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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q
 (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ________to _________ Commission file number:
    
    333-111423
333-111423-01
 CCH II, LLC
CCH II Capital Corp.*  (Exact name of registrants as specified in their charters)
 Delaware
    
    030511293Delaware
    
    134257703(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 12405 Powerscourt Drive
St. Louis, Missouri 63131  (Address of principal executive offices including zip code)
 (314) 965-0555  (Registrants telephone number, including area code)
 Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file reports), and (2) have been subject to such
filing requirements for the past 90 days. YES [X] NO [   ] Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). YES [   ] NO [X] Number of shares of common stock of CCH II Capital Corp. as of May 12, 2004:
100 * CCH II Capital Corp. meets the conditions set forth in General Instruction
H(1)(a) and (b) to Form 10-Q and is therefore filing with the reduced
disclosure format.




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CCH II, LLC
CCH II Capital Corp.
Quarterly Report on Form 10-Q for the Period ended March 31, 2004  
 Table of Contents PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements  CCH II, LLC and SubsidiariesCondensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    39Item 6.Exhibits and Reports on Form 8-K
    
    
    42SIGNATURES
    
    
    43EXHIBIT INDEX
    
    
    44Certification of Chief Executive OfficerCertification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  This quarterly report on Form 10-Q is for the three months ended March 31,
2004. The Securities and Exchange Commission (SEC) allows us to incorporate
by reference information that we file with the SEC, which means that we can
disclose important information to you by referring you directly to those
documents. Information incorporated by reference is considered to be part of
this quarterly report. In addition, information that we file with the SEC in
the future will automatically update and supersede information contained in
this quarterly report. In this quarterly report, we, us and our refer to
CCH II, LLC and its subsidiaries.




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS: This quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the Results of Operations and
Liquidity and Capital Resources sections under Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations in
this quarterly report. Although we believe that our plans, intentions and
expectations reflected in or suggested by these forward-looking statements are
reasonable, we cannot assure you that we will achieve or realize these plans,
intentions or expectations. Forward-looking statements are inherently subject
to risks, uncertainties and assumptions including, without limitation, the
factors described under Certain Trends and Uncertainties under Part I, Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations in this quarterly report. Many of the forward-looking statements
contained in this quarterly report may be identified by the use of
forward-looking words such as believe, expect, anticipate, should,
planned, will, may, intend, estimated and potential, among others.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this quarterly report are set forth in
this quarterly report and in other reports or documents that we file from time
to time with the SEC, and include, but are not limited to:  
    
    our ability to sustain and grow revenues and cash flows from
operating activities by offering video, high-speed data and other
services and to maintain a stable customer base, particularly in the
face of increasingly aggressive competition from other service
providers;
    
    our and our parent companies ability to pay or refinance debt as
it becomes due;
    
    the availability of funds to meet interest payment obligations
under our and our parent companies debt and to fund our operations and
necessary capital expenditures, either through cash flows from
operating activities, further borrowings or other sources;
    
    any adverse consequences arising out of the restatement of Charter
Communications, Inc.s 2000, 2001 and 2002 financial statements;
    
    the results of the pending grand jury investigation by the United
States Attorneys Office for the Eastern District of Missouri, the
pending SEC Division of Enforcement investigation, the putative class
action, the unconsolidated state action, and derivative shareholders
litigation against Charter Communications, Inc.;
    
    our ability to comply with all covenants in our indentures and
credit facilities, any violation of which would result in a violation
of the applicable facility or indenture and could trigger a default of
other obligations under cross-default provisions;
    
    our ability to obtain programming at reasonable prices or to pass 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 forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
We are under no duty or obligation to update any of the forward-looking
statements after the date of this quarterly report. 3




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PART I. FINANCIAL INFORMATION. 
 ITEM 1. FINANCIAL STATEMENTS.
 CCH II, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (DOLLARS IN MILLIONS)
 March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    72
    
    
    $
    85Accounts receivable, less allowance for doubtful accounts of
$15 and $17, respectively
    
    
    150
    
    
    
    178Receivables from related party
    
    
    104
    
    
    
    59Prepaid expenses and other current assets
    
    
    26
    
    
    
    21Total current assets
    
    
    352
    
    
    
    343INVESTMENT IN CABLE PROPERTIES:Property, plant and equipment, net of accumulated
depreciation of $4,087 and $3,834, respectively
    
    
    6,513
    
    
    
    6,808Franchises, net of accumulated amortization
of $3,298 and $3,445, respectively
    
    
    13,196
    
    
    
    13,680Total investment in cable properties, net
    
    
    19,709
    
    
    
    20,488OTHER NONCURRENT ASSETS
    
    
    171
    
    
    
    178Total assets
    
    $
    20,232
    
    
    $
    21,009LIABILITIES AND MEMBERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    925
    
    
    $
    1,044Total current liabilities
    
    
    925
    
    
    
    1,044LONG-TERM DEBT
    
    
    8,944
    
    
    
    9,557LOANS PAYABLE  RELATED PARTY
    
    
    37
    
    
    
    37DEFERRED MANAGEMENT FEES  RELATED PARTY
    
    
    14
    
    
    
    14OTHER LONG-TERM LIABILITIES
    
    
    677
    
    
    
    687MINORITY INTEREST
    
    
    722
    
    
    
    719MEMBERS EQUITY:Members equity
    
    
    8,972
    
    
    
    9,008Accumulated other comprehensive loss
    
    
    (59
    )
    
    
    (57
    )Total members equity
    
    
    8,913
    
    
    
    8,951Total liabilities and members equity
    
    $
    20,232
    
    
    $
    21,009
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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CCH II, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (DOLLARS IN MILLIONS)
Unaudited
 Three Months Ended March 31,2004
    
    2003REVENUES
    
    $
    1,214
    
    
    $
    1,178COSTS AND EXPENSES:Operating (excluding depreciation and amortization)
    
    
    512
    
    
    
    485Selling, general and administrative
    
    
    239
    
    
    
    235Depreciation and amortization
    
    
    370
    
    
    
    370(Gain) loss on sale of assets, net
    
    
    (106
    )
    
    
    9Option compensation expense, net
    
    
    14
    
    
    
    Special charges, net
    
    
    10
    
    
    
    21,039
    
    
    
    1,101Income from operations
    
    
    175
    
    
    
    77OTHER INCOME AND EXPENSE:Interest expense, net
    
    
    (163
    )
    
    
    (130
    )Gain (loss) on derivative instruments and hedging activities, net
    
    
    (7
    )
    
    
    14Other, net
    
    
    (1
    )
    
    
    (171
    )
    
    
    (116
    )Income (loss) before minority interest and income taxes
    
    
    4
    
    
    
    (39
    )MINORITY INTEREST
    
    
    (3
    )
    
    
    (3
    )Income (loss) before income taxes
    
    
    1
    
    
    
    (42
    )INCOME TAX EXPENSE
    
    
    (1
    )
    
    
    (1
    )Net loss
    
    $
    
    
    
    $
    (43
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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CCH II, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (DOLLARS IN MILLIONS)
Unaudited
 Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    
    
    
    $
    (43
    )Adjustments to reconcile net loss to net cash flows from operating activities:Minority interest
    
    
    3
    
    
    
    3Depreciation and amortization
    
    
    370
    
    
    
    370Option compensation expense, net
    
    
    10
    
    
    
    Noncash interest expense
    
    
    1
    
    
    
    10(Gain) loss on derivative instruments and hedging activities, net
    
    
    7
    
    
    
    (14
    )(Gain) loss on sale of assets, net
    
    
    (106
    )
    
    
    9Deferred income taxes
    
    
    1
    
    
    
    1Other, net
    
    
    2
    
    
    
    Changes in operating assets and liabilities, net of effects from dispositions:Accounts receivable
    
    
    25
    
    
    
    34Prepaid expenses and other assets
    
    
    (7
    )
    
    
    1Accounts payable, accrued expenses and other
    
    
    (140
    )
    
    
    (165
    )Receivables from and payables to related party, including deferred management fees
    
    
    (51
    )
    
    
    (1
    )Net cash flows from operating activities
    
    
    115
    
    
    
    205CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (187
    )
    
    
    (101
    )Change in accrued expenses related to capital expenditures
    
    
    (7
    )
    
    
    (117
    )Proceeds from sale of assets
    
    
    725
    
    
    
    Net cash flows from investing activities
    
    
    531
    
    
    
    (218
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings of long-term debt
    
    
    165
    
    
    
    346Repayments of long-term debt
    
    
    (779
    )
    
    
    (152
    )Repayments to related parties
    
    
    
    
    
    
    (70
    )Payments for debt issuance costs
    
    
    (1
    )
    
    
    Distributions
    
    
    (44
    )
    
    
    (167
    )Net cash flows from financing activities
    
    
    (659
    )
    
    
    (43
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (13
    )
    
    
    (56
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    85
    
    
    
    310CASH AND CASH EQUIVALENTS, end of period
    
    $
    72
    
    
    $
    254CASH PAID FOR INTEREST
    
    $
    187
    
    
    $
    115
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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CCH II, LLC AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
(dollars in millions, except where indicated)
 1. Organization and Basis of Presentation CCH II, LLC (CCH II) is a holding company whose primary assets at March 31,
2004 are equity interests in its operating subsidiaries. CCH II was formed in
March 2003 and is a wholly owned subsidiary of CCH I, LLC (CCH I). CCH I is a
wholly owned subsidiary of Charter Communications Holdings, LLC (Charter
Holdings). Charter Holdings is a wholly owned subsidiary of Charter
Communications Holding Company, LLC (Charter Holdco), which is a subsidiary
of Charter Communications, Inc. (Charter). CCH II is the sole owner of CCO Holdings, LLC (CCO Holdings), which in turn
is sole owner of Charter Communications Operating, LLC (Charter Operating).
Charter Operating was formed in February 1999 to own and operate its cable
systems. In June and July of 2003, Charter Holdings entered into a series of
transactions and contributions which had the effect of i) creating CCH I, CCH
II and CCO Holdings and ii) combining/contributing all of Charter Holdings
interest in cable operations not previously owned by Charter Operating to
Charter Operating (the Systems Transfer). The Systems Transfer was accounted
for as a reorganization of entities under common control. Accordingly, the
accompanying financial statements combine the historical financial condition
and results of operations of Charter Operating, and the operations of
subsidiaries contributed by Charter Holdings for the three months ended March
31, 2003. CCH II and its subsidiaries are collectively referred to herein as
the Company. All significant intercompany transactions and balances have been
eliminated in consolidation. 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 definition television, video on
demand, telephony and interactive television. The Company sells its cable
video programming, high-speed data and advanced broadband services on a
subscription basis. The accompanying condensed consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the rules and
regulations of the Securities and Exchange Commission (SEC). Accordingly,
certain information and footnote disclosures included in the
Amendment No. 2 to the Companys Registration Statement on Form S-4 filed on May 5, 2004
have been condensed or omitted for this quarterly report. The accompanying
condensed consolidated financial statements are unaudited and are subject to
review by regulatory authorities. However, in the opinion of management, such
financial statements include all adjustments, which consist of only normal
recurring adjustments, necessary for a fair presentation of the results for the
periods presented. Interim results are not necessarily indicative of results
for a full year.

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Areas involving significant
judgments and estimates include capitalization of labor and overhead costs;
depreciation and amortization costs; impairments of property, plant and
equipment, franchises and goodwill; income taxes; and contingencies. Actual
results could differ from those estimates. Reclassifications Certain 2003 amounts have been reclassified to conform with
the 2004 presentation. 2. Liquidity and Capital Resources The Company has
incurred net losses of $0 and $43 million for the three months ended March 31,
2004 and 2003, respectively. The Companys net cash flows from operating
activities were $115 million and $205 million for the three months ended March
31, 2004 and 2003, respectively. The Company has historically required
significant cash 7




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) to fund capital expenditures and debt service costs. Historically, the Company
has funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, equity contributions from its parents,
borrowings from parent companies, issuances of debt securities and cash on
hand. The mix of funding sources changes from period to period, but for the
three months ended March 31, 2004, approximately 13% of the Companys funding
requirements were from cash flows from operating activities, 85% was from
proceeds from the sale of cable systems described below and 2% was from cash on
hand. For the three months ended March 31, 2004, the Company had net cash
flows used in financing activities of $659 million, reflecting a net repayment
of $614 million of debt. In April 2004, CCH IIs indirect subsidiaries,
Charter Operating and Charter Communications Operating Capital Corp., sold $1.5
billion of senior second lien notes in a private transaction. Additionally,
Charter Operating amended and restated its $5.1 billion credit facilities,
among other things, to defer maturities and increase availability under those
facilities to approximately $6.5 billion, consisting of a $1.5 billion six-year
revolving credit facility, a $2.0 billion six-year term loan facility and a
$3.0 billion seven-year term loan facility. Charter Operating used the
additional borrowings under the amended and restated credit facilities,
together with proceeds from the sale of the Charter Operating senior second
lien notes to refinance the credit facilities of its subsidiaries, CC VI
Operating Company, LLC (CC VI Operating), Falcon Cable Communications, LLC
(Falcon Cable), and CC VIII Operating, LLC (CC VIII Operating), all in one
concurrent transaction. The effect of the transaction, among other things, was
to substitute Charter Operating as the lender in place of the banks under those
subsidiaries credit facilities. On March 1, 2004, the Company closed the sale of certain cable systems in
Florida, Pennsylvania, Maryland, Delaware and West Virginia to Atlantic
Broadband Finance, LLC. This transaction resulted in a $108 million pretax
gain recorded as a gain on sale of assets in the Companys condensed
consolidated statements of operations. The Company closed on the sale of an
additional cable system in New York to Atlantic Broadband Finance, LLC in April
2004. Subject to post-closing contractual adjustments, the Company expects the
total net proceeds from the sale of all of these systems to be approximately
$733 million, of which $10 million is currently held in an indemnity escrow
account (with the unused portion thereof to be released by March 1, 2005). The
proceeds received to date have been used to repay a portion of amounts
outstanding under the Companys credit facilities. The Company expects that cash on hand, cash flows from operating activities and
the amounts available under the amended and restated Charter Operating credit
facilities will be adequate to meet its cash needs for the foreseeable future.
However, these credit facilities are subject to certain restrictive covenants,
some of which require the Company to achieve specified operating results. A
default under the covenants governing any of the Companys debt instruments
could result in the acceleration of its payment obligations under that debt
and, under certain circumstances, in cross-defaults under its other debt
obligations, which would have a material adverse effect on the Companys
financial condition or results of operations. The Company expects to maintain
compliance with these covenants in 2004. If the Companys actual operating
performance results in non-compliance with these covenants, or if other events
of non-compliance under these credit facilities or indentures governing
subsidiary or parent company debt occur, funding under the credit facilities
may not be available and defaults on some or potentially all debt obligations
could occur. Additionally, no assurance can be given that the Company will not
experience liquidity problems because of adverse market conditions, increased
competition or other unfavorable events. The indentures governing the CCH II notes, CCO Holdings notes, and Charter
Operating notes restrict those note issuers from making distributions to their
parent companies (including Charter and Charter Holdings) for payment of
principal on parent company notes, in each case unless there is no default
under those indentures and a specified leverage ratio test can be
met. Each such issuer currently meets the applicable leverage ratio test, and therefore is not
currently prohibited from making any such distributions to its direct parent.
The indentures governing the Charter Holdings notes permit Charter Holdings to
make distributions to Charter Holdco for payment of interest or principal on
Charters convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio test of 8.75 to 1.0, there is no default under Charter Holdings
indentures and 8




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) other specified tests are met. However, Charter Holdings continued not to meet
the leverage ratio test at March 31, 2004. As a result, distributions from
Charter Holdings to Charter Holdco or Charter again have been restricted and
will continue to be restricted until that test is met. Any financial or
liquidity problems of Charter or Charter Holdings would likely cause serious
disruption to the Companys business and have a material adverse effect on its
business and results of operations. The Companys long-term financing structure as of March 31, 2004 includes $6.6
billion of credit facility debt and $2.3 billion of high-yield notes. The
April 2004 refinancing discussed above resulted in approximately $1.5 billion
of senior second lien notes replacing credit facility debt and the deferral
beyond 2008 of approximately $8 billion of scheduled debt maturities and
commitment reductions under the Companys credit facilities, which would
otherwise have come due or would have occurred before that time. Approximately
$15 million of financing matures during the remainder of 2004, and the Company
expects to pay amounts due at maturity by borrowing under its credit
facilities. Unused availability as of the closing of the amendment and
restatement of the Charter Operating credit facilities on April 27, 2004 was
approximately $1.0 billion. 3. Franchises and Goodwill On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, which eliminates the amortization of indefinite
lived intangible assets. Accordingly, beginning January 1, 2002, all
franchises that qualify for indefinite life treatment under SFAS No. 142 are no
longer amortized against earnings but instead are tested for impairment
annually, or more frequently as warranted by events or changes in
circumstances. Based on the guidance prescribed in Emerging Issues Task Force
(EITF) Issue No. 02-7, Unit of Accounting for Testing of Impairment of
Indefinite-Lived Intangible Assets,franchises are aggregated into essentially
inseparable asset groups to conduct the valuations. The asset groups generally
represented geographic clusters of the Companys cable systems, which
management believes represents the highest and best use of those assets. Fair
value is determined based on estimated discounted future cash flows using
assumptions that are consistent with internal forecasts. The effect of SFAS No. 142 as of March 31, 2004 and December 31, 2003 is
presented in the following table: March 31, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountIndefinite-lived
intangible assets:Franchises with
indefinite lives
    
    $
    16,439
    
    
    $
    3,287
    
    
    $
    13,152
    
    
    $
    17,018
    
    
    $
    3,412
    
    
    $
    13,606Goodwill
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    52
    
    
    
    
    
    
    
    52$
    16,491
    
    
    $
    3,287
    
    
    $
    13,204
    
    
    $
    17,070
    
    
    $
    3,412
    
    
    $
    13,658Finite-lived
intangible assets:Franchises with
finite lives
    
    $
    55
    
    
    $
    11
    
    
    $
    44
    
    
    $
    107
    
    
    $
    33
    
    
    $
    74
 For the three months ended March 31, 2004, the net carrying amount of
indefinite-lived intangible assets was reduced by $483 million as a result of
the sale of cable systems to Atlantic Broadband Finance, LLC discussed in Note
2. Additionally, approximately $29 million of franchises that were previously
classified as finite-lived were reclassified to indefinite-lived, based on the
Companys ability in 2003 to renew these franchise assets. Franchise
amortization expense for each of the three months ended March 31, 2004 and 2003
was $1 million and $2 million, respectively, which represents the amortization
relating to franchises that did not qualify for indefinite-life treatment under
SFAS No. 142, including costs associated with franchise renewals. The Company
expects that amortization 9




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) expense on franchise assets will be approximately $4 million annually. Actual
amortization expense to be reported in future periods could differ from these
estimates as a result of new intangible asset acquisitions or divestitures,
changes in useful lives and other relevant factors. 4. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following as of March 31,
2004 and December 31, 2003: March 31,
    
    December 31,2004
    
    2003Accounts payable  trade
    
    $
    110
    
    
    $
    144Accrued capital expenditures
    
    
    100
    
    
    
    93Accrued interest
    
    
    117
    
    
    
    142Programming costs
    
    
    306
    
    
    
    319Franchise related fees
    
    
    39
    
    
    
    70State sales tax
    
    
    56
    
    
    
    61Other accrued expenses
    
    
    197
    
    
    
    215$
    925
    
    
    $
    1,044
 5. Long-Term Debt Long-term debt consists of the following as of March 31, 2004 and December 31,
2003: March 31, 2004
    
    December 31, 2003Face Value
    
    Accreted Value
    
    Face Value
    
    Accreted ValueLong-Term DebtCCH II:10.250% senior notes due 2010
    
    
    1,601
    
    
    
    1,601
    
    
    
    1,601
    
    
    
    1,601CCO Holdings:83⁄4% senior notes due 2013
    
    
    500
    
    
    
    500
    
    
    
    500
    
    
    
    500Renaissance:10.00% senior discount notes due 2008
    
    
    114
    
    
    
    116
    
    
    
    114
    
    
    
    116CC V Holdings:11.875% senior discount notes due 2008
    
    
    113
    
    
    
    113
    
    
    
    113
    
    
    
    113Credit FacilitiesCharter Operating
    
    
    4,248
    
    
    
    4,248
    
    
    
    4,459
    
    
    
    4,459CC VI Operating
    
    
    702
    
    
    
    702
    
    
    
    868
    
    
    
    868Falcon Cable
    
    
    641
    
    
    
    641
    
    
    
    856
    
    
    
    856CC VIII Operating
    
    
    1,023
    
    
    
    1,023
    
    
    
    1,044
    
    
    
    1,044$
    8,942
    
    
    $
    8,944
    
    
    $
    9,555
    
    
    $
    9,557
 In April 2004, CCH IIs indirect subsidiaries, Charter Operating and Charter
Communications Operating Capital Corp., sold $1.5 billion of senior second lien
notes in a private transaction. Additionally, Charter Operating amended and
restated its $5.1 billion credit facilities, among other things, to defer
maturities and increase availability under those facilities to approximately
$6.5 billion, consisting of a $1.5 billion six-year revolving credit facility,
a $2.0 billion six-year term loan facility and a $3.0 billion seven-year term
loan facility. Charter Operating used the additional borrowings under the
amended and restated credit facilities, together with proceeds from the sale of
the 10




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) Charter Operating senior second lien notes to refinance the credit facilities
of its subsidiaries, CC VI Operating, Falcon Cable, and CC VIII Operating, all
in one concurrent transaction. The effect of the transaction, among other
things, was to substitute Charter Operating as the lender in place of the banks
under those subsidiaries credit facilities. In addition, in connection with this transaction, a requirement was imposed
that the CC V Holdings, LLC senior discount notes be redeemed within 45 days
after Charter Holdings leverage ratio (determined under the indentures
governing the senior notes and senior discount notes issued by Charter
Holdings) is determined to be below 8.75 to 1.0, provided the ratio then
remains below that level. 6. Comprehensive Loss 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 loss on the accompanying consolidated balance
sheets. The Company reports changes in the fair value of interest rate
agreements designated as hedging instruments of the variability of cash flows
associated with floating-rate debt obligations, that meet the effectiveness
criteria of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in accumulated other comprehensive loss. Comprehensive loss for
the three months ended March 31, 2004 and 2003 was $2 million and $36 million,
respectively. 7. Accounting for Derivative Instruments and Hedging Activities The Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs.
The Companys policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, the Company has
agreed to exchange, at specified intervals through 2007, the difference between
fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. Interest rate collar agreements are used to limit
the Companys exposure to and benefits from interest rate fluctuations on
variable rate debt to within a certain range of rates. The Company does not hold or issue derivative instruments for trading purposes.
The Company does however have certain interest rate derivative instruments
that have been designated as cash flow hedging instruments. Such instruments
are those that effectively convert variable interest payments on certain debt
instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows
derivative gains and losses to offset related results on hedged items in the
condensed consolidated statement of operations. The Company has formally
documented, designated and assessed the effectiveness of transactions that
receive hedge accounting. For the three months ended March 31, 2004 and 2003,
net gain (loss) on derivative instruments and hedging activities includes
losses of $1 million and gains of $9 million, respectively, which represent
cash flow hedge ineffectiveness on interest rate hedge agreements arising from
differences between the critical terms of the agreements and the related hedged
obligations. Changes in the fair value of interest rate agreements designated
as hedging instruments of the variability of cash flows associated with
floating-rate debt obligations that meet the effectiveness criteria of SFAS No.
133 are reported in accumulated other comprehensive loss. For the three months
ended March 31, 2004 and 2003, a loss of $2 million and a gain of $7 million,
respectively, related to derivative instruments designated as cash flow hedges,
was recorded in accumulated other comprehensive loss. The amounts are
subsequently reclassified into interest expense as a yield adjustment in the
same period in which the related interest on the floating-rate debt obligations
affects earnings (losses). Certain interest rate derivative instruments are not designated as hedges as
they do not meet the effectiveness criteria specified by SFAS No. 133.
However, management believes such instruments are closely correlated with the
respective debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value with the impact
recorded as gain (loss) on derivative instruments and hedging activities in the 11




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) Companys condensed consolidated statements of operations. For the three
months ended March 31, 2004 and 2003, net gain (loss) on derivative instruments
and hedging activities includes losses of $6 million and gains of $5 million,
respectively, for interest rate derivative instruments not designated as
hedges. As of March 31, 2004 and December 31, 2003, the Company had outstanding $2.9
billion and $3.0 billion and $520 million and $520 million, respectively, in
notional amounts of interest rate swaps and collars, respectively. The
notional amounts of interest rate instruments do not represent amounts
exchanged by the parties and, thus, are not a measure of exposure to credit
loss. The amounts exchanged are determined by reference to the notional amount
and the other terms of the contracts. 8. Revenues Revenues consist of the following for the three months ended March 31, 2004 and
2003: Three MonthsEnded March 31,2004
    
    2003Video
    
    $
    849
    
    
    $
    866High-speed data
    
    
    168
    
    
    
    122Advertising sales
    
    
    59
    
    
    
    57Commercial
    
    
    56
    
    
    
    47Other
    
    
    82
    
    
    
    86$
    1,214
    
    
    $
    1,178
 9. Operating Expenses Operating expenses consist of the following for the three months ended March
31, 2004 and 2003: Three MonthsEnded March 31,2004
    
    2003Programming costs
    
    $
    334
    
    
    $
    314Advertising sales
    
    
    23
    
    
    
    21Service costs
    
    
    155
    
    
    
    150$
    512
    
    
    $
    485
 12




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 10. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of the following for the
three months ended March 31, 2004 and 2003: Three MonthsEnded March 31,2004
    
    2003General and administrative
    
    $
    208
    
    
    $
    215Marketing
    
    
    31
    
    
    
    20$
    239
    
    
    $
    235
 Components of selling expense are included in general and administrative and
marketing expense. 11. Special Charges In the fourth quarter of 2002, the Company recorded a special charge of $31
million associated with the Companys workforce reduction program and the
consolidation of its operations from three divisions and ten regions into five
operating divisions, elimination of redundant practices and streamlining its
management structure. During the year ended December 31, 2003, additional
severance related costs were incurred of $26 million and recorded as a special
charge. In the first quarter of 2004, an additional 100 employees were
identified for termination, and severance costs of $1 million were recorded in
special charges. Severance payments are made over a period of up to two years
with approximately $8 million paid during the three months ended March 31, 2004
and $43 million paid during the year ended December 31, 2003. As of March 31,
2004 and December 31, 2003, a liability of approximately $7 million and $14
million, respectively, is recorded on the accompanying condensed consolidated
balance sheets related to the realignment activities. For the three months
ended March 31, 2004, special charges also include approximately $9 million,
which represents litigation costs related to the tentative settlement of the
South Carolina national class action suit, subject to final documentation and
court approval (see note 13). During the three months ended March 31, 2003, the Company recorded severance
costs of $7 million in special charges. These severance costs included a $5
million settlement from the Internet service provider Excite@Home related to
the conversion of approximately 145,000 high-speed data customers to our
Charter Pipeline service in 2001. 12. Income Taxes CCH II is a single member limited liability company not subject to income tax.
CCH II holds all operations through indirect subsidiaries. The majority of
these indirect subsidiaries are limited liability companies that are not
subject to income tax. However, certain of CCH IIs indirect subsidiaries are
corporations and are subject to income tax. As of March 31, 2004 and December 31, 2003, the Company had net deferred income
tax liabilities of approximately $267 million. The net deferred income tax
liabilities relate to certain of CCH IIs indirect subsidiaries, which file
separate income tax returns. During the three months ended March 31, 2004 and
2003, the Company recorded $1 million of income tax expense. The income tax
expense is recognized through increases in current state income tax expense as
well as increases to the deferred tax liabilities of certain of CCH IIs
indirect corporate subsidiaries. Charter Holdco is currently under examination by the Internal Revenue Service
for the tax years ending December 31, 2000 and 1999. Management does not
expect the results of this examination to have a material adverse effect on 13




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) the Companys financial position or results of operations. 13. Contingencies Fourteen putative federal class action lawsuits (the ''Federal Class Actions)
have been filed against Charter and certain of its former and present officers
and directors in various jurisdictions allegedly on behalf of all purchasers of
Charters securities during the period from either November 8 or November 9,
1999 through July 17 or July 18, 2002. Unspecified damages are sought by the
plaintiffs. In general, the lawsuits allege that Charter utilized misleading
accounting practices and failed to disclose 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 quarterly report. In October 2002, Charter filed a motion with the Judicial Panel on
Multidistrict Litigation (the ''Panel) to transfer the Federal Class Actions
to the Eastern District of Missouri. On March 12, 2003, the Panel transferred
the six Federal Class Actions not filed in the Eastern District of Missouri to
that district for coordinated or consolidated pretrial proceedings with the
eight Federal Class Actions already pending there. The Panels transfer order
assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a
prior court order, StoneRidge Investment Partners LLC became lead plaintiff
upon entry of the Panels transfer order. StoneRidge subsequently filed a
Consolidated Amended Complaint. The Court subsequently consolidated the Federal
Class Actions into a single consolidated action (the ''Consolidated Federal
Class Action) for pretrial purposes. On June 19, 2003, following a pretrial
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 have been filed.
On February 10, 2004, in response to a joint motion made by StoneRidge and
defendants, Charter, Vogel and Allen, the court entered an order providing,
among other things, that: (1) the parties who filed such motion, engage in a
mediation within ninety (90) days; and (2) all proceedings in the Consolidated
Federal Class Action were stayed until May 10, 2004. On May 11, 2004, the
court extended the stay in the Consolidated Federal Class Action for an
additional sixty (60) days. On September 12, 2002, a shareholders derivative suit (the ''State Derivative
Action) was filed in the Circuit Court of the City of St. Louis, State of
Missouri (the Missouri State Court) against Charter and its then current
directors, as well as its former auditors. A substantively identical derivative
action was later filed and consolidated into the State Derivative Action. The
plaintiffs allege that the individual defendants breached their fiduciary
duties by failing to establish and maintain adequate internal controls and
procedures. Unspecified damages, allegedly on Charters behalf, are sought by
the plaintiffs. On March 12, 2004, an action substantively identical to the State Derivative
Action was filed in the Missouri State Court against Charter and certain of its
current and former directors, as well as its former auditors. The plaintiffs
allege that the individual defendants breached their fiduciary duties by
failing to establish and maintain adequate internal controls and procedures.
This case has not yet been consolidated with the State Derivative Action, but
Charter expects that it will be in the future. Unspecified damages, allegedly
on Charters behalf, are sought by plaintiffs. Separately, on February 12, 2003, a shareholders derivative suit (the ''Federal
Derivative Action), was filed against Charter and its then current directors
in the United States District Court for the Eastern District of Missouri. The
plaintiff alleges that the individual defendants breached their fiduciary
duties and grossly mismanaged Charter by failing to establish and maintain
adequate internal controls and procedures. Unspecified damages, allegedly on
Charters behalf, are sought by the plaintiffs. In addition to the Federal Class Actions, the State Derivative Action, the new
Missouri State Court derivative action and the Federal Derivative Action, six
putative class action lawsuits have been filed against Charter and certain of
its 14




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) then current directors and officers in the Court of Chancery of the State of
Delaware (the ''Delaware Class Actions). The lawsuits were filed after the
filing of a Schedule 13D amendment by Mr. Allen indicating that he was
exploring a number of possible alternatives with respect to restructuring or
expanding his ownership interest in Charter. Charter believes that the
plaintiffs speculated that Mr. Allen might have been contemplating an unfair
bid for shares of Charter or some other sort of going private transaction on
unfair terms and generally alleged that the defendants breached their fiduciary
duties by participating in or acquiescing to such a transaction. The lawsuits
were brought on behalf of Charters securities holders as of July 29, 2002, and
seek unspecified damages and possible injunctive relief. The Delaware Class
Actions are substantively identical. No such transaction by Mr. Allen has been
presented. Orders of dismissal without prejudice have been entered in each of
the Delaware Class Actions. All of the lawsuits discussed above are each in preliminary stages. No reserves
have been established for potential losses or related insurance recoveries on
these matters because Charter is unable to predict the outcome. Charter has
advised the Company that it intends to vigorously defend the lawsuits. In August 2002, Charter became aware of a grand jury investigation being
conducted by the U.S. Attorneys Office for the Eastern District of Missouri
into certain of its accounting and reporting practices, focusing on how 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 currently a target of the investigation.
Charter has also been advised by the U. S. Attorneys office that no member of
its board of directors, including its Chief Executive Officer, is a target of
the investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated customer account numbers. On July 25, 2003 one
of the former officers who was indicted entered a guilty plea. Charter has
advised the Company that it is fully cooperating with the investigation. On November 4, 2002, Charter received an informal, non-public inquiry from the
staff of the SEC. The SEC has subsequently issued a formal order of
investigation dated January 23, 2003, and subsequent document and testimony
subpoenas. The investigation and subpoenas generally concern Charters prior
reports with respect to 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. Charter has advised the Company that it
is fully cooperating with the SEC staff. Charter is generally required to indemnify each of the named individual
defendants in connection with the matters described above pursuant to the terms
of its bylaws and (where applicable) such individual defendants employment
agreements. In accordance with these documents, in connection with the pending
grand jury investigation, SEC investigation and the above described lawsuits,
some of its current and former directors and Charters current and former
officers have been advanced certain costs and expenses incurred in connection
with their defense. Charter has liability insurance coverage that it believes is available for the
matters described above, where applicable, subject to the terms, conditions and
limitations of the respective policies. There is no assurance that current
coverage will be sufficient for all claims described above or any future claims
that may arise. In October 2001, two customers, Nikki Nicholls and Geraldine M. Barber, filed a
class action suit against Charter Holdco in South Carolina Court of Common
Pleas, purportedly on behalf of a class of Charter Holdcos customers, alleging
that Charter Holdco improperly charged them a wire maintenance fee without
request or permission. They also claimed that Charter Holdco improperly
required them to rent analog and/or digital set-top terminals even though their
television sets were ''cable ready. Charter Holdco removed this case to the
United States District Court for the District of South Carolina in November
2001, and moved to dismiss the suit in December 2001. The federal judge
remanded the case to the South Carolina Court of Common Pleas in August 2002
without ruling on the motion to dismiss. The plaintiffs subsequently moved for
a default judgment, arguing that upon return to state court, Charter Holdco
should have but did not file a new motion to dismiss. The state court judge
granted the plaintiffs 15




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) motion over Charter Holdcos objection in September 2002. Charter Holdco
immediately appealed that decision to the South Carolina Court of Appeals and
the South Carolina Supreme Court, but those courts have ruled that until a
final judgment is entered against Charter Holdco, they lack jurisdiction to
hear the appeal. In January 2003, the Court of Common Pleas granted the plaintiffs motion for
class certification. In October and November 2003, Charter Holdco filed motions
(a) asking that court to set aside the default judgment, and (b) seeking
dismissal of plaintiffs suit for failure to state a claim. In January 2004,
the Court of Common Pleas granted in part and denied in part Charter Holdcos
motion to dismiss for failure to state a claim. It also took under advisement
Charter Holdcos motion to set aside the default judgment. In April 2004, the
parties participated in a mediation with respect to this and related
litigation. The mediator made a proposal to the parties. In May 2004, the
parties to this and the related litigation accepted the mediators proposal and
reached a tentative settlement. The tentative settlement remains subject to
final documentation and court approval. As a result of the tentative
settlement, the Company has recorded a special charge of $9 million in its
condensed consolidated statement of operations for the three months ended March
31, 2004 (see note 11). Charter is unable to predict the outcome of the lawsuits and the government
investigations described above. An unfavorable outcome in any of these lawsuits
or the government investigations could have a material adverse effect on
Charters and the Companys financial condition, results of operations or its
liquidity. In addition to the matters set forth above, Charter and the Company are also
party to other lawsuits and claims that arose in the ordinary course of
conducting its business. In the opinion of management, after taking into
account recorded liabilities, the outcome of these other lawsuits and claims
are not expected to have a material adverse effect on the Companys financial
condition, results of operations or its liquidity. 14. Stock Compensation Plans The Company has historically accounted for stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, as permitted by
SFAS No. 123, Accounting for Stock-Based Compensation. On January 1, 2003, the
Company adopted the fair value measurement provisions of SFAS No. 123 using the
prospective method under which the Company recognizes compensation expense of a
stock-based award to an employee over the vesting period based on the fair
value of the award on the grant date consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
Adoption of these provisions resulted in utilizing a preferable accounting
method as the condensed consolidated financial statements will present the
estimated fair value of stock-based compensation in expense consistently with
other forms of compensation and other expense associated with goods and
services received for equity instruments. In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,the fair
value method is being applied only to awards granted or modified after January
1, 2003, whereas awards granted prior to such date will continue to be
accounted for under APB No. 25, unless they are modified or settled in cash.
Management believes the adoption of these provisions will not have a material
impact on the consolidated results of operations or financial condition of the
Company. The ongoing effect on results of operations or financial condition
will depend on future stock-based compensation awards granted by the Company. 16




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) SFAS No. 123 requires pro forma disclosure of the impact on earnings as if the
compensation expense for these plans had been determined using the fair value
method. The following table presents the Companys net loss as reported and
the pro forma amounts that would have been reported using the fair value method
under SFAS No. 123 for the periods presented: Three Months Ended March 31,2004
    
    2003Net loss
    
    $
    
    
    
    $
    (43
    )Add back stock-based compensation expense related to stock
options included in reported net loss
    
    
    14
    
    
    
    Less employee stock-based compensation expense determined under fair
value based method for all employee stock option awards
    
    
    (12
    )
    
    
    (5
    )Effects of stock option exchange
    
    
    48
    
    
    
    Pro forma
    
    $
    50
    
    
    $
    (48
    )
 In January 2004, Charter commenced an option exchange program in which
employees of the Company 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 restricted Charter Class A common stock or, in some instances, cash.
Based on a sliding exchange ratio, which varied depending on the exercise price
of an employees outstanding options, if an employee would have received more
than 400 shares of restricted stock in exchange for tendered options, Charter
issued to that employee shares of restricted stock in the exchange. If, based
on the exchange ratios, an employee would have received 400 or fewer shares of
restricted stock in exchange for tendered options, Charter instead paid the
employee cash in an amount equal to the number of shares the employee would
have received multiplied by $5.00. The offer applied to options (vested and
unvested) to purchase a total of 22,929,573 shares of Charter Class A common
stock, or approximately 48% of Charters 47,882,365 total options issued and
outstanding as of December 31, 2003. Participation by employees was voluntary.
Those members of Charters board of directors who were not also employees of
the Company were not eligible to participate in the exchange offer. In the closing of the exchange offer on February 20, 2004, Charter accepted for
cancellation eligible options to purchase approximately 18,137,664 shares of
Charter Class A common stock. In exchange, Charter granted 1,966,686 shares of
restricted stock, including 460,777 performance shares to eligible employees of
the rank of senior vice president and above, and paid a total cash amount of
approximately $4 million (which amount includes applicable withholding taxes)
to those employees who received cash rather than shares of restricted stock.
The grants of restricted stock were effective as of February 25, 2004.
Employees tendered approximately 79% of the options exchangeable under the
program. The cost to the Company of the stock option exchange program was approximately
$12 million, with a 2004 cash compensation expense of approximately $4 million
and a non-cash compensation expense of approximately $8 million to be expensed
ratably over the three-year vesting period of the restricted stock issued in
the exchange. In January 2004, the Compensation Committee of the board of directors of
Charter approved Charters Long-Term Incentive Program (LTIP), which is a
program administered under the 2001 Stock Incentive Plan. Employees of Charter
and its subsidiaries whose pay classifications exceed a certain level are
eligible to receive stock options, and more senior level employees are eligible
to receive stock options and performance shares. Under the LTIP, the stock
options vest 25% on each of the first four anniversaries of the date of grant.
The performance shares are earned on the third anniversary of the grant date,
conditional upon Charters performance against financial performance measures
established by Charters management and approved by its board of directors as
of the time of the award. 17




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 15. Related Parties CC VIII.As part of the acquisition of the cable systems owned by Bresnan
Communications Company Limited Partnership in February 2000, CC VIII, LLC (CC
VIII), CCH IIs indirect limited liability company subsidiary, issued, after
adjustments, 24,279,943 Class A preferred membership units (collectively, the
''CC VIII interest) with a value and an initial capital account of
approximately $630 million to certain sellers affiliated with AT&T Broadband,
subsequently owned by Comcast Corporation (the ''Comcast sellers). While held
by the Comcast sellers, the CC VIII interest was entitled to a 2% priority
return on its initial capital account and such priority return was entitled to
preferential distributions from available cash and upon liquidation of CC VIII.
While held by the Comcast sellers, the CC VIII interest generally did not share
in the profits and losses of CC VIII. Mr. Allen granted the Comcast sellers the
right to sell to him the CC VIII interest for approximately $630 million plus
4.5% interest annually from February 2000 (the ''Comcast put right). In April
2002, the Comcast sellers exercised the Comcast put right in full, and this
transaction was consummated on June 6, 2003. Accordingly, Mr. Allen has become
the holder of the CC VIII interest, indirectly through an affiliate.
Consequently, subject to the matters referenced in the next paragraph, Mr.
Allen generally thereafter will be allocated his pro rata share (based on
number of membership interests outstanding) of profits or losses of CC VIII,
which is recorded in the accompanying condensed consolidated financial
statements as minority interest. In the event of a liquidation of CC VIII, Mr.
Allen would be entitled to a priority distribution with respect to the 2%
priority return (which will continue to accrete). Any remaining distributions
in liquidation would be distributed to CC V Holdings, LLC and Mr. Allen in
proportion to CC V Holdings, LLCs capital account and Mr. Allens capital
account (which will equal the initial capital account of the Comcast sellers of
approximately $630 million, increased or decreased by Mr. Allens pro rata
share of CC VIIIs profits or losses (as computed for capital account purposes)
after June 6, 2003). The limited liability company agreement of CC VIII does
not provide for a mandatory redemption of the CC VIII interest. An issue has arisen as to whether the documentation for the Bresnan transaction
was correct and complete with regard to the ultimate ownership of the CC VIII
interest following consummation of the Comcast put right. Specifically, under
the terms of the Bresnan transaction documents that were entered into in June
1999, the Comcast sellers originally would have received, after adjustments,
24,273,943 Charter Holdco membership units, but due to an FCC regulatory issue
raised by the Comcast sellers shortly before closing, the Bresnan transaction
was modified to provide that the Comcast sellers instead would receive the
preferred equity interests in CC VIII represented by the CC VIII interest. As
part of the last-minute changes to the Bresnan transaction documents, a draft
amended version of the Charter Holdco limited liability company agreement was
prepared, and contract provisions were drafted for that agreement that would
have required an automatic exchange of the CC VIII interest for 24,273,943
Charter Holdco membership units if the Comcast sellers exercised the Comcast
put right and sold the CC VIII interest to Mr. Allen or his affiliates.
However, the provisions that would have required this automatic exchange did
not appear in the final version of the Charter Holdco limited liability company
agreement that was delivered and executed at the closing of the Bresnan
transaction. The law firm that prepared the documents for the Bresnan
transaction brought this matter to the attention of Charter and representatives
of Mr. Allen in 2002. Thereafter, the board of directors of Charter formed a Special Committee
(currently comprised of Messrs. Tory, Wangberg and Merritt) to investigate the
matter and take any other appropriate action on behalf of Charter with respect
to this matter. After conducting an investigation of the relevant facts and
circumstances, the Special Committee determined that a ''scriveners error
had occurred in February 2000 in connection with the preparation of the
last-minute revisions to the Bresnan transaction documents and that, as a
result, Charter should seek the reformation of the Charter Holdco limited
liability company agreement, or alternative relief, in order to restore and
ensure the obligation that the CC VIII interest be automatically exchanged for
Charter Holdco units. The Special Committee further determined that, as part of
such contract reformation or alternative relief, Mr. Allen should be required
to contribute the CC VIII interest to Charter Holdco in exchange for 24,273,943
Charter Holdco membership units. The Special Committee also recommended to the
board of directors of Charter that, to the extent the contract reformation is
achieved, the board of directors should consider whether the CC VIII interest
should ultimately be held by Charter Holdco or Charter Holdings or another
entity owned directly or indirectly by them. 18




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##### Table of Contents



CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) Mr. Allen disagrees with the Special Committees determinations described above
and has so notified the Special Committee. Mr. Allen contends that the
transaction is accurately reflected in the transaction documentation and
contemporaneous and subsequent company public disclosures. The parties engaged in a process of non-binding mediation to seek to resolve
this matter, without success. The Special Committee is evaluating what further
actions or processes it may undertake to resolve this dispute. To accommodate
further deliberation, each party has agreed to refrain from initiating legal
proceedings over this matter until it has given at least ten days prior notice
to the other. In addition, the Special Committee and Mr. Allen have determined
to utilize the Delaware Court of Chancerys program for mediation of complex
business disputes in an effort to resolve the CC VIII interest dispute. If the
Special Committee and Mr. Allen are unable to reach a resolution through that
mediation process or to agree on an alternative dispute resolution process, the
Special Committee intends to seek resolution of this dispute through judicial
proceedings in an action that would be commenced, after appropriate notice, in
the Delaware Court of Chancery against Mr. Allen and his affiliates seeking
contract reformation, declaratory relief as to the respective rights of the
parties regarding this dispute and alternative forms of legal and equitable
relief. The ultimate resolution and financial impact of the dispute are not
determinable at this time. TechTV, Inc.TechTV, Inc. (''TechTV) operates a cable television network
that offers programming mostly related to technology. Pursuant to an
affiliation agreement that originated in 1998 and that terminates in 2008,
TechTV has provided the Company with programming for distribution via its cable
systems. The affiliation agreement provides, among other things, that TechTV
must offer Charter Holdco certain terms and conditions that are no less
favorable in the affiliation agreement than are given to any other distributor
that serves the same number of or fewer TechTV viewing customers. Additionally,
pursuant to the affiliation agreement, the Company was entitled to incentive
payments for channel launches through December 31, 2003. In March 2004, Charter Holdco entered into agreements with Vulcan Programming
and TechTV, which provide for (i) Charter Holdco and TechTV to amend the
affiliation agreement which, among other things, revises the description of the
TechTV network content, provides for Charter Holdco to waive certain claims
against TechTV relating to alleged breaches of the affiliation agreement and
provides for TechTV 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 the
Companys cable systems in consideration of the agreements, obligations,
releases and waivers under the agreements and in settlement of the
aforementioned claims and (iii) TechTV to be a provider of content relating to
technology and video gaming for the Companys interactive television platforms
through December 31, 2006 (exclusive for the first year). The Company
recognized approximately $4 million of the Vulcan Programming payment as an
offset to programming expense during the three months ended March 31, 2004 with
the remaining to be recognized over the term of the agreement. The Company
believes that Vulcan Programming, which is 100% owned by Mr. Allen, owned an
approximate 98% equity interest in TechTV as of March 31, 2004. Until September
2003, Mr. Savoy, a former Charter director, was the president and director of
Vulcan Programming and was a director of TechTV. Mr. Wangberg, one of Charters
directors, was the chairman, chief executive officer and a director of TechTV.
Although Mr. Wangberg resigned as the chief executive officer of TechTV in July
2002, he remained a director of TechTV until Vulcan Programming sold TechTV to
an unrelated third party in May 2004. Mr. Allen was a director of TechTV until
such sale. Digeo, Inc.On June 30, 2003, Charter Holdco entered into an agreement with
Motorola for the purchase of 100,000 digital video recorder (DVR) units. The
software for these DVR units is being supplied by Digeo Interactive, LLC
(Digeo Interactive), a wholly owned subsidiary of Digeo, Inc. (Digeo),
under a license agreement entered into in April 2004. Under the license
agreement Digeo Interactive granted to Charter Holdco the right to use Digeos
proprietary software for the number of DVR units that the Company deploys from
a maximum of 10 headends through year-end 2004. The license granted for each
unit deployed under the agreement is valid for five years. In 19




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CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) addition, the Company will pay certain other fees including a per-headend
license fee and maintenance fees. Total license and maintenance fees during
the term of the agreement are expected to be approximately $3 million. The
agreement provides that the Company is entitled to receive contract terms,
considered on the whole, and license fees, considered apart from other contract
terms, no less favorable than those accorded to any other Digeo customer. In May 2004, Charter Holdco entered into a binding term sheet with Digeo
Interactive for the purchase of 70,000 Digeo PowerKey DVR units. The term
sheet provides that the parties will proceed in good faith to negotiate, prior
to year-end 2004, definitive agreements for the purchase of the DVR units and
that the parties will enter into a license agreement for Digeos proprietary
software on terms substantially similar to the terms of the license agreement
described above. Total purchase price and license and maintenance fees during
the term of the definitive agreements are expected to be approximately $40
million. The term sheet and any definitive agreements will be terminable at no
penalty to Charter Holdco in certain circumstances. The Company believes that Vulcan Ventures, an entity controlled by Mr. Allen,
owns an approximate 60% equity interest in Digeo, Inc. Messrs. Allen and Vogel
are directors of Digeo. Mr. Savoy, who resigned from Charters board of
directors in April 2004, was a director and served on the compensation
committee of Digeo until September 2003. Mr. Vogel owns options to purchase
10,000 shares of Digeo common stock. 20




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. General CCH II, LLC (CCH II) is a holding company whose principal assets as of March
31, 2004 are equity interests in its operating subsidiaries. CCH II is a
wholly owned subsidiary of CCH I, LLC (CCH I). CCH I is a wholly owned
subsidiary of Charter Communications Holdings, LLC (Charter Holdings).
Charter Holdings is a wholly owned subsidiary of Charter Communications Holding
Company, LLC (Charter Holdco), which is a subsidiary of Charter
Communications, Inc. (Charter). We, us and our refer to CCH II and its
subsidiaries. Our parent companies are CCH I, Charter Holdings, Charter
Holdco and Charter. We offer our 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 definition television, video on
demand, telephony and interactive television. We sell our cable video
programming, high-speed data and advanced broadband services on a subscription
basis. The following table summarizes our customer statistics for analog and digital
video, residential high-speed data and residential telephony as of March 31,
2004 and 2003: Approximate as ofMarch 31,
    
    March 31,2004 (a)
    
    2003 (a)Cable Video Services:Analog Video:Residential (non-bulk) analog video customers (b)
    
    
    5,953,200
    
    
    
    6,277,300Multi-dwelling (bulk) and commercial unit customers (c)
    
    
    238,800
    
    
    
    250,900Analog video customers (b)(c)
    
    
    6,192,000
    
    
    
    6,528,200Digital Video:Digital video customers (d)
    
    
    2,657,400
    
    
    
    2,651,100Digital percentage of analog video customers (b)(c)(d)(e)
    
    
    43
    %
    
    
    41
    %Digital set-top terminals deployed
    
    
    3,756,300
    
    
    
    3,749,400Non-Video Cable Services:Residential high-speed data customers (f)
    
    
    1,653,000
    
    
    
    1,272,300Dial-up customers
    
    
    8,900
    
    
    
    12,700Telephony customers (g)
    
    
    26,300
    
    
    
    22,800
 Pro forma for the effect of the sale of systems to Atlantic Broadband Finance,
LLC, which closed in March and April 2004, and to WaveDivision Holdings, LLC,
which closed on October 1, 2003, as if all of these sales had occurred as of
January 1, 2003, analog video customers, digital video customers and
residential high-speed data customers would have been 6,265,900, 2,556,700 and
1,229,200, respectively as of March 31, 2003.  (a)
    
    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). Further, customers
include persons receiving service under promotional programs that
offered up to two months of service for free, some of whom had not
requested to be disconnected, but had not become paying customers as of
March 31, 2004. If such persons do not become paying customers, we do
not believe this would have a material impact on our consolidated
financial condition or consolidated results of operations. In
addition, at March 31, 2004 and 2003, customers include approximately
5,800 and 3,700 persons, whose accounts were over 90 days past due in
payment and approximately 2,200 and 1,000 of which were over 120 days
past due in payment, respectively. 21




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##### Table of Contents



(b)
    
    Residential (non-bulk) analog video customers include all
residential customers who receive video services, except for
complimentary accounts (such as our employees).(c)
    
    Included within video customers are those in commercial and
multi-dwelling structures, which are calculated on an equivalent bulk
unit (EBU) basis. EBU is calculated for a system by dividing the
bulk price charged to accounts in an area by the most prevalent price
charged to non-bulk residential customers in that market for the
comparable tier of service. The EBU method of estimating analog video
customers is consistent with the methodology used in determining costs
paid to programmers and has been consistently applied year over year.
As we increase our effective analog video prices to residential
customers without a corresponding increase in the prices charged to
commercial service or multi-dwelling customers, our EBU count will
decline even if there is no real loss in commercial service or
multi-dwelling customers.(d)
    
    Digital video customers include all households that have one or
more digital set-top terminals. Included in digital video customers on
March 31, 2004 and 2003 are approximately 12,000 and 14,800 customers,
respectively, that receive digital video service directly through
satellite transmission.(e)
    
    Represents the number of digital video customers as a percentage of
analog video customers.(f)
    
    All of these customers also receive video service and are included
in the video statistics above, except that the video statistics do not
include approximately 142,700 and 56,700 of these customers at March
31, 2004 and 2003, respectively, who were residential high-speed data
only customers.(g)
    
    Telephony customers include all households receiving telephone
service. Overview of Operations We have a history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally attributable
to insufficient revenue to cover the combination of operating costs and
interest costs we incur because of our high level of debt, depreciation
expenses that we incur resulting from the capital investments we have made and
continue to make in our cable properties, and amortization and impairment of
our franchise intangibles. We expect that these expenses (other than
amortization and impairment of franchises) will remain significant, and we
therefore expect to continue to report net losses for the foreseeable future. For the three months ended March 31, 2004 and 2003, our income from operations,
which includes depreciation and amortization expense but excludes interest
expense, was $175 million and $77 million, respectively. Our operating margins
increased from 7% for the three months ended March 31, 2003 to 14% for the
three months ended March 31, 2004, primarily the result of a gain on the sale
of certain cable systems in Florida, Pennsylvania, Maryland, Delaware and West
Virginia to Atlantic Broadband Finance, LLC of approximately $108 million,
partially offset by increases in option compensation expense and special
charges that we recognized in the three months ended March 31, 2004. Since our inception, and currently, our ability to conduct operations has been
and continues to be dependent on our access to credit under our credit
facilities. The occurrence of an event of default under our credit facilities
could result in borrowings from these credit facilities being unavailable to us
and could, in the event of a payment default or acceleration, also trigger
events of default under our outstanding notes and would have a material adverse
effect on us. Including the effects of the refinancing in April 2004,
approximately $15 million of our financing matures during 2004, which we expect
to fund through borrowings under our credit facilities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES For a discussion of our critical accounting policies and the means by which we
develop estimates therefore see Managements Discussion and Analysis of
Financial Condition and Results of Operations in Amendment
No. 2 to our Registration Statement on Form S-4. 22




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##### Table of Contents



RESULTS OF OPERATIONS Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 The following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted for
the periods presented (dollars in millions): Three Months Ended March 31,2004
    
    2003Revenues
    
    $
    1,214
    
    
    
    100
    %
    
    $
    1,178
    
    
    
    100
    %Costs and expenses:Operating (excluding depreciation and amortization)
    
    
    512
    
    
    
    42
    %
    
    
    485
    
    
    
    41
    %Selling, general and administrative
    
    
    239
    
    
    
    20
    %
    
    
    235
    
    
    
    20
    %Depreciation and amortization
    
    
    370
    
    
    
    31
    %
    
    
    370
    
    
    
    31
    %(Gain) loss on sale of assets, net
    
    
    (106
    )
    
    
    (9
    )%
    
    
    9
    
    
    
    1
    %Option compensation expense, net
    
    
    14
    
    
    
    1
    %
    
    
    
    
    
    
    Special charges, net
    
    
    10
    
    
    
    1
    %
    
    
    2
    
    
    
    1,039
    
    
    
    86
    %
    
    
    1,101
    
    
    
    93
    %Income from operations
    
    
    175
    
    
    
    14
    %
    
    
    77
    
    
    
    7
    %Interest expense, net
    
    
    (163
    )
    
    
    
    
    
    
    (130
    )Gain (loss) on derivative instruments and hedging
activities, net
    
    
    (7
    )
    
    
    
    
    
    
    14Other, net
    
    
    (1
    )
    
    
    
    
    
    
    (171
    )
    
    
    
    
    
    
    (116
    )Income (loss) before minority interest
and income taxes
    
    
    4
    
    
    
    
    
    
    
    (39
    )Minority interest
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Income (loss) before income taxes
    
    
    1
    
    
    
    
    
    
    
    (42
    )Income tax expense
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Net loss
    
    $
    
    
    
    
    
    
    
    $
    (43
    )
 Revenues.Revenues increased by $36 million, or 3%, from $1.2 billion for the
three months ended March 31, 2003 to $1.2 billion for the three months ended
March 31, 2004. This increase is principally the result of an increase of
380,700 and 6,300 high-speed data and digital video customers, respectively, as
well as price increases for video and high-speed data services, and is offset
partially by a decrease of 336,200 analog video customers. Included in the
reduction in analog video customers and reducing the increase in digital video
and high-speed data customers are 262,300 analog video customers, 94,400
digital video customers and 43,100 high-speed data customers sold in the cable
system sales to Atlantic Broadband Finance, LLC, which closed on March 1, 2004,
and to WaveDivision Holdings, LLC, which closed on October 1, 2003
(collectively referred to herein as the Systems Sales), and the sale of the
New York system to Atlantic Broadband Finance, LLC, which occurred in April
2004. Our goal is to increase revenues by stabilizing our analog video customer
base, implementing price increases on certain services and packages and
increasing revenues from incremental high-speed data services, digital video
and advanced products and services, such as telephony using voice-over-Internet
protocol, video on demand (VOD), high definition television and digital video
recorders, that we provide to our existing customer base and commercial
customers. 23




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##### Table of Contents



Revenues by service offering are as follows (dollars in millions): Three Months Ended March 31,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofRevenues
    
    Revenues
    
    Revenues
    
    Revenues
    
    Change
    
    % ChangeVideo
    
    $
    849
    
    
    
    70
    %
    
    $
    866
    
    
    
    74
    %
    
    $
    (17
    )
    
    
    (2
    )%High-speed data
    
    
    168
    
    
    
    14
    %
    
    
    122
    
    
    
    10
    %
    
    
    46
    
    
    
    38
    %Advertising sales
    
    
    59
    
    
    
    5
    %
    
    
    57
    
    
    
    5
    %
    
    
    2
    
    
    
    4
    %Commercial
    
    
    56
    
    
    
    4
    %
    
    
    47
    
    
    
    4
    %
    
    
    9
    
    
    
    19
    %Other
    
    
    82
    
    
    
    7
    %
    
    
    86
    
    
    
    7
    %
    
    
    (4
    )
    
    
    (5
    )%$
    1,214
    
    
    
    100
    %
    
    $
    1,178
    
    
    
    100
    %
    
    $
    36
    
    
    
    3
    %
 Video revenues consist primarily of revenues from analog and digital video
services provided to our non-commercial customers. Video revenues decreased by
$17 million, or 2%, from $866 million for the three months ended March 31, 2003
to $849 million for the three months ended March 31, 2004. Approximately $14
million of the decrease was the result of the System Sales, while the remaining
decrease of approximately $3 million was primarily the result of a decline in
analog video customers partially offset by price increases and an increase in
digital video customers. Revenues from high-speed data services provided to our non-commercial customers
increased $46 million, or 38%, from $122 million for the three months ended
March 31, 2003 to $168 million for the three months ended March 31, 2004.
Approximately 92% of the increase related to the increase in the average number
of customers, whereas approximately 8% related to the increase in average price
of the service. The increase was primarily the result of the addition of
high-speed data customers within our existing service areas. We were also able
to offer this service to more of our customers, as the estimated percentage of
homes passed that could receive high-speed data service increased from 84% as
of March 31, 2003 to 87% as of March 31, 2004 as a result of our system
upgrades. Advertising sales revenues consist primarily of revenues from commercial
advertising customers, programmers and other vendors. Advertising sales
increased $2 million, or 4%, from $57 million for the three months ended March
31, 2003 to $59 million for the three months ended March 31, 2004, primarily as
a result of an increase in local advertising sales revenues offset partially by
a decrease in advertising revenue from vendors. For the three months ended
March 31, 2004 and 2003, we received $3 million and $4 million, respectively,
in advertising revenue from vendors. Commercial revenues consist primarily of revenues from cable video and
high-speed data services to our commercial customers. Commercial revenues
increased $9 million, or 19%, from $47 million for the three months ended March
31, 2003 to $56 million for the three months ended March 31, 2004, primarily a
result of an increase in commercial high-speed data revenues. Other revenues consist of revenues from franchise fees, equipment rental,
customer installations, home shopping, dial-up Internet service, late payment
fees, wire maintenance fees and other miscellaneous revenues. Other revenues
decreased $4 million, or 5%, from $86 million for the three months ended March
31, 2003 to $82 million for the three months ended March 31, 2004. The
decrease was primarily the result of a decrease in installation revenue. 24




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##### Table of Contents



Operating Expenses.Operating expenses increased $27 million, or 6%, from $485
million for the three months ended March 31, 2003 to $512 million for the three
months ended March 31, 2004. Programming costs included in the accompanying
condensed consolidated statements of operations were $334 million and $314
million, representing 32% and 29% of total costs and expenses for the three
months ended March 31, 2004 and 2003, respectively. Key expense components as
a percentage of revenues were as follows (dollars in millions): Three Months Ended March 31,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofExpenses
    
    Revenues
    
    Expenses
    
    Revenues
    
    Change
    
    % ChangeProgramming
    
    $
    334
    
    
    
    27
    %
    
    $
    314
    
    
    
    26
    %
    
    $
    20
    
    
    
    6
    %Advertising sales
    
    
    23
    
    
    
    2
    %
    
    
    21
    
    
    
    2
    %
    
    
    2
    
    
    
    10
    %Service costs
    
    
    155
    
    
    
    13
    %
    
    
    150
    
    
    
    13
    %
    
    
    5
    
    
    
    3
    %$
    512
    
    
    
    42
    %
    
    $
    485
    
    
    
    41
    %
    
    $
    27
    
    
    
    6
    %
 Programming costs consist primarily of costs paid to programmers for the
provision of analog, premium and digital channels and pay-per-view programming.
The increase in programming costs of $20 million, or 6%, for the three months
ended March 31, 2004 over the three months ended March 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,
partially offset by a decrease in analog video customers. Programming costs
were offset by the amortization of payments received from programmers in
support of launches of new channels of $14 million and $16 million for the
three months ended March 31, 2004 and 2003, respectively. Programming costs
also include a $4 million reduction related to the settlement of a dispute with
TechTV, Inc. See note 15 to the condensed consolidated financial statements. Our cable programming costs have increased in every year we have operated in
excess of customary inflationary and cost-of-living type increases, and we
expect them to continue to increase because of a variety of factors, including
additional programming being provided to customers as a result of system
rebuilds that increase channel capacity, increased costs to produce or purchase
programming and inflationary or negotiated annual increases. Our increasing
programming costs will result in declining video product margins to the extent
we are unable to pass on cost increases to our customers. We expect to
partially offset any resulting margin compression from our traditional video
services with revenue from advanced video services, increased incremental
high-speed data revenues, advertising revenues and commercial services
revenues. Advertising sales expenses consist of costs related to traditional advertising
services provided to advertising customers, including salaries and benefits and
commissions. Advertising sales expenses increased $2 million, or 10%,
primarily as a result of increased salary and benefit costs and marketing
costs. Service costs consist primarily of service personnel salaries and
benefits, franchise fees, system utilities, Internet service provider fees,
maintenance and pole rent expense. The increase in service costs of $5
million, or 3%, resulted primarily from additional activity associated with
ongoing infrastructure maintenance. 25




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##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased by $4 million, or 2%, from $235 million for
the three months ended March 31, 2003 to $239 million for the three months
ended March 31, 2004. Key components of expense as a percentage of revenues
were as follows (dollars in millions): Three Months Ended March 31,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofExpenses
    
    Revenues
    
    Expenses
    
    Revenues
    
    Change
    
    % ChangeGeneral and
administrative
    
    $
    208
    
    
    
    17
    %
    
    $
    215
    
    
    
    18
    %
    
    $
    (7
    )
    
    
    (3
    )%Marketing
    
    
    31
    
    
    
    3
    %
    
    
    20
    
    
    
    2
    %
    
    
    11
    
    
    
    55
    %$
    239
    
    
    
    20
    %
    
    $
    235
    
    
    
    20
    %
    
    $
    4
    
    
    
    2
    %
 General and administrative expenses consist primarily of salaries and benefits,
rent expense, billing costs, call center costs, internal network costs, bad
debt expense and property taxes. The decrease in general and administrative
expenses of $7 million, or 3%, resulted primarily from decreases in salary and
benefit costs of $11 million and professional fees of $3 million. These
decreases were partially offset by increases in third party call center costs
of $4 million and bad debt expense of $2 million. Marketing expenses increased $11 million, or 55%, as a result of introducing
the Get Hooked national branding campaign related to our service offerings. Depreciation and Amortization.Depreciation and amortization expense remained
constant at $370 million for the three months ended March 31, 2004 and 2003.
The increase in capital expenditures was offset by lower depreciation as the
result of the System Sales. (Gain) Loss on Sale of Assets, Net.Gain on sale of assets of $106 million for
the three months ended March 31, 2004 primarily represents the pretax gain
realized on the sale of systems to Atlantic Broadband Finance, LLC which closed
on March 1, 2004. The loss on sale of assets of $9 million for the three
months ended March 31, 2003 represents the loss realized on the sale of fixed
assets. Option Compensation Expense, Net. Option compensation expense of $14 million
for the three months ended March 31, 2004 primarily represents the expense of
approximately $6 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 restricted Charter Class A common stock or, in some instances, cash.
The exchange offer closed in February 2004. Additionally, during the three
months ended March 31, 2004, we recognized approximately $3 million related to
the options granted under the Charter Long-Term Incentive Program and
approximately $5 million related to options granted following the adoption of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Special Charges, Net.Special charges of $10 million for the three months ended
March 31, 2004 represents approximately $9 million of litigation costs related
to the tentative settlement of the South Carolina national class action suit,
subject to final documentation and court approval and approximately $1 million
of severance and related costs of our workforce reduction. Special charges of
$2 million for the three months ended March 31, 2003 represents $7 million of
severance and related costs of our workforce reduction, partially offset by a
$5 million credit from a settlement from the Internet service provider
Excite@Home related to the conversion of approximately 145,000 high-speed data
customers to our Charter Pipeline service in 2001. We expect to continue to
record additional special charges in 2004 related to the reorganization of our
operations. Interest Expense, Net. Net interest expense increased by $33 million, or 25%,
from $130 million for the three months ended March 31, 2003 to $163 million for
the three months ended March 31, 2004. The increase in net interest expense
was a result of an increase in our average borrowing rate from 5.7% in the
first quarter of 2003 to 6.6% in 26




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##### Table of Contents



the first quarter of 2004 coupled with an increase of $1.1 billion in average
debt outstanding from $8.2 billion for the first quarter of 2003 compared to
$9.3 billion for the first quarter of 2004. Gain (Loss) on Derivative Instruments and Hedging Activities, Net.Net gain on
derivative instruments and hedging activities decreased $21 million from a gain
of $14 million for the three months ended March 31, 2003 to a loss of $7
million for the three months ended March 31, 2004. The decrease is primarily
the result of an increase in losses on interest rate agreements, which do not
qualify for hedge accounting under SFAS No. 133, which decreased from a gain of
$5 million for the three months ended March 31, 2003 to a loss of $6 million
for the three months ended March 31, 2004. This was coupled with an increase
in losses on interest rate agreements, as a result of hedge ineffectiveness, on
designated hedges, which decreased from a gain of $9 million for the three
months ended March 31, 2003 to a loss of $1 million for the three months ended
March 31, 2004. Other, Net.Net other expense of $1 million for the three months ended March
31, 2004 primarily represents losses on equity investments. Minority Interest.Minority interest expense represents the 10% dividend on
preferred membership units in CCH IIs indirect subsidiary, Charter Helicon,
LLC and the 2% accretion of the preferred membership interests in CC VIII and,
since June 6, 2003, the pro rata share of the profits of CC VIII allocated to
Mr. Allen. Income Tax Expense.Income tax expense of $1 million was recognized for each of
the three months ended March 31, 2004 and 2003. The income tax expense is
recognized through increases in current state income tax expense as well as
increases to the deferred tax liabilities of certain of CCH IIs indirect
corporate subsidiaries. Net Loss. Net loss decreased by $43 million, from $43 million for the three
months ended March 31, 2003 to $0 for the three months ended March 31, 2004 as
a result of the factors described above. Liquidity and Capital Resources Introduction This section contains a discussion
of our liquidity and capital resources, including a discussion of our cash
position, sources and uses of cash, access to credit facilities and other
financing sources, historical financing activities, cash needs, capital
expenditures and outstanding debt. Overview Our business requires significant
cash to fund capital expenditures, debt service costs and ongoing operations.
We have historically funded our operating activities, capital requirements and
debt service costs through cash flows from operating activities, borrowings
under our credit facilities, equity contributions from our parent companies,
borrowings from our parent companies, issuances of debt securities and cash on
hand. The mix of funding sources changes from period to period, but for the
three months ended March 31, 2004, approximately 13% of our funding
requirements were from cash flows from operating activities, 85% was from
proceeds from the sale of cable systems described below and 2% was from cash on
hand. For the three months ended March 31, 2004, net cash flows used in
financing activities were $659 million, reflecting a net repayment of debt of
$614 million. We expect that our mix of sources of funds will continue to
change in the future based on overall needs relative to our cash flow and on
the availability of funds under our credit facilities, our access to the debt
markets and our ability to generate cash flows from operating activities. In April 2004, CCH IIs indirect subsidiaries, Charter Communications
Operating, LLC (Charter Operating) and Charter Communications Operating
Capital Corp., sold $1.5 billion of senior second lien notes in a private
transaction. Additionally, Charter Operating amended and restated its $5.1
billion credit facilities, among other things, to defer maturities and increase
availability under those facilities to approximately $6.5 billion, consisting
of a $1.5 billion six-year revolving credit facility, a $2.0 billion six-year
term loan facility and a $3.0 billion seven-year term loan facility. Charter
Operating used the additional borrowings under the amended and restated credit
facilities, together with proceeds from the sale of the Charter Operating
senior second lien notes to refinance the credit 27




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facilities of its subsidiaries, CC VI Operating Company, LLC (CC VI
Operating), Falcon Cable Communications, LLC (Falcon Cable), and CC VIII
Operating, LLC (CC VIII Operating), all in one concurrent transaction. The
effect of the transaction, among other things, was to substitute Charter
Operating as the lender in place of the banks under the subsidiaries credit
facilities. On March 1, 2004, we closed the sale of certain cable systems in Florida,
Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband
Finance, LLC. We closed on the sale of an additional cable system in New York
to Atlantic Broadband Finance, LLC in April 2004. Subject to post closing
contractual adjustments, we expect the total net proceeds from the sale of all
of these systems to be approximately $733 million, of which $10 million is
currently held in an indemnity escrow account (with the unused portion thereof
to be released by March 1, 2005). The proceeds received to date have been used
to repay a portion of our credit facilities. As of March 31, 2004, we were and, as of the date of this report, we are in
compliance with the covenants under our credit facilities and our indentures,
and we expect to remain in compliance with those covenants throughout 2004. As
of March 31, 2004, we held $72 million in cash and cash equivalents. Further,
at the closing of the Charter Operating notes offering and the related
refinancing, we had total unused availability of approximately $1.0 billion
under the amended and restated Charter Operating credit facilities. As a
result, we expect that our cash on hand, cash flows from operating activities
and the amounts available under our credit facilities should be sufficient to
satisfy our liquidity needs for the foreseeable future. Continued access to
these credit facilities is subject to our remaining in compliance with the
applicable covenants of these credit facilities, including covenants tied to
our operating performance. If there is an event of default under our credit
facilities, such as the failure to maintain the applicable required financial
ratios, we would be unable to borrow under these credit facilities, which could
materially adversely impact our ability to operate our business and to make
payments under our debt instruments. A default under the covenants governing
any of our debt instruments could result in the acceleration of our payment
obligations under that debt and, under certain circumstances, in cross-defaults
under our or our parent companies other debt obligations, which would have a
material adverse effect on our financial condition and results of operations. Although Mr. Allen and his affiliates have purchased equity from Charter
and its subsidiaries in the past, Mr. Allen and his affiliates are not
obligated to purchase equity from, contribute to or loan funds to Charter or to
its subsidiaries in the future. The indentures governing our notes restrict us from making distributions to our
parent companies (including Charter and Charter Holdings) for payment of
principal on parent company notes, in each case unless there is no default
under those indentures and a specified leverage ratio test can be met. CCH II
currently meets the applicable leverage ratio test, and therefore is not
currently prohibited from making any such distributions to its direct parent.
The indentures governing the Charter Holdings notes permit Charter Holdings to
make distributions to Charter Holdco for payment of interest or principal on
Charters convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio test of 8.75 to 1.0, there is no default under Charter Holdings
indentures and other specified tests are met. However, Charter Holdings
continued not to meet the leverage ratio test at March 31, 2004. As a result,
distributions from Charter Holdings to Charter Holdco or Charter again have
been restricted and will continue to be restricted until that test is met. Any
financial or liquidity problems of Charter or Charter Holdings would likely
cause serious disruption to our business and have a material adverse effect on
our business and results of operations. In the past, our parent companies have accessed the equity and high-yield bond
markets as a source of capital for their subsidiaries growth. We believe that
our parent companies continued access to the debt markets will depend on
market conditions in light of general economic conditions, the business
condition of the cable, telecommunications and technology industry, their
significant levels of debt, and their debt ratings. If they are unable to raise
the required capital on reasonable terms, our parent companies may elect to
cause us to distribute or otherwise pay to them (to the extent available and
permitted by the indenture governing our notes) the necessary funds to service
or repay Charters, Charter Holdings or CCH IIs debt, thereby impacting our
liquidity. 28




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Long-Term Debt As of March 31, 2004 and December 31, 2003, long-term debt totaled
approximately $8.9 billion and $9.6 billion, respectively. As of March 31,
2004 and December 31, 2003, this debt was comprised of approximately $6.6
billion and $7.3 billion of debt under our credit facilities and $2.3 billion
and $2.3 billion of high-yield debt, respectively. As of March 31, 2004 and
December 31, 2003, the weighted average interest rate on the bank debt was
approximately 5.6% and 5.4%, respectively, while the weighted average interest
rate on the high-yield debt was approximately 10.0%, resulting in a blended
weighted average interest rate of 6.7% and 6.5%, respectively. Approximately
64% of our debt was effectively fixed, including the effects of our interest
rate hedge agreements, as of March 31, 2004 compared to approximately 60% at
December 31, 2003. April 2004 Charter Operating Notes.In April 2004, CCH IIs indirect
subsidiaries, Charter Operating and Charter Communications Operating Capital
Corp., sold $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 a private transaction. These notes are structurally senior
to the notes of Charter, Charter Holdings, CCH II and CCO Holdings and rank
equally with all other current or future unsubordinated obligations of Charter
Operating. The Charter Operating notes are structurally subordinated to all
obligations of Charter Operatings subsidiaries, including the Charter Operating
amended and restated credit facilities described below. At any time prior to April 30, 2007, the issuers of the 8% senior second lien
notes may redeem, on a pro rata basis, up to 35% of the total original
principal amount of these notes with proceeds from public equity sales at a
redemption price equal to 108.000% of the principal amount thereof, plus any
accrued and unpaid interest. Interest on the $1.1 billion 8% senior second
lien notes accrues at 8% per year and is payable semi-annually in arrears on
each April 30 and October 30, commencing on October 30, 2004. At any time prior to April 30, 2007, the issuers of the 8 3/8% senior second
lien notes may redeem, on a pro rata basis, up to 35% of the total original
principal amount of these notes with proceeds from public equity sales at a
redemption price equal to 108.375% of the principal amount thereof, plus any
accrued and unpaid interest. In addition, Charter Operating may redeem all or
any portion of these notes on or after April 30, 2009, at an initial purchase
price equal to 104.188% of the outstanding principal amount redeemed declining
ratably to 100% for redemptions on or after April 30, 2012, plus any accrued
and unpaid interest. Interest on the $400 million 8 3/8% senior second lien
notes accrues at 8 3/8% per year and is payable semi-annually in arrears on
each April 30 and October 30, commencing on October 30, 2004. In the event of specified change of control events, Charter Operating must
offer to purchase the outstanding Charter Operating senior second lien notes at
a purchase price equal to 101% of the total principal amount of the notes, plus
any accrued and unpaid interest. Until the guarantee and pledge date (as defined in the indenture governing the
Charter Operating notes, generally the fifth business day after the Charter
Holdings leverage ratio is certified to be below 8.75 to 1.0), the Charter
Operating notes are secured by a second-priority lien on substantially all of
Charter Operatings direct assets that secure the obligations of Charter
Operating under the Charter Operating credit facilities. The collateral
consists of substantially all of Charter Operatings direct assets in which
security interests may be perfected under the Uniform Commercial Code by filing
a financing statement (including capital stock and intercompany obligations). On and after the guarantee and pledge date, the collateral for the Charter
Operating notes will consist of all of Charter Operatings and its
subsidiaries assets that secure the obligations of Charter Operating or any
subsidiary of Charter Operating with respect to the Charter Operating credit
facility and the related obligations or certain other indebtedness on such
date. It is currently contemplated that, as of the guarantee and pledge date,
such collateral will consist of the capital stock of Charter Operating held by
CCO Holdings, all of the intercompany obligations owing to CCO Holdings by
Charter Operating or any subsidiary of Charter Operating, and substantially all
of Charter Operatings and the guarantors assets (other than the assets of CCO
Holdings) in which security interests may be perfected under the Uniform
Commercial Code by filing a financing statement (including capital stock and
intercompany obligations). 29




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In addition, within a time frame specified under the Charter Operating credit
facilities, Charter Operating will be required to redeem or cause to be
redeemed in full the notes outstanding under the CC V Holdings, LLC indenture.
In addition, when Charter Operating or its subsidiaries exercise any option to
redeem in full the notes outstanding under the Renaissance Media Group, LLC
(Renaissance) or CC V Holdings, LLC indentures, then, provided that the
leverage ratio test remains satisfied, the Renaissance or CC V Holdings, LLC
entities will then be required to guarantee the Charter Operating credit
facilities and the related obligations and to secure those guarantees with
first-priority liens, and to guarantee the notes and to secure the Charter
Operating senior second lien notes with second-priority liens, on substantially
all of their assets in which security interests may be perfected under the
Uniform Commercial Code by filing a financing statement (including capital
stock and intercompany obligations). Amended and Restated Charter Operating Credit Facilities.In April 2004, the
Charter Operating credit facilities were amended and restated concurrently with
the sale of $1.5 billion senior second lien notes described above, among other
things, to defer maturities and increase availability under these facilities
and to enable Charter Operating to acquire the interests of the lenders under
the CC VI Operating, CC VIII Operating and the Falcon Cable credit facilities.
The amended and restated Charter Operating credit facilities increase the
availability from $5.1 billion to $6.5 billion and provide for two term
facilities, one with a total principal amount of $2.0 billion, of which 12.5%
matures in 2007, 30% matures in 2008, 37.5% matures in 2009 and 20% matures in
2010 (Term A); and one with a total principal amount of $3.0 billion, which is
repayable in 27 equal quarterly installments aggregating in each loan year to
approximately $30 million, with the remaining balance due at final maturity in
2011 (Term B). The amended and restated Charter Operating credit facilities
also provide for a revolving credit facility, in a total amount of $1.5
billion, with a maturity date in 2010. Amounts under the amended and restated
Charter Operating credit facilities bear interest, at Charter Operatings
election, at a base rate or the Eurodollar rate, as defined, plus a margin for
Eurodollar loans of up to 3.0% for the Term A and revolving credit facilities
and up to 3.25% for the Term B credit facility, and for base rate loans, up to
2.0% for the Term A and revolving credit facilities and up to 2.25% for the
Term B credit facility. A quarterly commitment fee of up to 0.75% is payable
on the unused balance of the revolving credit facility. Obligations under the amended commitment amount of $6.5 billion are secured by
a lien on all assets of Charter Operating, to the extent such lien can be
perfected under the Uniform Commercial Code by filing a financing statement,
which assets include capital stock owned by Charter Operating and intercompany
obligations owing to it, including those from its subsidiaries, CC VI
Operating, CC VIII Operating and Falcon Cable. Obligations arising under the original commitment amount of $5.1 billion
continue to be guaranteed by CCO Holdings and by Charter Operatings
subsidiaries, other than the non-guarantor subsidiaries (defined below). The
non-guarantor subsidiaries, generally include CC VI Operating, CC VIII
Operating, Falcon Cable, and their respective subsidiaries. Obligations
arising under the original commitment amount of $5.1 billion continue to be
secured by a pledge of the equity interests owned by the subsidiary guarantors
and intercompany obligations owing to the subsidiary guarantors, as well as a
pledge of CCO Holdings equity interests in Charter Operating, and intercompany
obligations owing to CCO Holdings by Charter Operatings subsidiaries. At such time as Charter Holdings leverage ratio is determined to be below 8.75
to 1.0: (i) the guarantors guarantees will be amended to increase the amount
guaranteed to include all of the obligations arising under the amended
commitment amount of $6.5 billion; (ii) most of the non-guarantor subsidiaries
will become additional subsidiary guarantors of the amended commitment amount
of $6.5 billion; and (iii) such guarantees will be secured by a lien on all
assets of the subsidiary guarantors to the extent such lien can be perfected
under the Uniform Commercial Code by filing a financing statement; provided
that the guarantee and pledge of such interests is not otherwise restricted by
Charter Holdings subsidiaries indentures. The amended and restated Charter Operating credit facilities permit Charter
Operating and its subsidiaries to make distributions to pay interest on the
Charter Operating senior second lien notes, the CCO Holdings senior notes, the
CCH II senior notes, the Charter Holdings senior notes and Charters
convertible senior notes, provided that, among other things, no default has
occurred and is continuing under the amended and restated Charter Operating
credit facilities. Conditions to future borrowings include the absence of a
default or an event of default under the amended and restated Charter Operating
credit facilities. 30




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The events of default under the amended and restated Charter Operating credit
facilities include those customary for financings of this type, as well as
events of default for, among other things: (i) the failure to pay or the
occurrence of events that result in the acceleration of other indebtedness
owing by certain of CCO Holdings direct and indirect parent companies in
amounts in excess of $200 million in aggregate principal amount, (ii) Paul
Allen and/or certain of his family members and/or their exclusively owned
entities ceasing to have power, directly or indirectly, to vote as least 35% of
the ordinary voting power of Charter Operating, and (iii) certain of Charter
Operatings direct or indirect parent companies having indebtedness in excess
of $500 million aggregate principal amount which remains undefeased three
months prior to the final maturity of such indebtedness. Charter Operating used the additional borrowings under the amended and restated
credit facilities, together with proceeds from the sale of the Charter
Operating senior second lien notes to refinance the credit facilities of its
subsidiaries, CC VI Operating, Falcon Cable, and CC VIII Operating, all in one
concurrent transaction. Unused availability as of the closing of the amendment
and restatement of the Charter Operating credit facilities on April 27, 2004
was approximately $1.0 billion. The effect of the transaction, among other
things, was to substitute Charter Operating as the lender in place of the banks
under those subsidiaries credit facilities. As noted above, our access to capital from our credit facilities is contingent
on compliance with a number of restrictive covenants, including covenants tied
to our operating performance. We may not be able to comply with all of these
restrictive covenants. If there is an event of default under our credit
facilities, such as the failure to maintain the applicable required financial
ratios, we would be unable to borrow under these credit facilities, which could
materially adversely impact our ability to operate our business and to make
payments under our debt instruments. In addition, an event of default under
certain of our debt obligations, if not waived, may result in the acceleration
of those debt obligations, which could in turn result in the acceleration of
other debt obligations, and could result in exercise of remedies by our
creditors and could force us to seek the protection of the bankruptcy laws. Historical Operating, Financing and Investing Activities We held $72 million in cash and cash equivalents as of March 31, 2004 compared
to $85 million as of December 31, 2003. Operating Activities.Net cash
provided by operating activities decreased 44%, from $205 million for the three
months ended March 31, 2003 to $115 million for the three months ended March
31, 2004. For the three months ended March 31, 2004, net cash provided by
operating activities decreased primarily as a result of changes in operating
assets and liabilities that used $42 million more cash during the three months
ended March 31, 2004 than the corresponding period in 2003 coupled with an
increase in cash interest expense of $42 million over the corresponding prior
period. Investing Activities.Net cash provided by investing activities for the
three months ended March 31, 2004 was $531 million and net cash used in
investing activities for the three months ended March 31, 2003 was $218
million. Investing activities provided $749 million more cash during the three
months ended March 31, 2004 than the corresponding period in 2003 primarily as
a result of proceeds from the sale of certain cable systems in Florida,
Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband
Finance, LLC. Financing Activities.Net cash used in financing activities for
the three months ended March 31, 2004 and 2003 was $659 million and $43
million, respectively. The increase in cash used during the three months ended
March 31, 2004 as compared to the corresponding period in 2003 was primarily
the result of an increase in repayments of long-term debt and a decrease in
borrowings of long-term debt. 31




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Capital Expenditures We have significant ongoing capital expenditure requirements. Capital
expenditures were $187 million and $101 million for the three months ended
March 31, 2004 and 2003, respectively. The majority of the capital expenditures
for the three months ended March 31, 2004 and 2003 related to our customer
premise equipment. See 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 a larger customer base. Our capital expenditures are
funded primarily from cash flows from operating activities, the issuance of
debt and borrowings under credit facilities. In addition, during the three
months ended March 31, 2004 and 2003, our liabilities related to capital
expenditures decreased $7 million and $117 million, respectively. During 2004, we expect to spend a total of $850 million to $950 million on
capital expenditures. We expect that the nature of these expenditures will
continue to shift from upgrade/rebuild costs to customer premise equipment and
scalable infrastructure costs. We expect to fund capital expenditures for 2004
primarily from cash flows from operating activities and borrowings under our
credit facilities. We have adopted capital expenditure disclosure guidance,
which was developed by eleven publicly traded cable system operators, including
Charter, with the support of the National Cable & Telecommunications
Association (NCTA). The new disclosure is intended to provide more
consistency in the reporting of operating statistics in capital expenditures
and customers among peer companies in the cable industry. These disclosure
guidelines are not required disclosure under GAAP, nor do they impact our
accounting for capital expenditures under GAAP. The following table presents our major capital expenditures categories in
accordance with NCTA disclosure guidelines for the three months ended March 31,
2004 and 2003 (dollars in millions): Three Months Ended March 31,2004
    
    2003Customer premise equipment (a)
    
    $
    112
    
    
    $
    64Scalable infrastructure (b)
    
    
    19
    
    
    
    8Line extensions (c)
    
    
    25
    
    
    
    7Upgrade/Rebuild (d)
    
    
    12
    
    
    
    15Support capital (e)
    
    
    19
    
    
    
    7Total capital expenditures (f)
    
    $
    187
    
    
    $
    101
  (a)
    
    Customer premise equipment includes costs incurred at the customer
residence to secure new customers, revenue units and additional bandwidth
revenues. It also includes customer installation costs in accordance with
SFAS 51 and customer premise equipment (e.g., set-top terminals and cable
modems, etc.).(b)
    
    Scalable infrastructure includes costs, not related to customer premise
equipment or our network, to secure growth of new customers, revenue units
and additional bandwidth revenues or provide service enhancements (e.g.,
headend equipment).(c)
    
    Line extensions include network costs associated with entering new
service areas (e.g., fiber/coaxial cable, amplifiers, electronic
equipment, make-ready and design engineering).(d)
    
    Upgrade/rebuild includes costs to modify or replace existing
fiber/coaxial cable networks, including betterments.(e)
    
    Support capital includes costs associated with the replacement or
enhancement of non-network assets due to technological and physical
obsolescence (e.g., non-network equipment, land, buildings and vehicles).(f)
    
    Represents all capital expenditures made during the three months ended
March 31, 2004 and 2003, respectively. 32




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Certain Trends and Uncertainties The following discussion highlights a number of trends and uncertainties, in
addition to those discussed elsewhere in this quarterly report and in the
Critical Accounting Policies and Estimates section of Managements
Discussion and Analysis of Financial Condition and Results of Operations in
the Amendment No. 2 to our Registration Statement on Form S-4 filed on May 5,
2004 , that could materially impact our business, results of operations and
financial condition. Restrictive Covenants.Our credit facilities and the indentures governing our
publicly held notes contain a number of significant covenants that could
adversely impact our business. In particular, our credit facilities and
indentures restrict our ability to:  
    
    pay dividends or make other distributions;
    
    make certain investments or acquisitions;
    
    enter into related party transactions;
    
    dispose of assets or merge;
    
    incur additional debt;
    
    issue equity;
    
    repurchase or redeem equity interests and debt;
    
    grant liens; and
    
    pledge assets. Furthermore, our credit facilities require our subsidiaries to maintain
specified financial ratios and meet financial tests. The ability to comply
with these provisions may be affected by events beyond our control. The breach
of any of these covenants will result in a default under the applicable debt
agreement or instrument and could trigger acceleration of the related debt
under the applicable agreement, and in certain cases under other agreements
governing our indebtedness. Any default under our credit facilities or
indentures could adversely affect our growth, our financial condition and our
results of operations and the ability to make payments on our notes and credit
facilities. For more information, see the section above entitled Liquidity
and Capital Resources. Parent Company Liquidity Concerns.Our parent companies have a substantial
amount of debt and may incur additional debt in the future. At March 31, 2004,
Charter had approximately $764 million aggregate principal amount of
convertible senior notes outstanding, which mature in 2005 and 2006, and
Charter Holdings had approximately $8.9 billion aggregate principal amount of
senior notes and senior discount notes, some of which mature in 2007 and the
remainder of which mature in 2009 through 2012. Charter and Charter Holdings
will need to raise additional capital or receive distributions or payments from
us in order to satisfy their debt obligations. The indentures governing our
notes restrict us from making distributions to our parent companies (including
Charter and Charter Holdings) for payment of principal on parent company notes,
in each case unless there is no default under those indentures and a specified
leverage ratio test can be met. Each such issuer currently meets the applicable leverage
ratio test, and therefore is not currently prohibited from making any such
distributions to its direct parent. The indentures governing the Charter
Holdings notes permit Charter Holdings to make distributions to Charter Holdco
for payment of interest or principal on Charters convertible senior notes,
only if, after giving effect to the distribution, Charter Holdings can incur
additional debt under the leverage ratio test of 8.75 to 1.0, there is no
default under Charter Holdings indentures and other specified tests are met.
However, in the event that Charter Holdings could not incur any additional debt
under the 8.75 to 1.0 leverage ratio test, the indentures governing the Charter
Holdings notes permit us to make specified investments in Charter Holdco or
Charter, up to its formulaic capacity, as long as there is no default under the
indentures. For the quarter ended March 31, 2004, there were no defaults under
the Charter Holdings indentures and other specified tests were met. However,
Charter Holdings continued not to meet the leverage ratio test at March 31,
2004. As a result, distributions from Charter Holdings to Charter Holdco or
Charter again have been restricted and will continue to be restricted until
that test is met. Charter currently has sufficient assets to pay interest due
on its outstanding convertible senior notes during 2004. However, Charters
ability to make interest payments, or principal payments at maturity in 2005
and 2006, on its outstanding convertible senior notes is contingent upon it
obtaining additional debt and/or equity financing or receiving distributions or
other payments from its subsidiaries. 33




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Because Charter is our manager, and because we are indirectly wholly owned by
Charter Holdings, their financial or liquidity problems could cause serious
disruption to our business and could have a material adverse effect on our
business and results of operations. Any such event would likely adversely
impact our own credit rating, and our relations with customers and suppliers,
which could in turn further impair our ability to obtain financing and operate
our business. Further, to the extent that any such event results in a change
of control of Charter or Charter Holdings (whether through a bankruptcy,
receivership or other reorganization, or otherwise), it could result in an
event of default under our credit facilities and our outstanding notes and
require a change of control repurchase offer under our outstanding notes. Acceleration of Our Indebtedness.In the event of a default under our credit
facilities or notes, our creditors could elect to declare all amounts borrowed,
together with accrued and unpaid interest and other fees, to be due and
payable. In such event, our credit facilities and indentures will not permit
CCH IIs subsidiaries to distribute funds to CCH II to pay interest or
principal on its notes. If the amounts outstanding under such credit
facilities or notes are accelerated, all of the debt and liabilities would be
payable from the assets of CCH IIs subsidiaries, prior to any distribution of
CCH IIs subsidiaries assets to pay the interest and principal amounts on CCH
IIs notes. In addition, the lenders under our credit facilities could
foreclose on their collateral, which includes equity interests in CCH IIs
subsidiaries, and they could exercise other rights of secured creditors. In
any such case, we might not be able to repay or make any payments on CCH IIs
notes. Additionally, an acceleration or payment default under our credit
facilities would cause a cross-default in the indentures governing our notes.
Any default under any of our credit facilities or notes might adversely affect
the holders of our notes and our growth, financial condition and results of
operations and could force us to examine all options, including seeking the
protection of the bankruptcy laws. CCH IIs Notes are Structurally Subordinated
to all Liabilities of CCH IIs Subsidiaries.The borrowers and guarantors under
the amended and restated Charter Operating credit facilities and senior second lien notes are
indirect subsidiaries of CCH II. A number of CCH IIs subsidiaries are also
obligors under other debt instruments. As of March 31, 2004, our total debt
was approximately $8.9 billion, of which $7.3 billion would have been
structurally senior to CCH IIs notes. In a liquidation, the lenders under our
credit facilities and the holders of the other debt instruments and all other
creditors of CCH IIs subsidiaries would have the right to be paid before CCH
II from any of its subsidiaries assets. If CCH II caused a subsidiary to make a distribution to enable it to make
payments in respect of its notes, and such transfer were deemed a fraudulent
transfer or an unlawful distribution, the holders of CCH IIs notes could be
required to return the payment to (or for the benefit of) the creditors of CCH
IIs subsidiaries. In the event of the bankruptcy, liquidation or dissolution
of a subsidiary, following payment by such subsidiary of its liabilities, such
subsidiary may not have sufficient assets remaining to make any payments to us
as an equity holder or otherwise and may be restricted by bankruptcy and
insolvency laws from making any such payments. The foregoing contractual and
legal restrictions could limit our ability to make payments to the holders of
CCH IIs notes. Securities Litigation and Government Investigations.A number
of putative federal class action lawsuits have been filed against Charter and
certain of its former and present officers and directors alleging violations of
securities laws, which have been consolidated for pretrial purposes. In
addition, a number of other lawsuits have been filed against Charter in other
jurisdictions. A shareholders derivative suit was filed in the U.S. District
Court for the Eastern District of Missouri, and several class action lawsuits
were filed in Delaware state court against Charter and certain of its directors
and officers. Finally, two shareholders derivative suits were filed in
Missouri State Court against Charter, its then current directors and its former
independent auditor. These actions were consolidated during the fourth quarter
of 2002. Additionally, on March 12, 2004, an action substantively identical to
the Missouri State Court derivative suits was filed in the Missouri State
Court. This case has not yet been consolidated with the other
Missouri State Court derivative suits, but Charter expects that it
will be in the future. The
federal shareholders derivative suit, the Delaware class actions, the
consolidated derivative suit and the Missouri State Court derivative action
each allege that the defendants breached their fiduciary duties. In August 2002, Charter became aware of a grand jury investigation being
conducted by the U.S. Attorneys Office for the Eastern District of Missouri
into certain of its accounting and reporting practices focusing on how it
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 currently a target of the investigation.
Charter has also 34




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been advised by the U.S. Attorneys Office that no member of its board of
directors, including its Chief Executive Officer, is a target of the
investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated customer account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. Charter has
advised us that it is fully cooperating with the investigation. On November 4, 2002, Charter received an informal, non-public inquiry from the
staff of the SEC. The SEC subsequently issued a formal order of investigation
dated January 23, 2003, and subsequent related document and testimony
subpoenas. The investigation and subpoenas generally concern Charters prior
reports with respect to 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. Charter has advised us that it is
fully cooperating with the SEC staff. Due to the inherent uncertainties of litigation and investigations, Charter
cannot predict the ultimate outcome of these proceedings. An unfavorable
outcome in the lawsuits or the government investigations described above could
have a material adverse effect on our financial condition and results of
operations or our liquidity. In addition, the restatement of our 2000, 2001 and 2002 financial statements
may lead to additional allegations in the pending securities class and
shareholders derivative actions against Charter, or to additional claims being
filed or to investigations being expanded or commenced. These proceedings, and
Charters actions in response to these proceedings, could result in substantial
costs, substantial potential liabilities and the diversion of managements
attention, and could adversely affect our ability to execute our business and
financial strategies. Competition.The industry in which we operate is highly
competitive. In some instances, we compete against companies with fewer
regulatory burdens, easier access to financing, greater personnel resources,
greater brand name recognition and long-established relationships with
regulatory authorities and customers. Increasing consolidation in the cable
industry and the repeal of certain ownership rules may provide additional
benefits to certain of our competitors, either through access to financing,
resources or efficiencies of scale. Our principal competitor for video services throughout our territory is direct
broadcast satellite television services, also known as DBS. Competition from
DBS, including intensive marketing efforts, aggressive pricing, and the ability
of DBS to provide certain services that we are in process of developing, has
had an adverse impact on our ability to retain customers. Local telephone
companies and electric utilities can compete in this area, and they
increasingly may do so in the future. The subscription television industry
also faces competition from free broadcast television and from other
communications and entertainment media. With respect to our Internet access
services, we face competition, including intensive marketing efforts and
aggressive pricing, from telephone companies and other providers of dial-up
and digital subscriber line technology, also known as DSL. Further loss of
customers to DBS or other alternative video and data services could have a
material negative impact on our business. Mergers, joint ventures and alliances among franchised, wireless or private
cable operators, satellite television providers, local exchange carriers and
others, and the repeal of certain ownership rules may provide additional
benefits to some of our competitors, either through access to financing,
resources or efficiencies of scale, or the ability to provide multiple services
in direct competition with us. Variable Interest Rates.At March 31, 2004,
excluding the effects of hedging, approximately 74% of our debt bears interest
at variable rates that are linked to short-term interest rates. In addition, a
significant portion of our existing debt, assumed debt or debt we might arrange
in the future will bear interest at variable rates. If interest rates rise,
our costs relative to those obligations will also rise. As of March 31, 2004
and December 31, 2003, the weighted average interest rate on the bank debt was
approximately 5.6% and 5.4%, respectively, while the weighted average interest
rate on the high-yield debt was approximately 10.0%, resulting in a blended
weighted average interest rate of 6.7% and 6.5%, respectively. Approximately
64% of our debt was effectively fixed, including the effects of our interest
rate hedge agreements, as of March 31, 2004 compared to approximately 60% at
December 31, 2003. Streamlining of Operations.In the past, we experienced
rapid growth from acquisitions of a number of smaller 35




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cable operators and the rapid rebuild and rollout of advanced services. Our
future success will depend in part on our ability to standardize and streamline
our operations. The failure to implement a consistent corporate culture and
management, operating or financial systems or procedures necessary to
standardize and streamline our operations and effectively operate our
enterprise could have a material adverse effect on our business, results of
operations and financial condition. In addition, our ability to properly
manage our operations will be impacted by our ability to attract, retain and
incentivize experienced, qualified, professional management. Services.We expect that a substantial portion of our near-term growth will be
achieved through revenues from high-speed data services, digital video, bundled
service packages, and to a lesser extent, various commercial services that take
advantage of cables broadband capacity. The technology involved in our
product and service offerings generally requires that we have permission to use
intellectual property and that such property not infringe on rights claimed by
others. We may not be able to offer these advanced services successfully to
our customers or provide adequate customer service and these advanced services
may not generate adequate revenues. Also, if the vendors we use for these
services are not financially viable over time, we may experience disruption of
service and incur costs to find alternative vendors. In addition, if it is
determined that the product being utilized infringes on the rights of others,
we may be sued or be precluded from using the technology. Increasing Programming Costs.Programming has been, and is expected to continue
to be, our largest operating expense item. In recent years, the cable industry
has experienced a rapid escalation in the cost of programming, particularly
sports programming. This escalation may continue, and we may not be able to
pass programming cost increases on to our customers. The inability to fully
pass these programming cost increases on to our customers would have an adverse
impact on our cash flow and operating margins. Notes Price Volatility.The
market price of our publicly traded notes issued by us has been and is likely
to continue to be highly volatile. We expect that the price of our securities
may fluctuate in response to various factors, including the factors described
throughout this section and various other factors, which may be beyond our
control. These factors beyond our control could include: financial forecasts
by securities analysts; new conditions or trends in the cable or
telecommunications industry; general economic and market conditions and
specifically, conditions related to the cable or telecommunications industry;
any further downgrade of our debt ratings; announcement of the development of
improved or competitive technologies; the use of new products or promotions by
us or our competitors; changes in accounting rules; and new regulatory
legislation adopted in the United States. In addition, the securities market in
general, and the market for cable television securities in particular, have
experienced significant price fluctuations. Volatility in the market price for
companies may often be unrelated or disproportionate to the operating
performance of those companies. These broad market and industry factors may
seriously harm the market price of our publicly traded notes, regardless of our
operating performance. In the past, securities litigation has often commenced
following periods of volatility in the market price of a companys securities,
and several purported class action lawsuits were filed against Charter in 2001
and 2002, following a decline in its stock price. Economic Slowdown; Global
Conflict.It is difficult to assess the impact that the general economic
slowdown and global conflict will have on future operations. However, the
economic slowdown has resulted and could continue to result in reduced spending
by customers and advertisers, which could reduce our revenues, and also could
affect our ability to collect accounts receivable and maintain customers. If
we experience reduced operating revenues, it could negatively affect our
ability to make expected capital expenditures and could also result in our
inability to meet our obligations under our financing agreements. These
developments could also have a negative impact on our financing and variable
interest rate agreements through disruptions in the market or negative market
conditions. Long-Term Indebtedness  Change of Control Payments.We and our
parent companies may not have the ability to raise the funds necessary to
fulfill the obligations under our and our parent companies notes and our credit
facilities following a change of control. Under the indentures governing the
Charter convertible senior notes, upon the occurrence of specified change of
control events, including certain specified dispositions of stock by Mr. Allen,
Charter is required to offer to repurchase all of the outstanding Charter
convertible senior notes. However, Charter may not have sufficient funds at
the time of the change of control event to make the required repurchase of the
Charter convertible senior notes, and its subsidiaries are limited in their
ability to make distributions or other 36




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payments to Charter to fund any required repurchase. In addition, a change of
control under our credit facilities and the indentures governing our notes and Charter Holdings notes would
require the repayment of borrowings under those credit facilities and
indentures. These credit facilities and the notes would have to be repaid by
CCH IIs subsidiaries before assets could be available to Charter to repurchase
the Charter convertible senior notes. Charters failure to make or complete a
change of control offer would place it in default under the Charter convertible
senior notes. Any failure by us or Charter Holdings to make a change of control offer or repay the
amounts outstanding under our credit facilities would place us in default of
these agreements and could result in a default under the indentures governing
the Charter convertible senior notes. Regulation and Legislation.Cable system
operations are extensively regulated at the federal, state, and local level,
including rate regulation of basic service and equipment and municipal approval
of franchise agreements and their terms, such as franchise requirements to
upgrade cable plant and meet specified customer service standards. Additional
legislation and regulation is always possible. For example, there has been
considerable legislative interest recently in requiring cable operators to
offer historically bundled programming services on an á la carte basis. Cable operators also face significant regulation of their channel carriage.
They currently can be required to devote substantial capacity to the carriage
of programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. This carriage burden
could increase in the future, particularly if the FCC were to require cable
systems to carry both the analog and digital versions of local broadcast
signals or multiple channels added by digital broadcasters. The FCC is
currently conducting a proceeding in which it is considering this channel usage
possibility, although it previously issued a tentative decision against such
dual carriage. In addition, the carriage of new high definition broadcast and
satellite programming services over the next few years may consume significant
amounts of system capacity without contributing to proportionate increases in
system revenue. There is also uncertainty whether local franchising
authorities, state regulators, the FCC, or the U.S. Congress will impose
obligations on cable operators to provide unaffiliated Internet service
providers with regulated access to cable plant. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These open access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. The United States Court of Appeals for the Ninth
Circuit recently vacated in part an FCC ruling defining cable modem service as
an information service and remanded for further proceedings. The Ninth
Circuit held that cable modem service is not cable service but is part
telecommunications service and part information service. The decision will
likely be appealed, but it may possibly lead to cable operators having to
contribute to the federal governments universal service fund, to open access
requirements, and to other common carrier regulations. As we offer other
advanced services over our cable system, we are likely to face additional calls
for regulation of our capacity and operation. These regulations, if adopted,
could adversely affect our operations. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. No material changes in reported market risks have occurred since the filing of
the Amendment No. 2 to our Registration Statement on Form S-4 filed on May 5,
2004 . 
 Item 4. Controls and Procedures. As of the end of the period covered by this report, management, including our
Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with respect to the information generated for use in this quarterly
report. The evaluation was based in part upon reports and affidavits provided
by a number of executives. Based upon, and as of the date of that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commissions
rules and forms. 37




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There was no change in our internal control over financial reporting during the
quarter ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance of
achieving the desired control objectives and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based upon the above evaluation, our
management believes that its controls provide such reasonable assurances. 38




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PART II. OTHER INFORMATION. 
 Item 1. Legal Proceedings. Securities class actions and derivative suits Fourteen putative federal class action lawsuits (the ''Federal Class Actions)
have been filed against Charter and certain of its former and present officers
and directors in various jurisdictions allegedly on behalf of all purchasers of
Charters securities during the period from either November 8 or November 9,
1999 through July 17 or July 18, 2002. Unspecified damages are sought by the
plaintiffs. In general, the lawsuits allege that Charter utilized misleading
accounting practices and failed to disclose these accounting practices and/or
issued false and misleading financial statements and press releases concerning
Charters operations and prospects. In October 2002, Charter filed a motion
with the Judicial Panel on Multidistrict Litigation (the ''Panel) to transfer
the Federal Class Actions to the Eastern District of Missouri. On March 12,
2003, the Panel transferred the six Federal Class Actions not filed in the
Eastern District of Missouri to that district for coordinated or consolidated
pretrial proceedings with the eight Federal Class Actions already pending
there. The Panels transfer order assigned the Federal Class Actions to Judge
Charles A. Shaw. By virtue of a prior court order, StoneRidge Investment
Partners LLC became lead plaintiff upon entry of the Panels transfer order.
StoneRidge subsequently filed a Consolidated Amended Complaint. The Court
subsequently consolidated the Federal Class Actions into a single consolidated
action (the ''Consolidated Federal Class Action) for pretrial purposes. On
June 19, 2003, following a pretrial 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 have been filed. On February 10, 2004, in response to a joint
motion made by StoneRidge and defendants, Charter, Vogel and Allen, the court
entered an order providing, among other things, that: (1) the parties who filed
such motion, engage in a mediation within ninety (90) days; and (2) all
proceedings in the Consolidated Federal Class Action were stayed until May 10,
2004. On May 11, 2004, the court extended the stay in the Consolidated Federal
Class Action for an additional sixty (60) days. The Consolidated Federal Class Action is entitled:  
    
    In re Charter Communications, Inc. Securities Litigation, MDL
Docket No. 1506 (All Cases), StoneRidge Investments Partners, LLC,
Individually and On Behalf of All Others Similarly Situated, v. Charter
Communications, Inc., Paul Allen, Jerald L. Kent, Carl E. Vogel, Kent
Kalkwarf, David G. Barford, Paul E. Martin, David L. McCall, Bill
Shreffler, Chris Fenger, James H. Smith, III, Scientific-Atlanta, Inc.,
Motorola, Inc. and Arthur Andersen, LLP, Consolidated Case No.
4:02-CV-1186-CAS. On September 12, 2002, a shareholders derivative suit (the ''State Derivative
Action) was filed in the Circuit Court of the City of St. Louis, State of
Missouri (the Missouri State Court), against Charter and its then current
directors, as well as its former auditors. A substantively identical derivative
action was later filed and consolidated into the State Derivative Action. The
plaintiffs allege that the individual defendants breached their fiduciary
duties by failing to establish and maintain adequate internal controls and
procedures. Unspecified damages, allegedly on Charters behalf, are sought by
the plaintiffs. The consolidated State Derivative Action is entitled:  
    
    Kenneth Stacey, Derivatively on behalf of Nominal Defendant Charter
Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E.
Vogel, Larry W. Wangberg, Arthur Andersen, LLP and Charter
Communications, Inc. On March 12, 2004, an action substantively identical to the State Derivative
Action was filed in the Missouri State Court, against Charter and certain of
its current and former directors, as well as its former auditors. The
plaintiffs allege that the individual defendants breached their fiduciary
duties by failing to establish and maintain adequate internal controls and
procedures. This case has not yet been consolidated with the State Derivative
Action, but we expect that it will be in the future. Unspecified damages,
allegedly on Charters behalf, are sought by plaintiffs. This action is entitled: 39




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
    
    Thomas Schimmel, Derivatively on behalf on Nominal Defendant
Charter Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc
B. Nathanson, Nancy B. Peretsman, William D. Savoy, John H. Tory, Carl
E. Vogel, Larry W. Wangberg, and Arthur Andersen, LLP, and Charter
Communications, Inc. Separately, on February 12, 2003, a shareholders derivative suit (the ''Federal
Derivative Action), was filed against Charter and its then current directors
in the United States District Court for the Eastern District of Missouri. The
plaintiff alleges that the individual defendants breached their fiduciary
duties and grossly mismanaged Charter by failing to establish and maintain
adequate internal controls and procedures. Unspecified damages, allegedly on
Charters behalf, are sought by the plaintiffs. The Federal Derivative Action is entitled:  
    
    Arthur Cohn, Derivatively on behalf of Nominal Defendant Charter
Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E.
Vogel, Larry W. Wangberg, and Charter Communications, Inc. In addition to the Federal Class Actions, the State Derivative Action, the new
Missouri State Court derivative action and the Federal Derivative Action, six
putative class action lawsuits have been filed against Charter and certain of
its then current directors and officers in the Court of Chancery of the State
of Delaware (the ''Delaware Class Actions). The lawsuits were filed after the
filing of a Schedule 13D amendment by Mr. Allen indicating that he was
exploring a number of possible alternatives with respect to restructuring or
expanding his ownership interest in Charter. We believe the plaintiffs
speculated that Mr. Allen might have been contemplating an unfair bid for
shares of Charter or some other sort of going private transaction on unfair
terms and generally alleged that the defendants breached their fiduciary duties
by participating in or acquiescing to such a transaction. The lawsuits were
brought on behalf of Charters securities holders as of July 29, 2002, and seek
unspecified damages and possible injunctive relief. The Delaware Class Actions
are substantively identical. Charter has informed us that no such transaction
by Mr. Allen has been presented. Orders of dismissal without prejudice have
been entered in each of the Delaware Class Actions. The Delaware Class Actions consist of:  
    
    Eleanor Leonard, v. Paul G. Allen, Larry W. Wangberg, John H. Tory,
Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson,
William Savoy, and Charter Communications, Inc., filed on August 12,
2002;  
    
    Helene Giarraputo, on behalf of herself and all others similarly
situated, v. Paul G. Allen, Carl E. Vogel, Marc B. Nathanson, Ronald L.
Nelson, Nancy B. Peretsman, William Savoy, John H. Tory, Larry W.
Wangberg, and Charter Communications, Inc., filed on August 13, 2002;  
    
    Ronald D. Wells, Whitney Counsil and Manny Varghese, on behalf of
themselves and all others similarly situated, v. Charter
Communications, Inc., Ronald L. Nelson, Paul G. Allen, Marc B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E.
Vogel, Larry W. Wangberg, filed on August 13, 2002;  
    
    Gilbert Herman, on behalf of himself and all others similarly
situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E.
Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William
Savoy, and Charter Communications, Inc., filed on August 14, 2002;  
    
    Stephen Noteboom, on behalf of himself and all others similarly
situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E.
Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William
Savoy, and Charter Communications, Inc., filed on August 16, 2002; and  
    
    John Fillmore on behalf of himself and all others similarly
situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E.
Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson, William
Savoy, and Charter Communications, Inc., filed on October 18, 2002. 40




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All of the lawsuits discussed above are each in preliminary stages. No reserves
have been established for potential losses or related insurance recoveries on
these matters because Charter is unable to predict the outcome. Charter has
advised us that it intends to vigorously defend the lawsuits. Government investigations In August 2002, Charter became aware of a grand jury investigation being
conducted by the U.S. Attorneys Office for the Eastern District of Missouri
into certain of its accounting and reporting practices, focusing on how 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 currently a target of the investigation.
Charter has also been advised by the U. S. Attorneys office that no member of
its board of directors, including its Chief Executive Officer, is a target of
the investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated customer account numbers. On July 25, 2003 one
of the former officers who was indicted entered a guilty plea. Charter has
advised us that it is fully cooperating with the investigation. On November 4, 2002, Charter received an informal, non-public inquiry from the
staff of the SEC. The SEC has subsequently issued a formal order of
investigation dated January 23, 2003, and subsequent document and testimony
subpoenas. The investigation and subpoenas generally concern Charters prior
reports with respect to 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. Charter has advised us that it is fully
cooperating with the SEC staff. Indemnification Charter is generally required to indemnify each of the named individual
defendants in connection with the matters described above pursuant to the terms
of its bylaws and (where applicable) such individual defendants employment
agreements. In accordance with these documents, in connection with the pending
grand jury investigation, SEC investigation and the above described lawsuits,
some of its current and former directors and Charters current and former
officers have been advanced certain costs and expenses incurred in connection
with their defense. Insurance Charter has liability insurance coverage that it believes is available for the
matters described above, where applicable, subject to the terms, conditions and
limitations of the respective policies. There is no assurance that current
coverage will be sufficient for all claims described above or any future claims
that may arise. Other litigation In October 2001, two customers, Nikki Nicholls and Geraldine M. Barber, filed a
class action suit against Charter Holdco in South Carolina Court of Common
Pleas (''South Carolina Class Action), purportedly on behalf of a class of
Charter Holdcos customers, alleging that Charter Holdco improperly charged
them a wire maintenance fee without request or permission. They also claimed
that Charter Holdco improperly required them to rent analog and/or digital
set-top terminals even though their television sets were ''cable ready.
Charter Holdco removed this case to the United States District Court for the
District of South Carolina in November 2001, and moved to dismiss the suit in
December 2001. The federal judge remanded the case to the South Carolina Court
of Common Pleas in August 2002 without ruling on the motion to dismiss. The
plaintiffs subsequently moved for a default judgment, arguing that upon return
to state court, Charter Holdco should have but did not file a new motion to
dismiss. The state court judge granted the plaintiffs motion over Charter
Holdcos objection in September 2002. Charter Holdco immediately appealed that
decision to the South Carolina Court of Appeals and the South Carolina Supreme
Court, but those courts have ruled that until a final judgment is entered
against Charter Holdco, they lack jurisdiction to hear the appeal. 41




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In January 2003, the Court of Common Pleas granted the plaintiffs motion for
class certification. In October and November 2003, Charter Holdco filed motions
(a) asking that court to set aside the default judgment, and (b) seeking
dismissal of plaintiffs suit for failure to state a claim. In January 2004,
the Court of Common Pleas granted in part and denied in part Charter Holdcos
motion to dismiss for failure to state a claim. It also took under advisement
Charter Holdcos motion to set aside the default judgment. In April 2004, the
parties participated in a mediation with respect to this and related
litigation. The mediator made a proposal to the parties. In May 2004, the
parties to this and the related litigation accepted the mediators proposal and
reached a tentative settlement. The tentative settlement remains subject to
final documentation and court approval. As a result of the tentative
settlement, we have recorded a special charge of $9 million in our condensed
consolidated statement of operations for the three months ended March 31, 2004. The South Carolina Class Action is entitled:  
    
    Nikki Nicholls and Geraldine M. Barber, on behalf of themselves and
all others similarly situated v. Charter Communications Holding
Company, LLC and City of Spartanburg filed on October 29, 2001. Outcome Charter is unable to predict the outcome of the lawsuits and the government
investigations described above. An unfavorable outcome in any of these lawsuits
or the government investigations could have a material adverse effect on
Charters and our financial condition, results of operations or liquidity. In addition to the matters set forth above, Charter and the Company are also
party to other lawsuits and claims that arose in the ordinary course of
conducting its business. In the opinion of management, after taking into
account recorded liabilities, the outcome of these other lawsuits and claims
are not expected to have a material adverse effect on our financial condition,
results of operations or liquidity. 
 Item 6. Exhibits and Reports on Form 8-K. (a) EXHIBITS The index to the exhibits begins on page 43 of this quarterly report. (b) REPORTS ON FORM 8-K None. 42




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, CCH II, LLC and CCH II Capital Corp. have duly caused this quarterly
report to be signed on their behalf by the undersigned, thereunto duly
authorized. CCH II, LLCRegistrantBy: CHARTER COMMUNICATIONS, INC., Sole Manager
 Dated: May 17, 2004
    By:
    /s/ MICHAEL P. HUSEBYName:
    Michael P. HusebyTitle:
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) By:
    /s/ Paul E. MartinName:
    Paul E. MartinTitle:
    Senior Vice President and
Corporate Controller
(Principal Accounting Officer) CCH II CAPITAL CORP.Registrant
 Dated: May 17, 2004
    By:
    /s/ MICHAEL P. HUSEBYName:
    Michael P. HusebyTitle:
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) By:
    /s/ Paul E. MartinName:
    Paul E. MartinTitle:
    Senior Vice President and
Corporate Controller
(Principal Accounting Officer) 43




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EXHIBIT INDEX ExhibitNumber
    
    Description of Document2.1
    
    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 8-K
filed on May 30, 2003 (File No. 000-27927)).2.2
    
    Asset Purchase Agreement, dated September 3, 2003, by and
between Charter Communications VI, LLC, The Helicon Group,
L.P., Hornell Television Service, Inc., Interlink
Communications Partners, LLC, Charter Communications
Holdings, LLC and Atlantic Broadband Finance, LLC
(Incorporated by reference to Exhibit 2.1 to Charter
Communications, Inc.s current report on Form 8-K/A filed
on September 3, 2003 (File No. 000-27927)).10.1
    
    Amended and Restated Credit Agreement among Charter
Communications Operating, LLC, CCO Holdings, LLC and
certain lenders and agents named therein dated April 27,
2004 (Incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to the registration statement on Form S-4
of CCH II, LLC filed on May 5, 2004 (File No. 333-111423)).10.2
    
    Indenture relating to the 8% senior second lien notes due
2012 and 8 3/8% senior second lien notes due 2014, dated as
of April 27, 2004, by and among Charter Communications
Operating, LLC, Charter Communications Operating Capital
Corp. and Wells Fargo Bank, N.A. as trustee (Incorporated
by reference to Exhibit 10.32 to Amendment No. 2 to the
registration statement on Form S-4 of CCH II, LLC filed on
May 5, 2004 (File No. 333-111423)).10.3
    
    Purchase Agreement, dated April 20, 2004 by and between
Charter Communications Operating, LLC and Charter
Communications Operating Capital Corp. (Incorporated by
reference to Exhibit 10.32 to Amendment No. 2 to the
registration statement on Form S-4 of CCH II, LLC filed on
May 5, 2004 (File No. 333-111423)).10.4+
    
    Description of Long-Term Incentive Program to the Charter
Communications, Inc. 2001 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.4 to Charter
Communications Holdings, LLC quarterly report on Form 10-Q
filed on May 17, 2004 (File No. 333-77499)).31.1
    
    Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act
of 1934.31.2
    
    Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act
of 1934.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer).32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer).
 + Management compensatory plan or arrangement 44