Charter 2004 Annual Report Download

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2004
Annual Report

Table of contents

  • Page 1
    2004 Annual Report

  • Page 2
    ...by offering bundled video, data and voice services - commonly referred to as the "triple play." Because these services are supported by our existing infrastructure, we can make them available to customers at competitive prices, while assuring high quality service. We know the importance of execution...

  • Page 3
    ... Charter Communications network. Charter DVRâ„¢ Charter DVR takes digital cable to the next level. Record and save your favorite shows, sports and movies - those special moments that make TV worth watching. Never miss another minute! Charter High-Speedâ„¢ With Charter High-Speed Internet service...

  • Page 4
    ... and growth opportunities from new advanced services, including telephone service, HSI, Video on Demand (VOD), high-definition television (HDTV), Digital Video Recording (DVR) equipped set-tops and wireless home networking. In early 2004, we introduced the first all-digital cable telecommunications...

  • Page 5
    ...growth. The year 2004 was important for Charter - a year marked by change, transformation and a striving for excellence across the Company. We worked to strengthen our businesses and successfully addressed certain short-term financial challenges facing us. And while we have accomplished a great deal...

  • Page 6
    ... "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). (b) Pro forma results reï¬,ect the sales of systems to Atlantic Broadband Finance, LLC in March and April 2004 and...

  • Page 7
    ... of outstanding Class A Common Stock held by non-affiliates of the registrant at June 30, 2004 was approximately $1.1 billion, computed based on the closing sale price as quoted on the NASDAQ National Market on that date. For purposes of this calculation only, directors, executive officers...

  • Page 8
    (PAGE INTENTIONALLY LEFT BLANK)

  • Page 9
    ... annual report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this annual report. In this annual report, ''we,'' ''us'' and ''our'' refer to Charter Communications, Inc., Charter Communications Holding Company, LLC...

  • Page 10
    ... 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. ( ( All...

  • Page 11
    ...31, 2004. Our principal executive offices are located at Charter Plaza, 12405 Powerscourt Drive, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555 and we have a website accessible at www.charter.com. Since January 1, 2002, our annual reports, quarterly reports and current reports on...

  • Page 12
    ... in our customer care and marketing infrastructure, including targeted marketing capabilities; executing growth strategies for new services, including digital simulcast, VOD, telephony, and digital video recorder service (''DVR''); managing our operating costs by exercising discipline in capital and...

  • Page 13
    ... 31, 2004 and do not give effect to any exercise, conversion or exchange of options, preferred stock, convertible notes or other convertible or exchangeable securities. Charter acts as the sole manager of Charter Holdco and its direct and indirect limited liability company subsidiaries. Charter...

  • Page 14
    ...in Charter Communications, Inc. and Its Subsidiaries - Equity Put Rights - CC VIII.'' (5) CC V Holdings, LLC, the issuer of $113 million accreted value of senior discount notes, is a direct wholly owned subsidiary of CCO NR Holdings, LLC, and holds 100% of the common membership units of CC VIII, LLC...

  • Page 15
    ... table sets forth information as of December 31, 2004 with respect to the shares of common stock of Charter on an actual outstanding, ''as converted'' and ''fully diluted'' basis: Charter Communications, Inc. Actual Shares Outstanding(a) Assuming Exchange of Charter Holdco Membership Units(b) Number...

  • Page 16
    ... is its sole manager. The following table sets forth the information as of December 31, 2004 with respect to the common units of Charter Holdco on an actual outstanding and ''fully diluted'' basis. Charter Communications Holding Company, LLC(a) Fully Diluted Units Outstanding (assuming exchange or...

  • Page 17
    ... Organizational Structure and Mr. Allen's Investment in Charter Communications, Inc. and Its Subsidiaries - Equity Put Rights - CC VIII.'' PRODUCTS AND SERVICES We offer our customers traditional cable video programming (analog and digital video) as well as high-speed data services and in some areas...

  • Page 18
    ... On Demand and Subscription Video on Demand. We offer VOD service, which allows customers to access hundreds of movies and other programming at any time with digital picture quality. In some systems we also offer subscription VOD (SVOD) for a monthly fee or included in a digital tier premium channel...

  • Page 19
    ... us to offer up to 82 analog channels, and even more channels when our bandwidth is used for digital signal transmissions. Our increased bandwidth also permits two-way communication for Internet access, interactive services, and potentially, telephony services. As part of our systems upgrade and...

  • Page 20
    ... more channels and other services; dedicated bandwidth for two-way services, which avoids reverse signal interference problems that can occur with two-way communication capability; and ( improved picture quality and service reliability. We currently maintain a national network operations center to...

  • Page 21
    ... services; and Promote our bundling of digital video and high-speed data services and pricing strategies. ( ( ( PROGRAMMING General We believe that offering a wide variety of programming is an important factor that inï¬,uences a customer's decision to subscribe to and retain our cable services...

  • Page 22
    ...affect our business and operations. In terms of competition for customers, we view ourselves as a member of the broadband communications industry, which encompasses multi-channel video for television and related broadband services, such as high-speed data and other interactive video services. In the...

  • Page 23
    ...speed Internet access over cable systems. Most telephone companies which already have plant, an existing customer base, and other operational functions in place (such as, billing, service personnel, etc.) offer DSL service. DSL actively markets its service and many providers have offered promotional...

  • Page 24
    ... digital-quality program streams, as well as advanced digital services such as subscription video and data transmission. Traditional Overbuilds Cable systems are operated under non-exclusive franchises granted by local authorities. More than one cable system may legally be built in the same area...

  • Page 25
    ...nation's communications providers. It removed barriers to competition in both the cable television market and the local telephone market. At the same time, the FCC has pursued spectrum licensing options designed to increase competition to the cable industry by wireless multichannel video programming...

  • Page 26
    ... business. It could also affect whether local franchising authorities can collect franchise fees on cable modem service and whether cable systems will have any payment obligations to the federal government's universal service fund and be subject to other common carrier regulations. As the Internet...

  • Page 27
    ... one-way digital televisions. The rules require cable operators to provide ''CableCard'' security modules and support to customer owned digital televisions and similar devices already equipped with built-in settop terminal functionality. Cable operators must support basic home recording rights and...

  • Page 28
    ...our equipment is located. Charter Holdco owns the real property and building for our principal executive offices. The physical components of our cable systems require maintenance as well as periodic upgrades to support the new services and products we introduce. See ''Item 1. Business - Our Network...

  • Page 29
    ...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...

  • Page 30
    ... 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 equal to 150% of the fair market value...

  • Page 31
    ... 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...

  • Page 32
    ... Communications Holding Company, LLC and City of Spartanburg filed on October 29, 2001. The Georgia Class Action is now entitled: Outcome In addition to the matters set forth above, Charter is also party to other lawsuits and claims that arose in the ordinary course of conducting its business...

  • Page 33
    ...of Charter Communications Holdings and its subsidiaries restrict their ability to make distributions to us, and accordingly, limit our ability to declare or pay cash dividends. See ''Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.'' (D) Recent Sales of...

  • Page 34
    ... accounting change Cumulative effect of accounting change, net of tax Net loss Dividends on preferred stock - redeemable Net loss applicable to common stock Loss per common share, basic and diluted Weighted-average common shares outstanding Balance Sheet Data (end of period): Total assets Long-term...

  • Page 35
    ... of systems. Going forward, our goal is to increase revenues by stabilizing our analog video customer base, implementing price increases on certain services and packages and increasing the number of our customers who purchase high-speed data services, digital video and new products and services such...

  • Page 36
    ... our workforce, cable service related expenses, advertising sales costs, franchise fees and expenses related to customer billings. Our income from operations decreased from $516 million for year ended December 31, 2003 to loss from operations of $2.0 billion for the year ended December 31, 2004. We...

  • Page 37
    ... costs and expenses, for the years ended December 31, 2004, 2003 and 2002, respectively. Depreciation is recorded using the straight-line composite method over management's estimate of the estimated useful lives of the related assets as listed below: Cable distribution systems Customer equipment and...

  • Page 38
    ... 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 ï¬,ows, and such estimates include inherent uncertainties, including those relating to the timing...

  • Page 39
    ... of outstanding common units were allocated instead to membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. (the ''Special Loss Allocations'') to the extent of their respective capital account balances. After 2003, under the LLC Agreement, net tax losses of Charter Holdco are...

  • Page 40
    ... of the allocated income or loss among the states in which Charter Holdco does business, and (vi) future federal and state tax laws. Further, in the event of new capital contributions to Charter Holdco, it is possible that the tax effects of the Special Profit Allocations, Special Loss Allocations...

  • Page 41
    ...800 analog video customers, 83,300 digital video customers and 37,800 high-speed data customers sold in the cable system sales to Atlantic Broadband Finance, LLC, which closed in March and April 2004 (collectively, with the cable system sale to WaveDivision Holdings, LLC in October 2003, referred to...

  • Page 42
    ...The increase in programming costs of $70 million, or 6%, for the year ended December 31, 2004 over the year ended December 31, 2003 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...

  • Page 43
    ... options granted and expensed in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. Additionally, during the year ended December 31, 2004, we expensed approximately $8 million related to a stock option exchange program, under which our employees were offered the right to exchange...

  • Page 44
    ...2004 FORM 10-K cations 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. Option compensation expense of $4 million for the year ended...

  • Page 45
    ....92 for the year ended December 31, 2003 primarily as a result of price increases and incremental revenues from advanced services. Average monthly revenue per analog video customer represents total annual revenue, divided by twelve, divided by the average number of analog video customers during the...

  • Page 46
    ... increase in the average number of customers, whereas approximately $13 million related to the increase in the average price of the service. The increase in customers was primarily due to the addition of high-speed data customers in our existing service areas. We were also able to offer this service...

  • Page 47
    ...premium and digital channels and payper-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 offset by decreases in analog and digital video...

  • Page 48
    ... current and future temporary differences, as well as future operating results. The income tax benefit recognized in the year ended December 31, 2002 was directly related to the impairment of franchises associated with the adoption of SFAS No. 142. Cumulative effect of accounting change, net of tax...

  • Page 49
    ...our debt service costs, operating activities and capital requirements through cash ï¬,ows from operating activities, borrowings under the credit facilities of our subsidiaries, sales of assets, issuances of debt and equity securities and cash on hand. However, the mix of funding sources changes from...

  • Page 50
    ... market conditions, increased competition or other unfavorable events. If, at any time, additional capital or borrowing capacity is required beyond amounts internally generated or available under our credit facilities or through additional debt or equity financings, we would consider: ( issuing...

  • Page 51
    ...costs included in the accompanying statement of operations were $1.3 billion, $1.2 billion and $1.2 billion for the years ended December 31, 2004, 2003 and 2002, respectively. Certain of our programming agreements are based on a ï¬,at fee per month or have guaranteed minimum payments. The table sets...

  • Page 52
    ... and upgrade program and purchases of customer premise equipment. See the table below for more details. Upgrading our cable systems has enabled us to offer digital television, high-speed data services, VOD, interactive services, additional channels and tiers, and expanded pay-per-view options to...

  • Page 53
    ...original issue discount at the time of sale plus the accretion to the balance sheet date. (b) In general, the obligors have the right to redeem all of the notes set forth in the above table (except with respect to the 5.875% convertible senior notes due 2009 and the Charter Holdings notes with terms...

  • Page 54
    ... Leverage Ratio (as defined in the indenture governing the Charter Holdings senior notes and senior discount notes) being under 8.75 to 1.0, the Charter Operating credit facilities require that the 11.875% notes due 2008 issued by CC V Holdings, LLC be redeemed. Because such Leverage Ratio was...

  • Page 55
    ... to all existing and future indebtedness and other liabilities of our subsidiaries. Interest is payable semi-annually in arrears. The 5.875% convertible senior notes are convertible at any time at the option of the holder into shares of Class A common stock at an initial conversion rate of 413...

  • Page 56
    ... Holdings notes began to accrue on April 1, 2004. The March 1999 Charter Holdings notes are senior debt obligations of Charter Holdings and Charter Capital. They rank equally with all other current and future unsubordinated obligations of Charter Holdings and Charter Capital. They are structurally...

  • Page 57
    ... 15, 2005. The January 2000 Charter Holdings notes are senior debt obligations of Charter Holdings and Charter Capital. They rank equally with all other current and future unsubordinated obligations of Charter Holdings and Charter Capital. They are structurally subordinated to the obligations of...

  • Page 58
    ... The Charter Holdings 12.125% senior discount notes are redeemable at the option of the issuers at amounts decreasing from 106.063% to 100% of accreted value beginning January 15, 2007. In the event that a specified change of control event occurs, Charter Holdings and Charter Capital must offer to...

  • Page 59
    ... in sale and leaseback transactions unless, at the time of the transaction, Charter Holdings could have incurred secured indebtedness in an amount equal to the present value of the net rental payments to be made under the lease, and the sale of the assets and application of proceeds is permitted by...

  • Page 60
    ... equally with all other current or future unsubordinated obligations of CCH II and CCH II Capital Corp. The CCH II notes are structurally subordinated to all obligations of subsidiaries of CCH II, including the CCO Holdings notes, the Renaissance notes, the CC V Holdings notes, the Charter Operating...

  • Page 61
    ...1.0 leverage ratio test referred to above and there is no default, 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...

  • Page 62
    ... the Renaissance notes, the CC V Holdings notes, the Charter Operating notes and the Charter Operating credit facilities. In the event of specified change of control events, CCO Holdings must offer to purchase the outstanding CCO Holdings senior notes from the holders at a purchase price equal to...

  • Page 63
    ... 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 of CCO Holdings' note guarantee...

  • Page 64
    ... and its restricted subsidiaries are permitted to incur or issue: ( ( Holdings, all of which shall become a common equity capital contribution to Charter Operating on the guarantee and pledge date. The indenture governing the Charter Operating notes permits Charter Operating to incur debt under one...

  • Page 65
    ... indebtedness 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...

  • Page 66
    ...Holdings, LLC Notes.'' Within five business days after the redemption, and provided that such Leverage Condition remains satisfied, 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...

  • Page 67
    ... any asset sale either to commit to use the net cash proceeds over a specified 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 offer to repurchase the CC V Holdings notes with any...

  • Page 68
    ... notes. Renaissance Media Notes The 10% senior discount notes due 2008 were issued by Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Holdings Capital Corporation, with Renaissance Media Group LLC as guarantor and the United States Trust Company of New York...

  • Page 69
    ... markets could be limited when substantial amounts of our indebtedness become due. If our business does not generate sufficient cash ï¬,ow 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...

  • Page 70
    ... debt service costs and ongoing operations. Our ongoing operations will depend on our ability to generate cash and to secure financing in the future. We have historically funded liquidity and capital requirements through cash ï¬,ows from operating activities, borrowings under our credit facilities...

  • Page 71
    .... The foregoing contractual and legal restrictions could limit Charter's ability to make payments of principal and/or interest to the holders of its convertible senior notes. Securities Litigation and Government Investigations. A number of putative federal class action lawsuits have been filed...

  • Page 72
    ... networks that will enable them to begin providing video services, as well as telephony and Internet access services, to residential and business customers. The subscription television industry also faces competition from free broadcast television and from other communications and entertainment...

  • Page 73
    ... of our net operating losses to offset future taxable income. The anticipated issuance of 150 million shares of our Class A common stock offered pursuant to a share lending agreement executed by Charter in connection with the issuance of the 5.875% convertible senior notes in November 2004, as well...

  • Page 74
    ... to the federal government's universal service fund, to comply with 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 regulation...

  • Page 75
    ... rate agreements. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board issued the revised SFAS No. 123, Share-Based Payment, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange...

  • Page 76
    ... reference to the notional amount and the other terms of the contracts. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated financial statements, the related notes thereto, and the reports of independent auditors are included in this annual report beginning on page F-1. ITEM 9. CHANGES...

  • Page 77
    ...'s management and board of directors regarding the preparation and fair presentation of published financial statements. Charter's management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set...

  • Page 78
    ..., Inc., and Sony Pictures Entertainment. Mr. Dolgen holds a B.S. degree from Cornell University and a J.D. degree from New York University. Charles M. Lillis, 63, was elected to the board of directors of Charter in October 2003. Presently, he is the Managing Partner of Lone Tree Capital, which he co...

  • Page 79
    ... a Managing Partner and member of the executive committee at Tory Tory DesLauriers & Binnington, one of Canada's largest law firms. Mr. Tory serves on the board of directors of a number of Canadian companies, including Cara Operations Limited. Mr. Tory was educated at University of Toronto Schools...

  • Page 80
    ... Officer in August 2004. Prior to joining Charter, Mr. Chang was Executive Vice President of the Yankees Entertainment and Sports (YES) Network, a regional sports programming network in New York where he headed corporate development and financing activities from the company's inception in 2001...

  • Page 81
    ... Inc. He began his career in the cable industry in 1980. He attended the State University of New York at Albany. Mr. Davis serves as an advisory board member of Cedar Point Communications, and as a board member of @Security Broadband Corp., a company in which Charter owns an equity investment...

  • Page 82
    ... a one-time signing bonus of $150,000 pursuant to an employment agreement. (10) Mr. Chang's bonus for 2004 represents the 2004 portion of a $150,000 special bonus expected to be paid for co-Interim Chief Financial Officer service through March 31, 2005. Payment of the bonus is conditioned on...

  • Page 83
    ...on a per share market value (closing sale price) of $2.24 for our Class A common stock on December 31, 2004. (23) In addition to items in Note 1 above, includes (i) for 2004, $28,977 attributed to personal use of the corporate airplane, $10,000 as reimbursement for tax advisory services and (ii) for...

  • Page 84
    ... stock options, restricted stock and other incentive compensation under two plans - the 1999 Charter Communications Option Plan and the 2001 Stock Incentive Plan. The 1999 Charter Communications Option Plan provided for the grant of options to purchase membership units in Charter Holdco to current...

  • Page 85
    ...2004, we offered employees of Charter and its subsidiaries the right to exchange all stock options (vested and unvested) 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...

  • Page 86
    ... a suitable committee thereof, Mr. May will be granted options to purchase shares of Charter Class A common stock and/or receive a grant of restricted stock pursuant to the Charter Communications, Inc. 2001 Stock Incentive Plan, the number and terms of which will be determined as soon as practicable...

  • Page 87
    ...employee of Charter. Under the terms of this agreement, Ms. Bellville has the right to receive 65 weeks of base pay based on an annual base of $625,000, plus usual compensation for all accrued vacation and other leave time. Her options to purchase 700,000 shares of Class A common stock will continue...

  • Page 88
    ... from any one-time, special or enhanced severance programs that may be approved by us from time to time. Our senior executives are eligible to receive bonuses according to our 2005 Executive Bonus Plan. Under this plan, our executive officers and certain other management and professional employees...

  • Page 89
    ...Charter Communications Option Plan and the 2001 Stock Incentive Plan. Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act. The beneficial owners at December 31, 2004 of Class B common stock, Charter Holdco membership units and convertible senior notes of Charter...

  • Page 90
    ...1999 Charter Communications Option Plan. When vested, these options are exercisable for membership units of Charter Holdco, which are immediately exchanged on a one-for-one basis for shares of Charter Class A common stock. A person is also deemed to have the right to acquire shares of Class A common...

  • Page 91
    ... of our digital cable channels as partial consideration for a 1999 capital contribution of approximately $1.3 billion. Certain sellers of cable systems that we acquired were granted, or previously had the right, as described below, to put to Paul Allen equity in Charter and CC VIII, LLC issued to...

  • Page 92
    ... our cable systems. For the year ended December 31, 2004, Charter paid Viacom approximately $194 million for programming and Charter recorded as receivables approximately $8 million from Viacom for launch incentives and marketing support. We paid $344,800 to purchase certain access/network equipment...

  • Page 93
    ... due if Charter Holdco had allocated profits and losses among its members based generally on the number of common membership units. See ''Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Income Taxes.'' 83

  • Page 94
    ...rights for carriage of up to eight digital cable television programming services or channels on each of the digital cable systems with local and to the extent available, national control of the digital product owned, operated, controlled or managed by Charter or its subsidiaries now or in the future...

  • Page 95
    ... sports programming; as an owner of the business of Interactive Broadcaster Services Corporation or, Chat TV, an investment in @Security Broadband Corp., a company developing broadband security applications; and incidental businesses engaged in as of the closing of Charter's initial public offering...

  • Page 96
    ... to make payment of outstanding launch receivables due to Charter Holdco under the affiliation agreement, (ii) Vulcan Programming to pay approximately $10 million and purchase over a 24-month period, at fair market rates, $2 million of advertising time across various cable networks on Charter cable...

  • Page 97
    ...including capital calls, and may require Vulcan Ventures, through January 24, 2004, to make certain additional contributions through DBroadband Holdings, LLC to acquire additional equity in Digeo as necessary to maintain Charter Ventures' pro rata interest in Digeo in the event of certain future 87

  • Page 98
    ... 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. On June 30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for the purchase of 100,000 digital video recorder (''DVR'') units. The software...

  • Page 99
    ... Movie Channel, and Flix, Viacom provides Charter with programming for distribution via our cable systems. The affiliation agreements provide for, among other things, rates and terms of carriage, advertising on the Viacom networks, which Charter can sell to local advertisers and marketing support...

  • Page 100
    ... charter set forth in Appendix A of our 2004 Proxy Statement filed with the SEC on June 25, 2004. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following documents are filed as part of this annual report: (1) Financial Statements. A listing of the financial statements, notes...

  • Page 101
    ... Executive Officer Date: March 1, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Charter Communications, Inc. and in the capacities and on the dates indicated. Signature Title Date /s/ PAUL G. ALLEN...

  • Page 102
    ...led by Enstar Income Program II-1, L.P. on April 26, 2002 (File No. 000-14508)). Purchase Agreement, dated May 29, 2003, by and between Falcon Video Communications, L.P. and WaveDivision Holdings, LLC (incorporated by reference to Exhibit 2.1 to Charter Communications, Inc.'s current report on Form...

  • Page 103
    ...November 22, 2004, by and between Charter Communications, Inc. and Charter Communications Holding Company, LLC (incorporated by reference to Exhibit 10.7 to the current report on Form 8-K of Charter Communications, Inc. filed on November 30, 2004 (File No. 000-27927)). Unit Lending Agreement, dated...

  • Page 104
    ... 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 June 1, 2001 (File...

  • Page 105
    ... Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 11.750% Senior Discount Notes due 2011 (incorporated by reference to Exhibit 10.4(a) to the current report on Form 8-K filed by Charter Communications, Inc. on June 1, 2001 (File...

  • Page 106
    ... the Amended and Restated Limited Liability Company Agreement of Charter Communications Holding Company, LLC, dated as of November 22, 2004 (incorporated by reference to Exhibit 10.10 to the current report on Form 8-K of Charter Communications, Inc. filed on November 30, 2004 (File No. 000-27927...

  • Page 107
    ... of Long-Term Incentive Program to the Charter Communications, Inc. 2001 Stock Incentive Plan (incorporated by reference to Exhibit 10.11(g) to the annual report on Form 10-K of Charter Communications, Inc. filed on March 15, 2004 (File No. 000-27927)). (a)†Employment Offer Letter, dated...

  • Page 108
    ... Action, Arthur J. Cohn v. Ronald L. Nelson et al and Charter Communications, Inc. Description of Charter Communications, Inc. 2005 Executive Bonus Plan. Code of Conduct adopted January 28, 2003 (incorporated by reference to Exhibit 14.1 to the annual report on Form 10-K of Charter Communications...

  • Page 109
    ... of Independent Registered Public Accounting Firm - Internal Controls over Financial Reporting Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Shareholders...

  • Page 110
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors Charter Communications, Inc.: We have audited the accompanying consolidated balance sheets of Charter Communications, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes...

  • Page 111
    ... Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in...

  • Page 112
    ... Total current liabilities Long-Term Debt Deferred Management Fees - Related Party Other Long-Term Liabilities Minority Interest Preferred Stock - Redeemable; $.001 par value; 1 million shares authorized; 545,259 shares issued and outstanding Shareholders' Deficit: Class A Common stock; $.001...

  • Page 113
    ... of accounting change Income Tax Benefit Loss before cumulative effect of accounting change Cumulative Effect of Accounting Change, Net of Tax Net loss Dividends on preferred stock - redeemable Net loss applicable to common stock Loss Per Common Share, basic and diluted Weighted average common...

  • Page 114
    ... stock - redeemable Net loss Balance, December 31, 2003 Changes in fair value of interest rate agreements Option compensation expense, net Issuance of common stock in exchange for convertible notes Dividends on preferred stock - redeemable Net loss Balance, December 31, 2004 The accompanying notes...

  • Page 115
    ... deferred management fees Net cash ï¬,ows from operating activities Cash Flows From Investing Activities: Purchases of property, plant and equipment Change in accrued expenses related to capital expenditures Proceeds from sale of systems Payments for acquisitions, net of cash acquired Purchases of...

  • Page 116
    ... 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 data services and, in some areas, advanced broadband services such as high de...

  • Page 117
    ...on Charter's 5.875% convertible senior notes. Sale of Assets In March 2004, the Company closed the sale of certain cable systems in Florida, Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC. The Company closed the sale of an additional cable system in New York to...

  • Page 118
    ...(continued) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Franchises Franchise rights represent the value attributed to agreements with local authorities that allow access to homes in cable service areas acquired through the purchase of cable systems. Management estimates the fair value of franchise...

  • Page 119
    ... a corresponding operating expense. Programming Costs The Company has various contracts to obtain analog, digital and premium video programming from program suppliers whose compensation is typically based on a ï¬,at fee per customer. The cost of the right to exhibit network programming under such...

  • Page 120
    ... Costs Advertising costs associated with marketing the Company's products and services are generally expensed as costs are incurred. Such advertising expense was $72 million, $62 million and $60 million for the years ended December 31, 2004, 2003 and 2002, respectively. Stock-Based Compensation...

  • Page 121
    ... I, LLC purchased all of Enstar Income Program II-1, L.P.'s Illinois cable systems, serving approximately 6,400 (unaudited) customers, for a cash purchase price of $15 million. Enstar Communications Corporation, a direct subsidiary of Charter Holdco, is a general partner of the Enstar limited...

  • Page 122
    ... relationships, for valuation purposes, represent the value of the business relationship with existing customers and are calculated by projecting future after-tax cash ï¬,ows from these customers including the right to deploy and market additional services such as interactivity and telephony to...

  • Page 123
    ... primarily as a result of increased competition from direct broadcast satellite providers and decreased growth rates in the Company's high-speed data customers in the third quarter of 2004, in part, as a result of increased competition from digital subscriber line service providers led to the lower...

  • Page 124
    ...the following as of December 31, 2004 and 2003: 2004 Face Value Accreted Value CC V Holdings, LLC: 11.875% senior discount notes due 2008 Credit Facilities Charter Operating CC VI Operating Falcon Cable 113 113 113 113 Long-Term Debt Charter Communications, Inc.: 5.75% convertible senior notes...

  • Page 125
    ... sale of the notes to purchase a portfolio of U.S. government securities in an amount which the Company believes will be sufficient to make the first six interest payments on the notes. These government securities were pledged to the Company as security for a mirror note issued by Charter Holdco...

  • Page 126
    ... 2004 sale of the $862.5 million principal amount of 5.875% convertible senior notes due 2009, Charter Holdco issued to Charter mirror notes in identical principal amount in exchange for the proceeds from its offering. Charter Holdco then purchased and pledged certain U.S. government securities...

  • Page 127
    ... 15, 2005. The January 2000 Charter Holdings notes are senior debt obligations of Charter Holdings and Charter Capital. They rank equally with all other current and future unsubordinated obligations of Charter Holdings and Charter Capital. They are structurally subordinated to the obligations of...

  • Page 128
    .... The Charter Holdings 12.125% senior discount notes are redeemable at the option of the issuers at amounts decreasing from 106.063% to 100% of accreted value beginning January 15, 2007. In the event that a specified change of control event occurs, Charter Holdings and Charter Capital must offer to...

  • Page 129
    ... or activities by CCO Holdings and its restricted subsidiaries. Substantially all of CCO Holdings' direct and indirect subsidiaries are currently restricted subsidiaries. Charter Operating Notes. On April 27, 2004, Charter Operating and Charter Communications Operating Capital Corp. jointly issued...

  • Page 130
    ... into sale-leasebacks; in the case of restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to the bond issuers, guarantee their parent companies debt, or issue specified equity interests; ( ( ( Charter Operating Credit Facilities. In April 2004, Charter...

  • Page 131
    ... holding companies between Charter Holdings and Charter Operating. In 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 effect under the Charter Operating credit facilities...

  • Page 132
    ... rights of secured creditors. In any such case, the Company might not be able to repay or make any payments on its notes. Additionally, an acceleration or payment default under Charter Operating's credit facilities would cause a cross-default in the indentures governing the Charter Holdings notes...

  • Page 133
    .... If for any reason Charter fails to pay the dividends on the Preferred Stock on a timely basis, the dividend rate on each share increases to an annual rate of 7.75% until the payment is made. The Preferred Stock is redeemable by Charter at its option on or after August 31, 2004 and must be redeemed...

  • Page 134
    ... of the Company's debt and related interest rate agreements at December 31, 2004 and 2003 is as follows: 2004 Carrying Value Fair Value Carrying Value 2003 Fair Value Debt Charter convertible notes Charter Holdings debt CCH II debt CCO Holdings debt Charter Operating debt Credit facilities Other...

  • Page 135
    ...the activity for the Company's stock options, excluding granted shares of restricted Class A common stock, for the years ended December 31, 2004, 2003 and 2002, is as follows (amounts in thousands, except per share data): 2004 Weighted Average Exercise Price 2003 Weighted Average Exercise Price 2002...

  • Page 136
    ... date of grant. In January 2004, the Company began an option exchange program in which the Company offered its employees the right to exchange all stock options (vested and unvested) under the 1999 Charter Communications Option Plan and 2001 Stock Incentive Plan that had an exercise price over $10...

  • Page 137
    ...high-speed data customers to Charter Pipeline service in 2001. For the year ended December 31, 2004, special charges include approximately $85 million, representing the aggregate value of the Charter Class A common stock and warrants to purchase Charter Class A common stock contemplated to be issued...

  • Page 138
    ... of the allocated income or loss among the states in which Charter Holdco does business, and (vi) future federal and state tax laws. Further, in the event of new capital contributions to Charter Holdco, it is possible that the tax effects of the Special Profit Allocations, Special Loss Allocations...

  • Page 139
    ... stock (including upon an exchange by Paul Allen or his affiliates, directly or indirectly, of membership units of Charter Holdco into CCI common stock). Many of the foregoing transactions are beyond management's control. The total valuation allowance for deferred tax assets as of December 31, 2004...

  • Page 140
    ... million related to dividends on the mirror preferred membership units. Further, during 2004 Charter Holdco issued 7,252,818 common membership units to Charter in cancellation of $30 million principal amount of mirror notes so as to mirror the issuance by Charter of Class A common stock in exchange...

  • Page 141
    ... to make payment of outstanding launch receivables due to Charter Holdco under the affiliation agreement, (ii) Vulcan Programming to pay approximately $10 million and purchase over a 24-month period, at fair market rates, $2 million of advertising time across various cable networks on Charter cable...

  • Page 142
    ... capital calls, and may require Vulcan Ventures, through January 24, 2004, to make certain additional contributions through DBroadband Holdings, LLC to acquire additional equity in Digeo as necessary to maintain Charter Ventures' pro rata interest in Digeo in the event of certain future Digeo...

  • Page 143
    ...programming, including live sports, sitcoms, dramas, action series, documentaries, travel programs, music concerts and shows, special events, and news features including HDNet World Report. HDNet also offers a selection of classic and recent television series. The Company paid HDNet and HDNet Movies...

  • Page 144
    ... 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 annual report...

  • Page 145
    ... 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 Class Action. Motions to dismiss the Consolidated Amended Complaint were filed. On February 10, 2004, in response to...

  • Page 146
    ... Charter 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 target of the investigation. Charter was also advised by the U.S. Attorney's Office that no current...

  • Page 147
    ... structure governing the nation's communications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming...

  • Page 148
    ... notes Deferred income taxes Losses in excess of investment Other long term liabilities Preferred stock - redeemable Shareholders' deficit Total liabilities and shareholders' deficit $ 20 990 6 4,406 22 55 (4,406) $ $ $ 1,093 $ Condensed Statement of Operations Year Ended December 31, 2004...

  • Page 149
    ... statement of operations: Year Ended December 31, 2004 First Quarter Second Quarter Third Quarter Fourth Quarter Revenues Income (loss) from operations Loss before minority interest and income taxes Net loss applicable to common stock Basic and diluted loss per common share Weighted-average shares...

  • Page 150
    ... Company management and the Board of Directors to measure our ability to fund operations and our financing obligations. For this reason, it is a significant component of Charter's annual incentive compensation program. However, this measure is limited in that it does not reflect the periodic costs...

  • Page 151
    ..., Programming Michael J. Lovett Executive Vice President and Chief Operating Officer David C. Andersen Senior Vice President, Communications Thomas J. Hearity Senior Vice President, Acting General Counsel and Secretary James M. Heneghan Senior Vice President, Marketing and Advertising Sales Paul...

  • Page 152
    ... Charter Communications, Inc. Charter Plaza 12405 Powerscourt Drive St. Louis, MO 63131-3674 314.965.0555 www.charter.com Charter's Web site contains an Investor Center that offers financial information, including stock data, press releases, access to quarterly conference calls and SEC filings...