Charter 2005 Annual Report Download

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2005 Annual Report
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Table of contents

  • Page 1
    focus execute deliver 2005 Annual Report

  • Page 2
    ...clear digital picture and sound, as well as personalized features that make entertainment more interactive. Charter High-Speedâ„¢ Charter High-Speed Internet service is reliable, alwayson service that, in many markets, offers downloads up to 100 times faster than the competition. Charter Telephone...

  • Page 3
    ...favorite shows, sports and movies. Charter Businessâ„¢ Charter Business provides scalable, tailored, and cost-effective broadband communications solutions to organizations of all sizes through businessto-business Internet, data networking, telephone, video and music services. 2005 Annual Report 1

  • Page 4
    ... a stronger company executing clear strategies for on demand, high-definition television, and digital video growth. Backed by our talented recording, allowed us to both employees, our senior leadership attract new customers and team is focused on profitable increase average monthly growth. We are...

  • Page 5
    ...We plan to grow sales and improve retention by providing attractive products and services and investing in targeted marketing programs. We will continue to place a high priority on the ongoing roll-out of telephone service and on achieving increased telephone penetration so that we can offer bundled...

  • Page 6
    ... Units: Analog video customers Digital video customers Residential high-speed Internet customers Telephone customers Total revenue generating units 5,884,500 2,796,600 2,196,400 121,500 10,999,000 5,991,500 2,674,700 1,884,400 45,400 10,596,000 Video Cable Services: Analog Video: Estimated homes...

  • Page 7
    ... St. Louis, Missouri 63131 (Address of principal executive offices including zip code) (314) 965-0555 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Class A Common...

  • Page 8

  • Page 9
    ...14 Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services 73 78 88 91 98 PART IV Item 15 Exhibits and Financial Statement Schedules...

  • Page 10
    ... we make in this annual report are set forth in this annual report and in other reports or documents that we file from time to time with the United States Securities and Exchange Commission, or SEC, and include, but are not limited to: ( ( increasingly aggressive competition from other service...

  • Page 11
    ... company operating in the United States, with approximately 6.16 million customers at December 31, 2005. Through our broadband network of coaxial and fiber optic cable, we offer our customers traditional cable video programming (analog and digital, which we refer to as ''video'' service), high-speed...

  • Page 12
    ... for new debt securities; ( the August 2005 sale by our subsidiaries, CCO Holdings and CCO Holdings Capital Corp., of $300 million of 8 3/4% senior notes due 2013; the March and June 2005 issuance of $333 million of Charter Communications Operating, LLC (''Charter Operating'') notes in exchange for...

  • Page 13
    ... primary residential customer base, we will strive to expand the marketing of our video and high-speed Internet services to the business community and introduce telephone service, which we believe has growth potential. Operating and Capital Effectiveness We plan to further capitalize on initiatives...

  • Page 14
    ... value of senior discount notes) 100% CC VII companies CCO NR Holdings, LLC 100% CC VI companies 100% common equity CC V Holdings, LLC 100% Class B units CC VIII, LLC ("CC VIII") 30% Preferred Equity in CC VIII, LLC (4) 70% Preferred Equity in CC VIII, LLC (4) Charter acts as the sole manager...

  • Page 15
    ...management services agreement. The following table sets forth information as of December 31, 2005 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...

  • Page 16
    ..., at any time, for Charter Holdco Class A Common units at a rate equal to the then accreted value, divided by $2.00. See ''Item 13. Certain Relationships and Related Transactions - Transactions Arising Out of Our Organizational Structure and Mr. Allen's Investment in Charter Communications, Inc. and...

  • Page 17
    ...% of the voting power of Charter Holdco and is its sole manager. The following table sets forth the information as of December 31, 2005 with respect to the common units of Charter Holdco on an actual outstanding and ''fully diluted'' basis. Charter Communications Holding Company, LLC Fully Diluted...

  • Page 18
    ...well as high-speed Internet services. We sell our video programming and high-speed Internet services on a subscription basis, with prices and related charges, that vary primarily based on the types of service selected, whether the services are sold as a ''bundle'' versus on an ''` a la carte'' basis...

  • Page 19
    ...our high-speed Internet service. (f) ''Residential telephone customers'' include all households receiving telephone service. (a) Video Services Our video service offerings include the following: ( number of premium channel packages and we offer premium channels with our advanced services. ( Basic...

  • Page 20
    ... commercial customers primarily via cable modems attached to personal computers. We generally offer our high-speed Internet service as Charter High-Speed InternetTM. We also offer traditional dial-up Internet access in a very limited number of our markets. We ended 2005 with 20% penetration of high...

  • Page 21
    ... offered at monthly price ranges, excluding franchise fees and other taxes, as follows: Price Range as of December 31, 2005 Service Analog video packages Premium channels Pay-per-view events Digital video packages (including high-speed Internet service for higher tiers) High-speed Internet service...

  • Page 22
    ..., marketing, programming contract administration and Internet service, network and circuits administration. We operate with four divisions. Each division is supported by operational, financial, customer care, marketing and engineering functions. CUSTOMER CARE Our customer care centers are managed...

  • Page 23
    ...of margins despite increasing programming costs, we plan to continue to migrate certain program services from our analog level of service to our digital tiers. As we migrate our programming to our digital tier packages, certain programming that was previously available to all of our customers via an...

  • Page 24
    ...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 Internet, telephone and other interactive video services...

  • Page 25
    ... and Internet access service. At least one major telephone company plans to provide Internet protocol video over its upgraded network and contends that its use of this technology should allow it to provide video service without a cable franchise as required under Title VI of the Communications Act...

  • Page 26
    ... structure governing the 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...

  • Page 27
    .... The regulations currently restrict the prices that cable systems charge for the minimum level of video programming service, referred to as ''basic service'', and associated equipment. All other cable offerings are now universally exempt from rate regulation. Although basic rate regulation operates...

  • Page 28
    ...at the FCC and Congress that would require cable operators offering Internet service to provide non-discriminatory access to its network to competing Internet service providers. In a 2005 ruling, commonly referred to as Brand X, the Supreme Court upheld an FCC decision making it less likely that any...

  • Page 29
    .... The specific terms and conditions of cable franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, franchise fees, system construction, maintenance, technical performance, and customer service standards. A number of states subject...

  • Page 30
    ... system design and support, internal audit, purchasing, customer care, marketing and programming contract administration and oversight and coordination of external auditors and consultants and related professional fees. The corporate office performs these services on a cost reimbursement basis...

  • Page 31
    ... to payments on our debt, which will reduce our funds available for working capital, capital expenditures and other general corporate expenses; limit our flexibility in planning for, or reacting to, changes in our business, the cable and telecommunications industries and the economy at large; place...

  • Page 32
    ... and high bandwidth Internet access services, to residential and business customers and they are now offering such service in limited areas. Some of these telephone companies have obtained, and are now seeking, franchises or operating authorizations that are less burdensome than existing Charter...

  • Page 33
    ... order to attract new customers, from time to time we make promotional offers, including offers of temporarily reduced-price or free service. These promotional programs result in significant advertising, programming and operating expenses, and also require us to make capital expenditures to acquire...

  • Page 34
    ... and our growth, our financial condition and our results of operations could suffer materially. If a court determines that the Class B common stock is no longer entitled to special voting rights, we would lose our rights to manage Charter Holdco. In addition to the investment company risks discussed...

  • Page 35
    ... sale of all or substantially all of our assets. Mr. Allen is not restricted from investing in, and has invested in, and engaged in, other businesses involving or related to the operation of cable television systems, video programming, high-speed Internet service, telephone or business and financial...

  • Page 36
    ... equal employment opportunity, technical standards and customer service requirements. ( ( ( franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and...

  • Page 37
    ... response to increasing costs, our losses would increase. There has been considerable legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an a ´ la carte basis or to at least offer a separately available child-friendly ''Family Tier...

  • Page 38
    ... 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 Technology.'' We believe that our properties are generally in good operating condition...

  • Page 39
    ... 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.'' High Low...

  • Page 40
    ... $454 million and $2.4 billion of net losses for the years ended December 31, 2005 and 2004, respectively. Under our existing capital structure, Charter will absorb all future losses. Paul G. Allen indirectly holds the preferred membership units in CC VIII. There was an issue regarding the ultimate...

  • Page 41
    ... of Operations Approximately 86% of our revenues for each of the years ended December 31, 2005 and 2004, respectively, are attributable to monthly subscription fees charged to customers for our video, high-speed Internet, telephone and commercial services provided by our cable systems. Generally...

  • Page 42
    ..., general and administrative expenses, depreciation and amortization expense and interest expense. Operating costs primarily include programming costs, the cost of our workforce, cable service related expenses, advertising sales costs, franchise fees and expenses related to customer billings. Our...

  • Page 43
    ... amount of cost related to franchises, pursuant to which we are granted the right to operate our cable distribution network throughout our service areas. The net carrying value of franchises as of December 31, 2005 and 2004 was approximately $9.8 billion (representing 60% of total assets) and...

  • Page 44
    ... marketing rights), and the right to deploy and market new services such as interactivity and telephone to the potential customers (service marketing rights). Fair value is determined based on estimated discounted future cash flows using assumptions consistent with internal forecasts. The franchise...

  • Page 45
    ...responsible for its share of taxable income or loss of Charter Holdco allocated to it in accordance with the Charter Holdco limited liability company agreement (''LLC Agreement'') and partnership tax rules and regulations. The LLC Agreement provides for certain special allocations of net tax profits...

  • Page 46
    ... Vulcan Cable III Inc. and CII choose not to make such election or to the extent such allocations are not possible, Charter would then be allocated tax profits attributable to the membership units received in such exchange pursuant to the Special Profit Allocation provisions. Mr. Allen has generally...

  • Page 47
    ..., except share data): Year Ended December 31, 2005 2004 2003 Revenues Costs and Expenses: Operating (excluding depreciation and amortization) Selling, general and administrative Depreciation and amortization Impairment of franchises Asset impairment charges (Gain) loss on sale of assets, net Option...

  • Page 48
    ... analog video customer base and increase the number of our customers who purchase bundled services including high-speed Internet, digital video and telephone services, in addition to VOD, high-definition television and DVR services. In addition, we intend to increase revenues by expanding marketing...

  • Page 49
    ... costs to support improved service levels and our advanced products, increased costs of providing high-speed Internet and telephone service as a result of the increase in these customers and higher fuel prices. The increase in service costs was reduced by $4 million as a result of the System Sales...

  • Page 50
    ... million related to a stock option exchange program, under which our employees were offered the right to exchange all stock options (vested and unvested) issued under the 1999 Charter Communications Option Plan and 2001 Stock Incentive Plan that had an exercise price over $10 per share for shares of...

  • Page 51
    ... Redeemable Preferred Stock in connection with the Cable USA acquisition, on which Charter pays or accrues a quarterly cumulative cash dividend at an annual rate of 5.75% if paid or 7.75% if accrued on a liquidation preference of $100 per share. Beginning January 1, 2005, Charter accrued the...

  • Page 52
    ... from price increases and incremental video revenues from existing customers and approximately $27 million resulting from an increase in digital video customers. Approximately $163 million of the increase in revenues from high-speed Internet services provided to our non-commercial customers related...

  • Page 53
    ... video customers. Additionally, the increase in programming costs was reduced by $42 million as a result of the Systems Sales. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $62 million and $64 million for the year...

  • Page 54
    ... 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 or, in some instances, cash. The exchange offer closed in February 2004. Option compensation expense of $4 million for the year ended...

  • Page 55
    ...Redeemable Preferred Stock, on which it pays a quarterly cumulative cash dividend at an annual rate of 5.75% on a liquidation preference of $100 per share. Loss per common share. The loss per common share increased by $13.65 as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES...

  • Page 56
    ... and provisions for payment of cash interest as the series of old Charter Holdings notes for which such CIH notes were exchanged. In addition, the maturities for each series were extended three years. Our business requires significant cash to fund debt service costs, capital expenditures and ongoing...

  • Page 57
    ... of our revolving credit facilities. Acquisition In January 2006, we closed the purchase of certain cable systems in Minnesota from Seren Innovations, Inc. We acquired approximately 18,900 analog video customers and 14,800 telephone customers for a total purchase price of approximately $43 million...

  • Page 58
    ... rate reset based on the yield curve in effect at December 31, 2005. (4) We pay programming fees under multi-year contracts ranging from three to ten years typically based on a flat fee per customer, which may be fixed for the term or may in some cases, escalate over the term. Programming costs...

  • Page 59
    ... publicly traded cable system operators, including Charter, with the support of the National Cable & Telecommunications Association (''NCTA''). The disclosure is intended to provide more consistency in the reporting of operating statistics in capital expenditures and customers among peer companies...

  • Page 60
    ... due 2015 CCH II, LLC:(d) 10.250% senior notes due 2010 CCO Holdings, LLC: 8 3/4% senior notes due 2013 Senior floating notes due 2010 Charter Operating: 8% senior second-lien notes due 2012 8 3/8 % senior second-lien notes due 2014 Renaissance Media Group LLC: 10.000% senior discount notes due 2008...

  • Page 61
    ...I C AT I O N S , I N C . (c) 2005 FORM 10-K The 4.75% convertible senior notes and the 5.875% convertible senior notes are convertible at the option of the holders into shares of Class A common stock at a conversion rate, subject to certain adjustments, of 38.0952 and 413.2231 shares, respectively...

  • Page 62
    ... fair value of high-yield and convertible notes is based on quoted market prices, and the fair value of the credit facilities is based on dealer quotations. Charter Operating Credit Facilities - General The Charter Operating credit facilities were amended and restated concurrently with the sale of...

  • Page 63
    ... Group) having power, directly or indirectly, to vote more than 35% of the ordinary voting power of Charter Operating, unless the Paul Allen Group holds a greater share of ordinary voting power of Charter Operating, (v) (vi) (vii) certain of Charter Operating's indirect or direct parent companies...

  • Page 64
    ..., CCHC may pay any increase in the accreted value of the CCHC note in cash and the accreted value of the CCHC note will not increase to the extent such amount is paid in cash. The CCHC note is exchangeable at CII's option, at any time, for Charter Holdco Class A Common units at a rate equal to the...

  • Page 65
    ... 2000, Charter Holdings and Charter Capital exchanged these notes for new notes with substantially similar terms, except that the new notes are registered under the Securities Act. The January 2000 Charter Holdings notes are general unsecured obligations of Charter Holdings and Charter Capital. Cash...

  • Page 66
    ... and Charter Capital exchanged substantially all of these notes for new notes, with substantially similar terms, except that the new notes are registered under the Securities Act. The January 2002 Charter Holdings notes are general unsecured obligations of Charter Holdings and Charter Capital. Cash...

  • Page 67
    ... 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 68
    ... the Charter Holdings notes. CCH I Holdings, LLC Notes In September 2005, CIH and CCH I Holdings Capital Corp. jointly issued $2.5 billion total principal amount of 9.92% to 13.50% senior accreting notes due 2014 and 2015 in exchange for an aggregate amount of $2.4 billion of Charter Holdings notes...

  • Page 69
    ... conditions are met, restricted payments are permitted in a total amount of up to 100% of CCH I's consolidated EBITDA, as defined, for the period from September 28, 2005 to the end of CCH I's most recently ended full fiscal quarter for which financial statements are available minus 1.3 times its...

  • Page 70
    ... threshold to acquire assets, including current assets, used or useful in their businesses or use the net cash proceeds to repay certain debt, or to offer to repurchase the CCH I notes with any remaining proceeds. CCH I and its restricted subsidiaries may generally not engage in sale and leaseback...

  • Page 71
    ...investments in customers and suppliers in the ordinary course of business and investments received in connection with permitted asset sales. ( ( ( ( to repurchase management equity interests in amounts not to exceed $10 million per fiscal year, regardless of the existence of any default, to pay...

  • Page 72
    ... 2003 and August 2005, CCO Holdings and CCO Holdings Capital Corp. jointly issued $500 million and $300 million, respectively, total principal amount of 8 3/4% senior notes due 2013. Interest on the CCO Holdings senior notes accrues at 8 3/4% per year and is payable semi-annually in arrears on...

  • Page 73
    ...threshold to acquire assets, including current assets, used or useful in their businesses or use the net cash proceeds to repay debt, or to offer to repurchase the CCO Holdings senior notes with any remaining proceeds. CCO Holdings and its restricted subsidiaries may generally not engage in sale and...

  • Page 74
    ... Operating and Charter Communications Operating Capital Corp. jointly issued $1.1 billion of 8% senior second-lien notes due 2012 and $400 million of 8 3/8% senior second-lien notes due 2014, for total gross proceeds of $1.5 billion. In March and June 2005, Charter Operating consummated exchange...

  • Page 75
    ...if no default exists or would exist as a consequence of such incurrence. If those conditions are met, restricted payments are permitted in a total amount of up to 100% of Charter Operating's consolidated EBITDA, as defined, minus 1.3 times its consolidated interest expense, plus 100% of new cash and...

  • Page 76
    ...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 specified restricted payments including merger fees up to 1.25% of the transaction value...

  • Page 77
    ...) LLC and Renaissance Media Holdings Capital Corporation, with Renaissance Media Group LLC as 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 a subsidiary of Charter Operating...

  • Page 78
    ...% cash, temporary cash investments or 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 specified threshold either to acquire assets used in their own or related businesses...

  • Page 79
    ...Item 7A. Quantitative and Qualitative Disclosures About Market Risk,'' for further information regarding the fair values and contract terms of our interest rate agreements. RECENTLY ISSUED ACCOUNTING STANDARDS In November 2004, the Financial Accounting Standards Board (''FASB'') issued SFAS No. 153...

  • Page 80
    ...2005 and 2004, respectively. The fair value of high-yield and convertible notes is based on quoted market prices, and the fair value of the credit facilities is based on dealer quotations. We do not hold or issue derivative instruments for trading purposes. We do, however, have certain interest rate...

  • Page 81
    ... exchanged are determined by 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...

  • Page 82
    ...Robert A. Quigley, Executive Vice President and Chief Marketing Officer, and Charter executed an offer letter dated as of November 22, 2005 pursuant to which Charter agreed to pay him a signing bonus of $200,000 deferred until January 2006; grant options to purchase 145,800 shares of Class A common...

  • Page 83
    ...of directors Director Director Director Director Director Director Director Director, President and Chief Executive Officer Director Director The following sets forth certain biographical information with respect to the directors listed above. Paul G. Allen, 53, has been Chairman of Charter's board...

  • Page 84
    ... of Charter's Audit Committee at that time. Since October 2003, Mr. Merritt has been a Managing Director of Salem Partners, LLC, an investment banking firm. He was a Managing Director in the Entertainment Media Advisory Group at Gerard Klauer Mattison & Co., Inc., a company that provided financial...

  • Page 85
    ...and program guide company which later merged with Gemstar International, from 1994 to 1997. Mr. Wangberg was Chairman and Chief Executive Officer of Times Mirror Cable Television and Senior Vice President of its corporate parent, Times Mirror Co., from 1983 to 1994. He currently serves on the boards...

  • Page 86
    ... Corp., a company in which Charter owns an equity investment interest. Mr. Davis is also a member of the Society of Cable Telecommunications Engineers. Robert A. Quigley, 62, Executive Vice President and Chief Marketing Officer. Mr. Quigley joined Charter in his current position in December 2005...

  • Page 87
    ... degree in history and is a member of the Direct Marketing Association Board of Directors. Sue Ann R. Hamilton, 45, Executive Vice President, Programming. Ms. Hamilton joined Charter as Senior Vice President of Programming in March 2003 and was promoted to her current position in April 2005. From...

  • Page 88
    ... and directors, we believe that all Section 16(a) filing requirements were met in 2005. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth information as of December 31, 2005 regarding the compensation to those executive officers listed below for services...

  • Page 89
    ... the named officer's unvested restricted stock holdings was $0, based on a per share market value (closing sale price) of $1.22 for our Class A common stock on December 31, 2005. (24) Includes (i) for 2005, 129,600 performance shares granted in April 2005 under our Long-Term Incentive Program which...

  • Page 90
    ... and Option Value The following table sets forth, for the individuals named in the Summary Compensation Table, (i) information concerning options exercised during 2005, (ii) the number of shares of our Class A common stock underlying unexercised options at year-end 2005, and (iii) the value of...

  • Page 91
    ...of Class A common stock are issued, conditional upon our performance against financial performance measures established by our management and approved by the board of directors or Compensation Committee as of the time of the award. We granted 3.2 million performance shares in 2005 under this program...

  • Page 92
    ... Number of Securities Underlying Options Exchanged Name Date Market Price of Stock at Time of Exchange ($) Exercise Price at Time of Exchange ($) New Exercise Price ($) Length of Original Option Term Remaining at Date of Exchange Carl E. Vogel Former President and Chief Executive Officer Paul...

  • Page 93
    ... employed as Charter's Executive Vice President and Chief Operating Officer for a term commencing April 1, 2005 and expiring on April 1, 2008. The contract will be reviewed every 18 months thereafter and may be extended pursuant to such reviews. Under the agreement, Mr. Lovett will receive an annual...

  • Page 94
    ... plan generally afforded to, and to receive vacation and sick pay on such terms as are offered to, Charter's other senior executive officers. As of January 20, 2006, Charter entered into an employment agreement with Mr. Fisher, Executive Vice President and Chief Executive Officer (the ''Employment...

  • Page 95
    ... to be reviewed on an annual basis. The agreement also provides for a one time signing bonus of $200,000, the grant of 50,000 restricted shares of Charter Class A common stock, an option to purchase 100,000 shares of Charter common stock under the 2001 Stock Incentive Plan, an option to purchase 145...

  • Page 96
    ... President and Chief Executive Officer or the designee thereof, at a salary of $450,000. He shall be eligible to participate in the incentive bonus plan, stock option plan and to receive such other employee benefits as are available to other senior executives. The term of this agreement is two years...

  • Page 97
    ... entitlement or guaranteed benefit. The guidelines provide that persons employed at the level of Senior Vice President may be eligible to receive between six and fifteen months of severance benefits. Currently, all Executive Vice Presidents have employment agreements with Charter which provide...

  • Page 98
    ...All current directors and executive officers as a group (19 persons) Carl E. Vogel(10) Steelhead Partners(11) J-K Navigator Fund, L.P.(11) James Michael Johnston(11) Brian Katz Klein(11) FMR Corp.(12) Fidelity Management & Research Company(12) Edward C. Johnson 3d(12) Standard Pacific Capital LLC(13...

  • Page 99
    ... voting power (i.e., the 50,000 shares of Class B common stock held by Mr. Allen have not been converted into shares of Class A common stock; that the membership units of Charter Holdco owned by each of Vulcan Cable III Inc. and Charter Investment, Inc. have not been exchanged for shares of Class...

  • Page 100
    ... exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders TOTAL (1) 29...

  • Page 101
    ... 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 102
    ...affiliate of Mapleton Investments, LLC. Charter reimbursed certain of its current and former directors and executive officers a total of approximately $16,200 for costs incurred in connection with litigation matters in 2005. The following sets forth additional information regarding the transactions...

  • Page 103
    ... 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.'' Vulcan Ventures Channel Access...

  • Page 104
    ... to develop a digital video recorder set-top terminal; an existing investment in Cable Sports Southeast, LLC, a provider of regional sports programming; as an owner of the business of Interactive Broadcaster Services Corporation or, Chat TV, an investment in @Security Broadband Corp., a company...

  • Page 105
    ...and the President and Chief Executive Officer of Vulcan Inc. and is a director and Vice President of Vulcan Ventures. Mr. Lance Conn is Executive Vice President of Vulcan Inc. and Vulcan Ventures. The various cable, media, Internet and telephone companies in which Mr. Allen has invested may mutually...

  • Page 106
    ... which is the fair market value per share of Oxygen Media common stock on the conversion date. We recognized the guaranteed value of the investment over the life of the carriage agreement as a reduction of programming expense. For the year ended December 31, 2005, we recorded approximately...

  • Page 107
    ... from other contract terms, no less favorable than those accorded to any other Digeo customer. Charter paid approximately $1 million in license and maintenance fees in 2005. In April 2004, we launched DVR service (using units containing the Digeo software) in our Rochester, Minnesota market using...

  • Page 108
    ... Investments, LLC. Indemnification Advances Pursuant to Charter's bylaws (and the employment agreements of certain of our current and former officers), Charter is obligated (subject to certain limitations) to indemnify and hold harmless, to the fullest extent permitted by law, any officer, director...

  • Page 109
    ...I C AT I O N S , I N C . 2005 FORM 10-K PART IV 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 and reports of independent public accountants required by...

  • Page 110
    ...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 Paul G. Allen NEIL SMIT Neil Smit Chairman of the Board of Directors February 28, 2006 /s/ President, Chief Executive Officer...

  • Page 111
    ... Redeemable Preferred Stock of Charter Communications, Inc. (incorporated by reference to Annex A to the Definitive Information Statement on Schedule 14C filed by Charter Communications, Inc. on December 12, 2005 (File No. 000-27927)). Indenture relating to the 5.875% convertible senior notes due...

  • Page 112
    ..., Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K of Charter Communications, Inc. filed on October 4, 2005 (File No. 000-27927)). Indenture relating to the 9.920% Senior Discount...

  • Page 113
    ... Holdings, LLC, Charter Communications Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 13.500% Senior Discount Notes due 2011 (incorporated by reference to Exhibit 10.10 to the current report on Form 8-K of Charter Communications, Inc. filed on October 4, 2005 (File...

  • Page 114
    ... Holdings Capital Corporation and BNY Midwest Trust Company as Trustee governing 12.125% Senior Discount Notes due 2012 (incorporated by reference to Exhibit 10.14 to the current report on Form 8-K of Charter Communications, Inc. filed on October 4, 2005 (File No. 000-27927)). Indenture relating...

  • Page 115
    ... 28, 2005 among CCH I, LLC and CCH I Capital Corp., as Issuers, Charter Communications Holdings, LLC, as Parent Guarantor, and The Bank of New York Trust Company, NA, as Trustee, governing 11.00% Senior Secured Notes due 2015 (incorporated by reference to Exhibit 10.2 to the current report on Form...

  • Page 116
    ...10.10 to the current report on Form 8-K of Charter Communications, Inc. filed on November 30, 2004 (File No. 000-27927)). Second Amended and Restated Limited Liability Company Agreement for Charter Communications Holdings, LLC, dated as of October 31, 2005 (incorporated by reference to Exhibit 10.21...

  • Page 117
    ... the annual report on Form 10-K of Charter Communications, Inc. filed on April 15, 2003 (File No. 000-27927)). Executive Services Agreement, dated as of January 17, 2005, between Charter Communications, Inc. and Robert P. May (incorporated by reference to Exhibit 99.1 to the current report on Form...

  • Page 118
    ....1 to the current report on Form 8-K of Charter Communications, Inc. filed on January 27, 2006 (File No. 000-27927)). Subsidiaries of Charter Communications, Inc. Consent of KPMG LLP Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of...

  • Page 119
    ... Public Accounting Firm - Consolidated Financial Statements Report of Independent Registered Public Accounting Firm - Internal Controls over Financial Reporting Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Operations for the Years Ended December 31, 2005...

  • Page 120
    ... 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, 2005 and 2004, and the related consolidated statements of operations...

  • Page 121
    ... 10-K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Charter Communications, Inc.: We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Charter Communications, Inc. (the Company...

  • Page 122
    ... Franchises, net Total investment in cable properties, net Other Noncurrent Assets Total assets LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities: Accounts payable and accrued expenses Total current liabilities Long-Term Debt Note Payable - Related Party Deferred Management Fees - Related...

  • Page 123
    ... share and share data) 2005 2004 2003 Revenues Costs and Expenses: Operating (excluding depreciation and amortization) Selling, general and administrative Depreciation and amortization Impairment of franchises Asset impairment charges (Gain) loss on sale of assets, net Option compensation expense...

  • Page 124
    ...-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity (Deficit) (Dollars in millions) Balance, December 31, 2002 Changes in fair value of interest rate agreements Option compensation expense, net Issuance of common stock related to acquisitions...

  • Page 125
    ... from investing activities Cash Flows From Financing Activities: Borrowings of long-term debt Repayments of long-term debt Proceeds from issuance of debt Payments for debt issuance costs Redemption of preferred stock Purchase of pledge securities Net cash flows from financing activities Net Increase...

  • Page 126
    ...debt by CCH I, LLC Issuance of debt by Charter Communications Operating, LLC Retirement of Charter Communications Holdings, LLC debt Issuance of shares in Securities Class Action Settlement CC VIII Settlement - exchange of interests Debt exchanged for Charter Class A common stock Issuance of debt by...

  • Page 127
    ...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 Internet services and, in some areas, advanced broadband services such as high-definition television, video on demand...

  • Page 128
    ... is working with its financial advisors to address this funding requirement. However, there can be no assurance that such funding will be available to the Company. In addition, Paul G. Allen, Charter's Chairman and controlling shareholder, and his affiliates are not obligated to purchase equity...

  • Page 129
    ... financial statements. 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 rights at the date of acquisition...

  • Page 130
    .... Certain marketable equity securities are classified as available-for-sale and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive income or loss. The following summarizes investment information as of and for the years ended December 31, 2005 and...

  • Page 131
    ...commercial video, high-speed Internet and telephone services are recognized when the related services are provided. Advertising sales are recognized at estimated realizable values in the period that the advertisements are broadcast. Local governmental authorities impose franchise fees on the Company...

  • Page 132
    ... share as reported and the pro forma amounts that would have been reported using the fair value method under SFAS No. 123 for the years presented: Year Ended December 31, 2005 2004 2003 Net loss applicable to common stock Add back stock-based compensation expense related to stock options included...

  • Page 133
    ...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 rights at the date of acquisition and determines if the franchise has a finite life or an indefinite-life...

  • Page 134
    ... competition from direct broadcast satellite providers and decreased growth rates in the Company's high-speed Internet 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 projected growth rates and the...

  • Page 135
    ... EXPENSES Accounts payable and accrued expenses consist of the following as of December 31, 2005 and 2004: 2005 2004 Accounts payable - trade Accrued capital expenditures Accrued expenses: Interest Programming costs Franchise related fees Compensation Other $ 114 73 333 272 67 90 242 $ 1,191...

  • Page 136
    ... of the Charter Holdings notes for financial reporting purposes as opposed to the current accreted value for legal purposes and notes indenture purposes (the amount that is currently payable if the debt becomes immediately due). As of December 31, 2005, the accreted value of the Company's debt for...

  • Page 137
    ... used for general corporate purposes, including the payment of distributions to its parent companies, including Charter Holdings, to pay interest expense. Gain on Extinguishment of Debt In September 2005, Charter Holdings and its wholly owned subsidiaries, CCH I and CIH, completed the exchange of...

  • Page 138
    ... December 31, 2005, there was $862.5 million in total principal amount outstanding and $843 million in accreted value outstanding. 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 413.2231...

  • Page 139
    ...value outstanding of these notes was $43 million. Cash interest on the January 2000 11.75% Charter Holdings notes began to accrue on January 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...

  • Page 140
    ... 2002 Charter Holdings notes are general unsecured obligations of Charter Holdings and Charter Capital. The January 2002 12.125% senior discount notes mature on January 15, 2012, and as of December 31, 2005, the total principal amount outstanding was $113 million and the total accreted value of...

  • Page 141
    ...a premium that varies over time. CCH I, LLC Notes. In September 2005, CCH I and CCH I Capital Corp. jointly issued $3.5 billion total principal amount of 11.000% senior secured notes due October 2015 in exchange for an aggregate amount of $4.2 billion of certain Charter Holdings notes. The notes are...

  • Page 142
    ... offer to purchase the outstanding CCO Holdings senior notes from the holders at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest. Charter Operating Notes. On April 27, 2004, Charter Operating and Charter Communications Operating Capital...

  • Page 143
    ..., Charter Capital, CIH, CIH, Capital Corp., CCH I, CCH I Capital Corp., CCH II, CCH II Capital Corp., CCO Holdings, CCO Holdings Capital Corp., Charter Operating, Charter Communications Operating Capital Corp., Renaissance Media Group, and all of their restricted subsidiaries to: ( ( ( ( a senior...

  • Page 144
    ... 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 required that the 11.875% notes due 2008 issued by CC V Holdings, LLC be redeemed. Because such Leverage Ratio was...

  • Page 145
    ... the Paul Allen Group) having power, directly or indirectly, to vote more than 35% of the ordinary voting power of Charter Operating, unless the Paul Allen Group holds a greater share of ordinary voting power of Charter Operating, certain of Charter Operating's indirect or direct parent companies...

  • Page 146
    ..., CCHC may pay any increase in the accreted value of the CCHC Note in cash and the accreted value of the CCHC Note will not increase to the extent such amount is paid in cash. The CCHC Note is exchangeable at CII's option, at any time, for Charter Holdco Class A Common units at a rate equal to the...

  • Page 147
    ... no voting rights but are entitled to receive cumulative cash dividends at an annual rate of 5.75%, payable quarterly. 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...

  • Page 148
    ... credit loss. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS Certain marketable equity securities are classified as availablefor-sale and reported at market value with unrealized gains and losses...

  • Page 149
    ... pay rate for the Company's interest rate swap agreements was 9.51% and 8.07% at December 31, 2005 and 2004, respectively. 18. REVENUES Revenues consist of the following for the years presented: Year Ended December 31, 2005 2004 2003 Video High-speed Internet Telephone Advertising sales Commercial...

  • Page 150
    ... in cash. The ongoing effect on consolidated results of operations or financial condition will be dependent upon future stock based compensation awards granted. The Company recorded $14 million, $31 million and $4 million of option compensation expense for the years ended December 31, 2005, 2004...

  • Page 151
    ... the year ended December 31, 2003, the severance and lease costs were offset by a $5 million settlement from the Internet service provider Excite@Home related to the conversion of high-speed Internet customers to Charter Pipeline service in 2001. For the year ended December 31, 2004, special charges...

  • Page 152
    .... For the year ended December 31, 2005, special charges also include approximately $1 million related to various legal settlements. 24. INCOME TAXES LLC Agreement generally provides that any additional net tax profits are to be allocated among the members of Charter Holdco based generally on their...

  • Page 153
    .... For the years ended December 31, 2005, 2004 and 2003, the Company recorded deferred income tax expense and benefits as shown below. The income tax expense is recognized through increases in deferred tax liabilities related to our investment in Charter Holdco, as well as through current federal and...

  • Page 154
    .... The management services include such services as centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Costs associated with...

  • Page 155
    ...as a director of Charter in April 2004. The various cable, media, Internet and telephone companies in which Mr. Allen has invested may mutually benefit one another. The Company can give no assurance, nor should you expect, that any of these business relationships will be successful, that the Company...

  • Page 156
    ... which is the fair market value per share of Oxygen Media common stock on the conversion date. The Company recognized the guaranteed value of the investment over the life of the carriage agreement as a reduction of programming expense. For the years ended December 31, 2005, 2004 and 2003, the...

  • Page 157
    ... for the years ended December 31, 2005 and 2004, respectively, in capital purchases under this agreement. CC VIII. As part of the acquisition of the cable systems owned by Bresnan Communications Company Limited Partnership in February 2000, CC VIII, LLC, Charter's indirect limited liability company...

  • Page 158
    ... long-term liabilities. On October 6, 2005, Charter Helicon, LLC redeemed all of the preferred membership interest for the redemption price of $25 million plus accrued interest. Certain related parties, including members of the board of directors and officers, hold interests in the Company's senior...

  • Page 159
    ... and rental costs charged to expense for the years ended December 31, 2005, 2004 and 2003, were $23 million, $23 million and $30 million, respectively. (2) The Company pays programming fees under multi-year contracts ranging from three to ten years typically based on a flat fee per customer, which...

  • Page 160
    ... affect the Company's operations, including, without limitation, additional regulatory requirements the Company may be required to comply with as it offers new services such as telephone. 27. EMPLOYEE BENEFIT PLAN The Company's employees may participate in the Charter Communications, Inc. 401...

  • Page 161
    ... Communications, Inc. (Parent Company Only) CONDENSED BALANCE SHEETS December 31, 2005 2004 Assets Cash and cash equivalents Receivable from related party Notes receivable from Charter Holdco Total assets Liabilities and Shareholders' Deficit Current liabilities Convertible notes Deferred income...

  • Page 162
    ... OF CASH FLOWS Year Ended December 31, 2005 2004 2003 Cash Flows from Operating Activities: Net loss after preferred dividends Equity in losses of Charter Holdco Changes in operating assets and liabilities Deferred income taxes Net cash flows from operating activities Cash Flows from Investing...

  • Page 163
    ...S 2005 FORM 10-K Notes to Consolidated Financial Statements (continued) 31. SUBSEQUENT EVENTS In February 2006, the Company signed two separate definitive agreements to sell certain cable television systems serving a total of approximately 316,000 analog video customers in West Virginia, Virginia...

  • Page 164
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  • Page 166
    ...uctuations in working capital levels from period to period. The Company believes that adjusted EBITDA, un-levered free cash ï¬,ow and free cash ï¬,ow provide information useful to investors in assessing our ability to service our debt, fund operations, and make additional investments with internally...

  • Page 167
    ...Fisher Executive Vice President and Chief Financial Officer Grier C. Raclin Executive Vice President, General Counsel and Corporate Secretary Robert A. Quigley Executive Vice President and Chief Marketing Officer Sue Ann R. Hamilton Executive Vice President, Programming Lynne F. Ramsey Senior Vice...

  • Page 168
    ... our business. Corporate Headquarters 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...