Charter 2004 Annual Report Download - page 36

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
which have historically increased at rates in excess of inflation began to absorb substantially all future losses before income
and are expected to continue to increase. See ‘‘Business — taxes that otherwise would have been allocated to minority
Programming’’ for more details. We are attempting to control interest. This resulted in an additional $2.4 billion of net loss for
our costs of operations by maintaining strict controls on the year ended December 31, 2004. Under our existing capital
expenses. More specifically, we are focused on managing our structure, future losses will continue to be absorbed by Charter.
cost structure by renegotiating programming agreements to
Critical Accounting Policies and Estimates
reduce the rate of historical increases in programming cost,
Certain of our accounting policies require our management to
managing our workforce to control increases and improve
make difficult, subjective or complex judgments. Management
productivity, and leveraging our size in purchasing activities.
has discussed these policies with the Audit Committee of
Our expenses primarily consist of operating costs, selling,
Charter’s board of directors and the Audit Committee has
general and administrative expenses, depreciation and amortiza-
reviewed the following disclosure. We consider the following
tion expense and interest expense. Operating costs primarily
policies to be the most critical in understanding the estimates,
include programming costs, the cost of our workforce, cable
assumptions and judgments that are involved in preparing our
service related expenses, advertising sales costs, franchise fees
financial statements and the uncertainties that could affect our
and expenses related to customer billings. Our income from
results of operations, financial condition and cash flows:
operations decreased from $516 million for year ended Decem-
ber 31, 2003 to loss from operations of $2.0 billion for the year (Capitalization of labor and overhead costs;
ended December 31, 2004. We had a negative operating margin
(Useful lives of property, plant and equipment;
(defined as income (loss) from operations divided by revenues)
of 41% for the year ended December 31, 2004 whereas for the (Impairment of property, plant, and equipment, franchises,
year ended December 31, 2003, we had a positive operating and goodwill;
margin of 11%. The decline in income from operations and (Income taxes; and
operating margin for the year end December 31, 2004 is
(Litigation.
principally due to the impairment of franchises of $2.4 billion
recorded in the third quarter of 2004. The year ended In addition, there are other items within our financial
December 31, 2004 also includes a gain on the sale of certain statements that require estimates or judgment but are not
cable systems to Atlantic Broadband Finance, LLC which is deemed critical, such as the allowance for doubtful accounts, but
substantially offset by an increase in option compensation changes in judgment, or estimates in these other items could
expense and special charges when compared to the year ended also have a material impact on our financial statements.
December 31, 2003. For the year ended December 31, 2003, Capitalization of labor and overhead costs. The cable
income from operations was $516 million and for the year industry is capital intensive, and a large portion of our resources
ended December 31, 2002, our loss from operations was are spent on capital activities associated with extending, rebuild-
$4.3 billion. Operating margin was 11% for the year ended ing, and upgrading our cable network. As of December 31, 2004
December 31, 2003, whereas for the year ending December 31, and 2003, the net carrying amount of our property, plant and
2002, we had negative operating margin of 95%. The improve- equipment (consisting primarily of cable network assets) was
ment in income from operations and operating margin from approximately $6.3 billion (representing 36% of total assets) and
2002 to 2003 was principally due to a $4.6 billion franchise $7.0 billion (representing 33% of total assets), respectively. Total
impairment charge in the fourth quarter of 2002 which did not capital expenditures for the years ended December 31, 2004,
recur in 2003 and the recognition of gains in 2003 of 2003 and 2002 were approximately $924 million, $854 million
$93 million related to unfavorable contracts and other settle- and $2.2 billion, respectively.
ments and gain on sale of system. Although we do not expect Costs associated with network construction, initial customer
charges for impairment in the future of comparable magnitude, installations, installation refurbishments and the addition of
potential charges could occur due to changes in market network equipment necessary to provide advanced services are
conditions. capitalized. Costs capitalized as part of initial customer installa-
We have a history of net losses. Further, we expect to tions include materials, direct labor, and certain indirect costs.
continue to report net losses for the foreseeable future. Our net These indirect costs are associated with the activities of
losses are principally attributable to insufficient revenue to cover personnel who assist in connecting and activating the new
the interest costs on our high level of debt, the depreciation service and consist of compensation and overhead costs associ-
expenses that we incur resulting from the capital investments we ated with these support functions. The costs of disconnecting
have made in our cable properties, and the amortization and service at a customer’s dwelling or reconnecting service to a
impairment of our franchise intangibles. We expect that these previously installed dwelling are charged to operating expense in
expenses (other than impairment of franchises) will remain the period incurred. Costs for repairs and maintenance are
significant, and we therefore expect to continue to report net charged to operating expense as incurred, while equipment
losses for the foreseeable future. Additionally, because minority replacement and betterments, including replacement of cable
interest in Charter Holdco was substantially eliminated at drops from the pole to the dwelling, are capitalized.
December 31, 2003, beginning in the first quarter of 2004, we
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