2002 Acquisitions 6/01 8/01 2/02 4/02...

  • Page 39
    ... of the sale, exchange, or acquisition. Overview of Operations Approximately 86% and 84% of our revenues for the years ended December 31, 2003 and 2002, respectively, are attributable to monthly subscription fees charged to customers for our video, high-speed data, telephone and commercial services...

  • Page 40
    ... spent on capital activities associated with extending, rebuilding, and upgrading our cable network. As of December 31, 2003 and 2002, the net carrying amount of our property, plant and equipment (consisting primarily of cable network assets) was approximately $7.0 billion (representing 33% of total...

  • Page 41
    ... with the installation of expanded services and equipment replacement and betterment; and ‚ Verifying the integrity of the customer's network connection by initiating test signals downstream from the headend to the customer's digital set-top terminal. We capitalized internal direct labor costs of...

  • Page 42
    .... Depreciation is recorded using the straight-line method over management's estimate of the estimated useful lives of the related assets as follows: Cable distribution systems Customer equipment and installations Vehicles and equipment Buildings and leasehold improvements Furniture and Ã'xtures...

  • Page 43
    ...: penetration rates for analog and digital video and high-speed data, revenue growth rates, expected operating margins and capital expenditures. Considerable management judgment is necessary to estimate future cash Ã-ows, and such estimates include inherent uncertainties, including those relating to...

  • Page 44
    ... Out of Our Organizational Structure and Mr. Allen's Investment in Charter and Its Subsidiaries Ì Equity Put Rights Ì CC VIII'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov) and possibly later years to Vulcan Cable III, Inc. and Charter Investment, Inc. will...

  • Page 45
    ... Ã'nancial condition, results of operations or our liquidity, including our ability to comply with our debt covenants. Litigation. As described in the ""Legal Proceedings'' section of the Charter Communications, Inc. 2003 Annual Report on Form 10-K available at www.sec.gov, numerous allegations have...

  • Page 46
    ...Ended December 31, 2002 2001 Revenues Costs and Expenses: Operating (excluding depreciation and amortization Selling, general and administrative Depreciation and amortization ÏÏÏÏ Impairment of franchises Gain on sale of system Option compensation expense (income), net Special charges, net...

  • Page 47
    ... incremental high-speed data services, digital video and advanced products and services such as digital video recorders, high deÃ'nition television, VOD and telephony using VOIP to our existing customer base and commercial customers. Average monthly revenue per analog video customer increased from...

  • Page 48
    ... digital channels and pay-per-view programs. The increase in programming costs of $83 million, or 7%, was due to price increases, particularly in sports programming, and due to an increased number of channels carried on our systems, partially oÃ...set by decreases in analog and digital video customers...

  • Page 49
    ..., net. Special charges of $21 million for the year ended December 31, 2003 represent approximately $26 million of severance and related costs of our ongoing initiative to reduce our workforce partially oÃ...set by a $5 million credit from a settlement from the Internet service provider Excite@Home...

  • Page 50
    ... Arising Out of Our Organizational Structure and Mr. Allen's Investment in Charter Communications, Inc. and Its Subsidiaries Ì Equity Put Rights Ì CC VIII'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov. Additionally, reported losses allocated to minority...

  • Page 51
    ... by the average number of analog video customers. Revenues by service oÃ...ering are as follows (dollars in millions): 2002 Revenues Year Ended December 31, 2001 % of % of Revenues Revenues Revenues 2002 over 2001 % Change Change Video High-speed data Advertising sales Commercial Other $3,420...

  • Page 52
    ...to an increase in commercial high-speed data revenues. Other revenues consist of revenues from franchise fees, equipment rental, customer installations, home shopping, dial-up Internet service, late payment fees, wire maintenance fees and other miscellaneous revenues. For the years ended December 31...

  • Page 53
    ... of analog, premium and digital channels and pay-per-view programs. The increase in programming costs of $203 million, or 21%, was primarily due to price increases, particularly in sports programming, an increased number of channels carried on our systems and an increase in digital video customers...

  • Page 54
    ... lawsuits and governmental investigations. Special charges of $18 million in 2001 represent charges associated with the transition of approximately 145,000 data customers from the Excite@Home Internet service to our Charter Pipeline service, as well as employee severance costs. Interest expense, net...

  • Page 55
    ...Transactions ÃŒ Transactions Arising Out of Our Organizational Structure and Mr. Allen's Investment in Charter Communications, Inc. and Its Subsidiaries ÃŒ Equity Put Rights ÃŒ CC VIII'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov. Income tax beneÃ't. Income tax...

  • Page 56
    ... for a cable system in New York occurred in April 2004. Subject to post-closing contractual adjustments, the Company expects the total net proceeds from the sale of all these systems to be approximately $733 million, of which $10 million is currently held in an indemnity escrow account (with the...

  • Page 57
    ... addition, because of our corporate structure, we may have less access to capital than certain of our operating subsidiaries. Therefore our ability to repay any of our existing convertible senior notes is subject to additional uncertainties. Charter is a holding company and its principal assets are...

  • Page 58
    ... costs included in the accompanying statement of operations were $1.2 billion, $1.2 billion and $963 million for the years ended December 31, 2003, 2002 and 2001, respectively. Certain of our programming agreements are based on a Ã-at fee per month or have guaranteed minimum payments. The table sets...

  • Page 59
    ... upgrade program and purchases of customer premise equipment. See the table on the next page for more details. Upgrading our cable systems has enabled us to oÃ...er digital television, high-speed data services, VOD, interactive services, additional channels and tiers, and expanded pay-per-view options...

  • Page 60
    ...electronic equipment, make-ready and design engineering). (d) Upgrade/rebuild includes costs to modify or replace existing Ã'ber/coaxial cable networks, including betterments. (e) Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological...

  • Page 61
    ... Semi-Annual Interest Payment Dates Start Date for Interest Payment on Discount Notes Maturity Date(b) Long-Term Debt Charter Communications, Inc.: October and November 2000 5.750% convertible senior notes due 2005(c May 2001 4.750% convertible senior notes due 2006(c Charter Holdings: March 1999...

  • Page 62
    ... Dates Start Date for Interest Payment on Discount Notes Maturity Date(b) CCO Holdings, LLC 8âˆ,% senior notes due 2013 ÏÏÏÏ Renaissance Media Group LLC: 10.000% senior discount notes due 2008 CC V Holdings, LLC: 11.875% senior discount notes due 2008 Credit Facilities Charter Operating CC...

  • Page 63
    .... For Charter Operating, this includes the Renaissance Media Group LLC senior discount notes with an accreted value of $116 million as of December 31, 2003. (2) Includes permitted intercompany loans between Charter Holdings or Charter Communications Holding Company to the respective bank group...

  • Page 64
    ... our Debt Agreements. Our Debt Agreements are listed as exhibits to the Charter Communications, Inc. 2003 Annual Report Form 10-K available at www.sec.gov, and are incorporated by reference to the Charter Communications, Inc. 2003 Annual Report on Form 10-K from other SEC Ã'lings of Charter or its...

  • Page 65
    ...exchange for the lenders' consent to the organizational restructuring, Charter Operating's pricing increased by 50 basis points across all levels in the pricing grid then in eÃ...ect under the Charter Operating credit facilities. Obligations under the Charter Operating credit facilities are guaranteed...

  • Page 66
    ...nancial covenants limited the availability under these facilities to $119 million as of December 31, 2003. Falcon Cable Credit Facilities The obligations under the Falcon credit facilities are guaranteed by the direct parent of Falcon Cable Communications, Charter Communications VII, LLC, and by the...

  • Page 67
    ...each case, such distributions are not permitted during the existence of a default under the related credit facilities. See ""Ì Certain Trends and Uncertainties Ì Restrictive Covenants.'' The events of default for these credit facilities include, among other things, (i) the failure to make payments...

  • Page 68
    ...Ã'cially, directly or indirectly, at least 25% of the equity interests in the related borrower. See ""ÃŒ Certain Trends and Uncertainties ÃŒ Long-Term Indebtedness ÃŒ Change of Control Payments.'' Existing Notes On September 23, 2003, we and our subsidiaries, CCH II and Charter Holdings, purchased...

  • Page 69
    ... issuers, and BNY Midwest Trust Company, as trustee. Charter Holdings and Charter Capital exchanged these notes for new March 1999 Charter Holdings notes with substantially similar terms, except that the new March 1999 Charter Holdings notes are registered under the Securities Act and, therefore, do...

  • Page 70
    ... Midwest Trust Company, as trustee. In March 2001, Charter Holdings and Charter Capital exchanged these notes for new January 2001 Charter Holdings notes, with substantially similar terms, except that the new January 2001 Charter Holdings notes are registered under the Securities Act and, therefore...

  • Page 71
    ... of equity securities. In addition, on or after May 15, 2006, Charter Holdings and Charter Capital may redeem some or all of the May 2001 10.000% Charter Holdings notes and the May 2001 11.750% Charter Holdings notes at any time, in each case, at a premium. The optional redemption price declines to...

  • Page 72
    ...' high-yield indentures: ‚ Charter Holdings and its restricted subsidiaries are generally permitted to pay dividends on equity interests, repurchase interests, or make other speciÃ'ed restricted payments only if Charter Holdings can incur $1.00 of new debt under the leverage ratio test, which...

  • Page 73
    ... payments including merger fees up to 1.25% of the transaction value, repurchases using concurrent new issuances, and certain dividends on existing subsidiary preferred equity interests. ‚ Charter Holdings and its restricted subsidiaries may not make investments except permitted investments...

  • Page 74
    ...reports are available) of 5.5 to 1.0. In addition, regardless of whether the leverage ratio could be met, so long as no default exists or would result from the incurrence or issuance, CCH II and its restricted subsidiaries are permitted to incur or issue: ‚ up to $9.75 billion of debt under credit...

  • Page 75
    ... Charter Holdings notes, Charter notes, and other direct or indirect parent company notes (including the CCH II notes), ‚ to make distributions in connection with the private exchanges pursuant to which the CCH II notes were issued, and ‚ other speciÃ'ed restricted payments including merger fees...

  • Page 76
    ... or productive assets. CCH II and its restricted subsidiaries are then required within 365 days after any asset sale either to commit to use the net cash proceeds over a speciÃ'ed threshold to acquire assets, including current assets, used or useful in their businesses or use the net cash proceeds...

  • Page 77
    ... Holdings and its restricted subsidiaries are permitted to pay dividends on equity interests, repurchase interests, or make other speciÃ'ed restricted payments only if CCO Holdings can incur $1.00 of new debt under the leverage ratio test, which requires that CCO Holdings meet a 4.5 to 1.0 leverage...

  • Page 78
    ...CCH II notes, Charter notes, and other direct or indirect parent company notes, so long as CCO Holdings could incur $1.00 of indebtedness under the 4.5 to 1.0 leverage ratio test referred to above and there is no default; or ‚ to make other speciÃ'ed restricted payments including merger fees up to...

  • Page 79
    ...% senior discount notes due 2008. On July 22, 1999, the issuers exchanged $196.0 million of the original issued and outstanding Avalon notes for an equivalent amount of new Avalon notes. The form and terms of the new Avalon notes are substantially identical to the original Avalon notes except that...

  • Page 80
    ... are then required within 360 days after any asset sale either to commit to use the net cash proceeds over a speciÃ'ed threshold either to acquire assets, including controlling assets in permitted businesses, make capital expenditures or use the net cash proceeds to repay debt, or to oÃ...er to...

  • Page 81
    ... guarantor and the United States Trust Company of New York as trustee. Renaissance Media Group LLC, which is the direct or indirect parent company of these issuers, is now a subsidiary of Charter Operating. The Renaissance 10% notes and the Renaissance guarantee are unsecured, unsubordinated debt of...

  • Page 82
    ... Renaissance Media Group and its restricted subsidiaries may make permitted investments up to $2 million in related businesses and other speciÃ'ed permitted investments, restricted payments up to $10 million, dividends up to 6% each year of the net cash proceeds of public equity oÃ...erings, and other...

  • Page 83
    ...assumption of debt. Charter Holdings and its restricted subsidiaries are then required within 12 months after any asset sale either to commit to use the net cash proceeds over a speciÃ'ed threshold either to acquire assets used in their own or related businesses or use the net cash proceeds to repay...

  • Page 84
    ... Amended and Restated Charter Operating Credit Facilities Ì General The Charter Operating credit facilities were amended and restated concurrently with the sale of $1.5 billion senior second lien notes in April 2004, among other things, to defer maturities and increase availability under these...

  • Page 85
    ... Charter Operating, unless the Paul Allen Group holds a greater share of ordinary voting power of Charter Operating, (vii) certain of Charter Operating's indirect or direct parent companies having indebtedness in excess of $500 million aggregate principal amount which remains undefeased three months...

  • Page 86
    ... and related obligations will be required to guarantee the Charter Operating notes. The note guarantee of each such guarantor will be: ‚ a senior obligation of such guarantor; ‚ structurally senior to the outstanding senior notes of CCO Holdings and CCO Holdings Capital Corp. (except in the case...

  • Page 87
    ..., the Charter notes, and other direct or indirect parent company notes, so long as Charter Operating could incur $1.00 of indebtedness under the 4.25 to 1.0 leverage ratio test referred to above and there is no default; or ‚ to make other speciÃ'ed restricted payments including merger fees up to...

  • Page 88
    ...and other obligations under permitted credit facilities, liens securing the purchase price of new assets, liens securing amounts up to $50 million and liens incurred in the ordinary course of business. Charter Operating and Charter Communications Operating Capital Corp., its co-issuer, are generally...

  • Page 89
    ... satisÃ'ed, CC V Holdings, LLC and its subsidiaries will be required to guarantee the Charter Operating credit facility and the related obligations and to secure those guarantees with Ã'rst-priority liens, and to guarantee the notes and to secure the Charter Operating senior second lien notes with...

  • Page 90
    ... See ""Certain Relationships and Related Transactions Ì Business Relationships'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov for information regarding related party transactions and transactions with other parties with whom we or our related parties may have...

  • Page 91
    ... could materially adversely impact our ability to operate our business and to make payments under our debt instruments. If, at any time, additional capital or capacity is required beyond amounts internally generated or available through existing credit facilities or in traditional debt or equity...

  • Page 92
    .... On July 24, 2003, a federal grand jury charged four former oÇcers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inÃ-ated customer account numbers. On July 25, 2003, one...

  • Page 93
    ... from high-speed data services, digital video, bundled service packages, and to a lesser extent various commercial services that take advantage of cable's broadband capacity. The technology involved in our product and service oÃ...erings generally requires that we have permission to use intellectual...

  • Page 94
    ... conditions related to the cable or telecommunications industry; any further downgrade of our debt ratings; announcement of the development of improved or competitive technologies; the use of new products or promotions by us or our competitors; changes in accounting rules; new regulatory legislation...

  • Page 95
    ...local level, including rate regulation of basic service and equipment and municipal approval of franchise agreements and their terms, such as franchise requirements to upgrade cable plant and meet speciÃ'ed customer service standards. Cable operators also face signiÃ'cant regulation of their channel...

  • Page 96
    .... See ""Certain Relationships and Related Transactions ÃŒ Third Party Business Relationships in which Mr. Allen has an Interest ÃŒ Digeo, Inc.'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov. In December 2003, the SEC issued StaÃ... Accounting Bulletin (SAB) No. 104...

  • Page 97
    ... fair value of high-yield debt and bank debt is based on quoted market prices. We have certain interest rate derivative instruments that have been designated as cash Ã-ow hedging instruments. Such instruments are those which eÃ...ectively convert variable interest payments on certain debt instruments...

  • Page 98
    ... for these instruments and are therefore subject to credit loss in the event of nonperformance by the counter party to the interest rate exchange agreement. However the counterparties are banks and we do not anticipate nonperformance by any of them on the interest rate exchange agreement. 96

  • Page 99
    INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2003 and 2002 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 ÏÏ Consolidated Statements of Changes in Shareholders' Equity (DeÃ'cit) for the...

  • Page 100
    ... balance sheets of Charter Communications, Inc. and subsidiaries (the ""Company'') as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders' equity (deÃ'cit), and cash Ã-ows for each of the three years in the period ended December 31, 2003...

  • Page 101
    ... ÏÏÏÏ Total investment in cable properties, net OTHER NONCURRENT ASSETS Total assets LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses Total current liabilities LONG-TERM DEBT DEFERRED MANAGEMENT FEES Ã" RELATED PARTY OTHER LONG-TERM...

  • Page 102
    ..., except per share and share data) REVENUES COSTS AND EXPENSES: Operating (excluding depreciation and amortization) Selling, general and administrative Depreciation and amortization Impairment of franchises Gain on sale of system Option compensation expense (income), net Special charges, net...

  • Page 103
    ... Issuance of common stock related to acquisitions Net proceeds from issuance of common stock Redeemable securities reclassiÃ'ed as equity Contributions from Charter Investment, Inc Changes in fair value of interest rate agreements Option compensation expense, net Loss on issuance of equity...

  • Page 104
    ... management fees Other operating activities Net cash Ã-ows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Change in accounts payable and accrued expenses related to capital expendituresÏÏÏÏÏ Proceeds from sale of system Payments...

  • Page 105
    ... broadband communications company operating in the United States. The Company oÃ...ers its customers traditional video programming (analog and digital video) as well as high-speed data services and in some areas advanced broadband services such as high deÃ'nition television, video on demand, telephony...

  • Page 106
    ...ect to the sale of the New York system, net proceeds will be approximately $735 million, subject to post-closing adjustments. The Company will use these proceeds to repay bank debt. The Company's long-term Ã'nancing structure as of December 31, 2003 includes $7.2 billion of credit facility debt, $10...

  • Page 107
    ... the useful lives of the related assets as follows: Cable distribution systems Customer equipment and installations Vehicles and equipment Buildings and leasehold improvements Furniture and Ã'xtures Franchises Franchise rights represent the value attributed to agreements with local authorities...

  • Page 108
    ... with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Charter recognizes losses for any decline in value considered to be other than temporary. Certain marketable equity securities are classiÃ'ed as available-for-sale and reported at market value with unrealized gains...

  • Page 109
    ... range of rates. The Company does not hold or issue any derivative Ã'nancial instruments for trading purposes. Revenue Recognition Revenues from residential and commercial video and high-speed data services are recognized when the related services are provided. Advertising sales are recognized...

  • Page 110
    ... using the fair value method under SFAS No. 123 for the years presented: Year Ended December 31, 2003 2002 2001 Net loss applicable to common stock Add back stock-based compensation expense (income) related to stock options included in reported net loss (net of minority interest Less employee...

  • Page 111
    CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 and 2001 (dollars in millions, except where indicated) Unfavorable Contracts and Other Settlements The Company recognized $72 million of beneÃ't for the year ended December 31, 2003 as a ...

  • Page 112
    ...ed network and other considerations across its geographic divisional operating structure, management has determined that the Company has one reportable segment, broadband services. 4. Acquisitions On February 28, 2002, CC Systems, LLC, a subsidiary of the Company, and High Speed Access Corp. (""HSA...

  • Page 113
    ...Ã'cantly from historical results. Year Ended December 31, 2001 (in millions, except per share data) Revenues Loss from operations Loss before minority interest, income taxes and cumulative eÃ...ect of accounting change Net loss Loss per common share, basic and diluted $ 3,969 (1,211) (2,724...

  • Page 114
    ... new technology and upgrade programs, could materially aÃ...ect future depreciation expense. Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was $1.5 billion, $1.4 billion and $1.2 billion, respectively. 7. Franchises and Goodwill The Company constructs and operates its cable...

  • Page 115
    ... of the associated cable systems with a view to whether or not the Company is in compliance with any technology upgrading requirements. Certain franchises did not qualify for indeÃ'nite-life treatment due to technological or operational factors that limit their lives. These franchise costs will be...

  • Page 116
    ... 1, 2001, is presented below: Year Ended December 31, 2003 2002 2001 NET LOSS: Reported net loss applicable to common stock Add back:...and 2002: 2003 2002 Accounts payable Capital expenditures Accrued interest Programming costs Franchise related fees State sales tax Other accrued expenses ...

  • Page 117
    ... Accreted Value Long-Term Debt Charter Communications, Inc.: October and November 2000 5.75% convertible senior notes due 2005 May 2001 4.75% convertible senior notes due 2006 Charter Holdings: March 1999 8.250% senior notes due 2007 8.625% senior notes due 2009 9.920% senior discount notes due...

  • Page 118
    ... due 2010, achieving approximately $294 million of debt discount. CCH II also issued an additional $30 million principal amount of 10.25% notes for an equivalent amount of cash and used the proceeds for transaction costs and for general corporate purposes. See discussion of the CCH II notes below...

  • Page 119
    ...Charter Holdings and Charter Communications Capital Corporation (""Charter Capital''), as the issuers, and BNY Midwest Trust Company, as trustee. Charter Holdings and Charter Capital exchanged these notes for new March 1999 Charter Holdings notes with substantially similar terms, except that the new...

  • Page 120
    ... COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 and 2001 (dollars in millions, except where indicated) the issuers, and BNY Midwest Trust Company, as trustee. In June 2000, Charter Holdings and Charter Capital exchanged these notes for new...

  • Page 121
    ...Midwest Trust Company, as trustee. In September 2001, Charter Holdings and Charter Capital exchanged substantially all of these notes for new May 2001 Charter Holdings notes, with substantially similar terms, except that the new May 2001 Charter Holdings notes are registered under the Securities Act...

  • Page 122
    CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 and 2001 (dollars in millions, except where indicated) 2001 11.750% Charter Holdings notes, in each case, at a premium with proceeds of certain oÃ...erings of equity securities. In addition...

  • Page 123
    ... Notes. In connection with the acquisition of Renaissance in April 1999, the Company assumed $163 million principal amount at maturity of 10.000% senior discount notes due 2008 of which $49 million was repurchased in May 1999. The Renaissance notes did not require the payment of interest until...

  • Page 124
    ... to exist dividend or payment restrictions with respect to the bond issuers, guarantee their parent companies debt, or issue speciÃ'ed equity interests; and ‚ engage in certain transactions with aÇliates. Charter Operating Credit Facilities. The Charter Communications Operating, LLC (""Charter...

  • Page 125
    ... covenants limited the availability under these facilities to $119 million as of December 31, 2003. Falcon Cable Credit Facilities. The obligations under the Falcon credit facilities are guaranteed by the direct parent of Falcon Cable Communications, Charter Communications VII, LLC, and by the...

  • Page 126
    ...Ã'nancial covenants limited the availability under these facilities to $366 million as of December 31, 2003. CC VIII Operating Credit Facilities. The obligations under the CC VIII Operating credit facilities are guaranteed by the parent company of CC VIII Operating, CC VIII Holdings, LLC, and by the...

  • Page 127
    ...operations. In addition, the lenders under the Company's credit facilities could foreclose on their collateral, which includes equity interests in the Company's subsidiaries, and exercise other rights of secured creditors. In any such case, the Company might not be able to repay or make any payments...

  • Page 128
    ... in fair value of interest rate risk management derivative agreements. Such amounts are temporary as they are contractually scheduled to reverse over the life of the underlying instrument. Additionally, reported losses allocated to minority interest on the statement of operations will be limited to...

  • Page 129
    ... equity securities are classiÃ'ed as available-for-sale and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive loss on the accompanying consolidated balance sheets. The Company reports changes in the fair value of interest rate agreements designated...

  • Page 130
    ... and losses to oÃ...set related results on hedged items in the consolidated statement of operations. The Company has formally documented, designated and assessed the eÃ...ectiveness of transactions that receive hedge accounting. For the years ended December 31, 2003, 2002 and 2001, net gain (loss) on...

  • Page 131
    .... The Company is exposed to market price risk volatility with respect to investments in publicly traded and privately held entities. The fair value of interest rate agreements represents the estimated amount the Company would receive or pay upon termination of the agreements. Management believes...

  • Page 132
    ...Video High-speed data Advertising sales Commercial Other $3,461 556 263 204 335 $4,819 $3,420 337 302 161 346 $4,566 $2,971 148 197 123 368 $3,807 17. Operating Expenses Operating expenses consist of the following for the years presented: Year Ended December 31, 2003 2002 2001 Programming...

  • Page 133
    ... under the 1999 Plan. During July and October 2003, in connection with new employment agreements and related option agreements entered into by the Company, certain executives and directors were awarded a total of 80,603 shares of restricted Class A common stock. The shares vest monthly over a twelve...

  • Page 134
    ... quoted market values of Class A common stock. In January 2004, the Company commenced an option exchange program in which employees of the Company and its subsidiaries were oÃ...ered the right to exchange all stock options (vested and unvested) issued under the 1999 Charter Communications Option Plan...

  • Page 135
    ... and ten regions into Ã've operating divisions, elimination of redundant practices and streamlining its management structure. The remaining $4 million related to legal and other costs associated with the Company's ongoing grand jury investigation, shareholder lawsuits and SEC investigation. The $31...

  • Page 136
    ... settlement from the Internet service provider Excite@Home related to the conversion of high-speed data customers to Charter Pipeline service in 2001. During the year ended December 31, 2001, the Company recorded $18 million in special charges that represent $15 million of costs associated with the...

  • Page 137
    ... available tax loss carryforwards. In addition, under their exchange agreement with Charter, Vulcan Cable III, Inc. and Charter Investment, Inc. may exchange some or all of their membership units in Charter Holdco for Charter's Class B common stock, be merged with Charter, or be acquired by Charter...

  • Page 138
    ... to Vulcan Cable III, Inc. and Charter Investment, Inc. in accordance with the Special Loss Allocations provided under the Charter Holdco amended and restated limited liability company agreement. The Company does not expect to recognize a similar beneÃ't related to its investment in Charter Holdco...

  • Page 139
    ... of its subsidiaries. Under these agreements, Charter provides management services for the cable systems owned or operated by its subsidiaries. The management services include such services as centralized customer billing services, data processing and related support, beneÃ'ts administration and...

  • Page 140
    ... Blazer Inc., Action Sports Cable Network (""Action Sports'') and Microsoft Corporation. In addition, Mr. Allen and Mr. Savoy were directors of USA Networks, Inc. (""USA Networks''), who operates the USA Network, The Sci-Fi Channel, Trio, World News International and Home Shopping Network, owning...

  • Page 141
    ...Media and Action Sports. The Company pays a fee for the programming service generally based on the number of customers receiving the service. Such fees for the years ended December 31, 2003, 2002 and 2001 were each less than 1% of total operating expenses with the exception of USA Networks which was...

  • Page 142
    ... to the Company and support fees for the broadband media centers and relevant content and support services are currently under negotiation. In March 2001, Charter Communications Ventures, LLC (""Charter Ventures''), the Company's indirect subsidiary, and Vulcan Ventures formed DBroadband Holdings...

  • Page 143
    ...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...

  • Page 144
    ...Ã-at fee per month or have guaranteed minimum payments. The table sets forth the aggregate guaranteed minimum commitments under the Company's programming contracts. (3) ""Other'' represents other guaranteed minimum commitments, which consist primarily of commitments to the Company's billing services...

  • Page 145
    ... a Case Management Order setting forth a schedule for the pretrial phase of the consolidated class action. Motions to dismiss the Consolidated Amended Complaint have been Ã'led. On February 10, 2004, in response to a joint motion made by StoneRidge and defendants, Charter, Vogel and Allen, the court...

  • Page 146
    .... On July 24, 2003, a federal grand jury charged four former oÇcers of Charter with conspiracy and mail and wire fraud, alleging improper accounting and reporting practices focusing on revenue from digital set-top terminal suppliers and inÃ-ated customer account numbers. On July 25, 2003, one...

  • Page 147
    ... sets were ""cable ready.'' Charter removed this case to the United States District Court for the District of South Carolina in November 2001, and moved to dismiss the suit in December 2001. The federal judge remanded the case to the South Carolina Court of Common Pleas in August 2002 without ruling...

  • Page 148
    CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 and 2001 (dollars in millions, except where indicated) maximum contribution limit as determined by the Internal Revenue Service. The Company matches 50% of the Ã'rst 5% of participant ...

  • Page 149
    ...(dollars in millions, except where indicated) Charter Communications, Inc. (Parent Company Only) Condensed Balance Sheet December 31, 2003 2002 ASSETS Cash and cash equivalents Receivable from related party Investment in Charter Holdco Notes receivable from Charter Holdco $ 1 9 Ì 803 $ 10...

  • Page 150
    CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 and 2001 (dollars in millions, except where indicated) Condensed Statements of Cash Flows 2003 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss after preferred dividends Equity ...

  • Page 151
    ..., except where indicated) First Quarter Year Ended December 31, 2002 Second Quarter Third Quarter Fourth Quarter Revenues Income (loss) from operations Loss before minority interest, income taxes and cumulative eÃ...ect of accounting change Net loss applicable to common stock ÏÏÏÏ Basic and...

  • Page 152
    ... account changes should be directed to: Mellon Investor Services LLC Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 Toll-free number: 888.213.0965 Web site: www.mellon-investor.com Corporate Headquarters Charter Communications, Inc. Charter Plaza 12405 Powerscourt Drive St. Louis, MO...

  • Page 153
    Charter Plaza 12405 Powerscourt Drive St. Louis, MO 63131 www.charter.com