Charter 2004 Annual Report Download - page 72

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
and wire fraud charges and are awaiting sentencing. We are video services, as well as telephony and Internet access services,
fully cooperating with the investigation. to residential and business customers. The subscription television
On November 4, 2002, we received an informal, non-public industry also faces competition from free broadcast television
inquiry from the staff of the SEC. The SEC issued a formal and from other communications and entertainment media. With
order of investigation dated January 23, 2003, and subsequently respect to our Internet access services, we face competition,
served document and testimony subpoenas on Charter and a including intensive marketing efforts and aggressive pricing, from
number of its former employees. The investigation and subpoe- telephone companies and other providers of ‘‘dial-up’’ and
nas generally concerned our prior reports with respect to our digital subscriber line technology, also known as DSL. Further
determination of the number of customers and various of our loss of customers to DBS or other alternative video and data
accounting policies and practices including our capitalization of services and marketing efforts to retain customers and combat
certain expenses and dealings with certain vendors, including that loss could have a material negative impact on the value of
programmers and digital set-top terminal suppliers. On July 27, our business and its performance.
2004, the SEC and Charter reached a final agreement to settle Mergers, joint ventures and alliances among franchised,
the investigation. In the Settlement Agreement and Cease and wireless or private cable operators, satellite television providers,
Desist Order, Charter agreed to entry of an administrative order local exchange carriers and others, and the repeal of certain
prohibiting any future violations of United States securities laws ownership rules may provide additional benefits to some of our
and requiring certain other remedial internal practices and competitors, either through access to financing, resources or
public disclosures. Charter neither admitted nor denied any efficiencies of scale, or the ability to provide multiple services in
wrongdoing, and the SEC assessed no fine against Charter. direct competition with us.
Moreover, due to the inherent uncertainties of litigation and Long-Term Indebtedness — Change of Control Pay-
investigations, and due to the remaining conditions to the ments. We may not have the ability to raise the funds
finalization of our anticipated settlements, we cannot predict necessary to fulfill our obligations under Charter’s convertible
with certainty the ultimate outcome of these proceedings. An senior notes, our senior and senior discount notes and our credit
unfavorable outcome in the lawsuits or the government investi- facilities following a change of control. Under the indentures
gation described above could result in substantial potential governing the Charter convertible senior notes, upon the
liabilities and have a material adverse effect on our consolidated occurrence of specified change of control events, including
financial condition and results of operations or our liquidity. certain specified dispositions of stock by Mr. Allen, Charter is
Further, these proceedings, and our actions in response to these required to offer to repurchase all of the outstanding Charter
proceedings, could result in substantial additional defense costs convertible senior notes. However, we may not have sufficient
and the diversion of management’s attention, and could funds at the time of the change of control event to make the
adversely affect our ability to execute our business and financial required repurchase of the Charter convertible senior notes and
strategies. Charter’s subsidiaries are limited in their ability to make
Competition. The industry in which we operate is distributions or other payments to Charter to fund any required
highly competitive, and has been more so in recent years. In repurchase. In addition, a change of control under our credit
some instances, we compete against companies with fewer facilities and indentures governing our notes would require the
regulatory burdens, easier access to financing, greater personnel repayment of borrowings under those credit facilities and
resources, greater brand name recognition and long-established indentures. Because such credit facilities and notes are obliga-
relationships with regulatory authorities and customers. Increas- tions of Charter’s subsidiaries, the credit facilities and the notes
ing consolidation in the cable industry and the repeal of certain would have to be repaid by Charter’s subsidiaries before their
ownership rules may provide additional benefits to certain of assets could be available to Charter to repurchase the Charter
our competitors, either through access to financing, resources or convertible senior notes. Charter’s failure to make or complete a
efficiencies of scale. change of control offer would place it in default under the
Our principal competitor for video services throughout our Charter convertible senior notes. The failure of Charter’s
territory is direct broadcast satellite television services, also subsidiaries to make a change of control offer or repay the
known as DBS. Competition from DBS, including intensive amounts outstanding under their credit facilities would place
marketing efforts, aggressive pricing, and the ability of DBS to them in default under these agreements and could result in a
provide certain services that we are in the process of developing, default under the indentures governing the Charter convertible
has had an adverse impact on our ability to retain customers. senior notes. See ‘‘— Certain Trends and Uncertainties —
DBS has grown rapidly over the last several years and Liquidity.’’
continues to do so. The cable industry, including Charter, has Variable Interest Rates. At December 31, 2004, exclud-
lost a significant number of subscribers to DBS competition, and ing the effects of hedging, approximately 31% of our debt bears
we face serious challenges in this area on a going forward basis. interest at variable rates that are linked to short-term interest
Local telephone companies and electric utilities can compete in rates. In addition, a significant portion of our existing debt,
this area, and they increasingly may do so in the future. Certain assumed debt or debt we might arrange in the future will bear
telephone companies have begun more extensive deployment of interest at variable rates. If interest rates rise, our costs relative
fiber in their networks that will enable them to begin providing to those obligations will also rise. As of December 31, 2004 and
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