Charter 2004 Annual Report Download - page 73

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
December 31, 2003, the weighted average interest rate on the to remove such programming channels from our line-up, which
credit facility debt was approximately 6.8% and 5.4%, the could result in a further loss of customers. In addition, our
weighted average interest rate on the high-yield debt was inability to fully pass these programming cost increases on to
approximately 9.2% and 10.3%, and the weighted average our customers would have an adverse impact on our cash flow
interest rate on the convertible debt was approximately 5.7% and operating margins.
and 5.5%, respectively, resulting in a blended weighted average Utilization of Net Operating Loss Carryforwards. As
interest rate of 8.8% and 8.2%, respectively. Approximately 83% of December 31, 2004, we had approximately $5.2 billion of tax
of our debt was effectively fixed including the effects of our net operating losses (resulting in a gross deferred tax asset of
interest rate hedge agreements as of December 31, 2004 approximately $2.1 billion), expiring in the years 2005 through
compared to approximately 80% at December 31, 2003. 2024. Due to uncertainties in projected future taxable income,
Services. We expect that a substantial portion of our valuation allowances have been established against the gross
near-term growth will be achieved through revenues from high- deferred tax assets for book accounting purposes except for
speed data services, digital video, bundled service packages, and deferred benefits available to offset certain deferred tax liabilities.
to a lesser extent various commercial services that take Currently, such tax net operating losses can accumulate and be
advantage of cable’s broadband capacity. We may not be able to used to offset any of our future taxable income. An ‘‘ownership
offer these advanced services successfully to our customers or change’’ as defined in the applicable federal income tax rules,
provide adequate customer service and these advanced services would place significant limitations, on an annual basis, on the
may not generate adequate revenues. Also, if the vendors we use use of such net operating losses to offset any future taxable
for these services are not financially viable over time, we may income we may generate. Such limitations, in conjunction with
experience disruption of service and incur costs to find the net operating loss expiration provisions, could effectively
alternative vendors. In addition, the technology involved in our eliminate our ability to use a substantial portion of our net
product and service offerings generally requires that we have operating losses to offset future taxable income.
permission to use intellectual property and that such property The anticipated issuance of 150 million shares of our
not infringe on rights claimed by others. If it is determined that Class A common stock offered pursuant to a share lending
the product or service being utilized infringes on the rights of agreement executed by Charter in connection with the issuance
others, we may be sued or be precluded from using the of the 5.875% convertible senior notes in November 2004, as
technology. well as possible future conversions of our convertible notes,
Increasing Programming Costs. Programming has significantly increases the risk that we will experience an
been, and is expected to continue to be, our largest operating ownership change in the future for tax purposes, resulting in a
expense item. In recent years, the cable industry has experienced material limitation on the use of a substantial amount of our
a rapid escalation in the cost of programming, particularly sports existing net operating loss carryforwards. We do not believe that
programming. We expect programming costs to continue to the issuance of shares associated with the share lending
increase because of a variety of factors, including inflationary or agreement would result in our experiencing an ownership
negotiated annual increases, additional programming being change. However, future transactions and the timing of such
provided to customers and increased costs to purchase or transactions could cause an ownership change. Such transactions
produce programming. The inability to fully pass these pro- include additional issuances of common stock by us (including
gramming cost increases on to our customers would have an but not limited to issuances upon future conversion of our
adverse impact on our cash flow and operating margins. As 5.875% convertible senior notes or as contemplated in the
measured by programming costs, and excluding premium proposed settlement of derivative class action litigation), reacqui-
services (substantially all of which were renegotiated and sitions of the borrowed shares by us, or acquisitions or sales of
renewed in 2003), as of December 31, 2004 approximately 10% shares by certain holders of our shares, including persons who
of our current programming contracts were expired, and have held, currently hold, or accumulate in the future five
approximately another 34% are scheduled to expire by the end percent or more of our outstanding stock (including upon an
of 2005. There can be no assurance that these agreements will exchange by Paul Allen or his affiliates, directly or indirectly, of
be renewed on favorable or comparable terms. To the extent membership units of Charter Holdco into our Class A common
that we are unable to reach agreement with certain program- stock). Many of the foregoing transactions are beyond our
mers on terms that we believe are reasonable we may be forced control.
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