UNITED STATES


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 June 30, 2009





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:    333-112593


333-112593-01





CCO Holdings, LLC


CCO Holdings Capital Corp.


(Exact name of registrants as specified in their charters)


(Debtors-In-Possession as of March 27, 2009)





Delaware
86-1067239Delaware
20-0257904(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 such 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 have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants
were required to submit and post such files). YES [  ]  NO [  ]





Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer o Accelerated
filer o Non-accelerated filer þ Smaller reporting company o





Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Act). Yes oNo þ





Number of shares of common stock of CCO Holdings Capital Corporation outstanding as of August 14, 2009: 1























CCO Holdings, LLC


CCO Holdings Capital Corp.


Quarterly Report on Form 10-Q for the Period ended June 30, 2009





Table of Contents





PART I. FINANCIAL INFORMATION
PageItem 1. Financial Statements - CCO Holdings, LLC and SubsidiariesCondensed Consolidated Balance Sheets as of June 30, 2009and December 31, 2008
4Condensed Consolidated Statements of Operations for the three and sixmonths ended June 30, 2009 and 2008
5Condensed Consolidated Statements of Cash Flows for thesix months ended June 30, 2009 and 2008
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
32Item 4. Controls and Procedures
32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
34Item 1A.  Risk Factors
35Item 6. Exhibits
40SIGNATURES
S-1EXHIBIT INDEX
E-1





This quarterly report on Form 10-Q is for the three and six months ended June 30, 2009.  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 CCO Holdings, LLC and its subsidiaries.















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 "Risk Factors" under Part II, Item 1A and the factors described under “Risk Factors” under Part I, Item 1A of our most recent Form 10-K filed with the SEC.  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," "aim," "on track," "target," "opportunity," 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:




·
the completion of our and our parent companies’ restructuring including the outcome and impact on our business of the proceedings under Chapter 11 of the Bankruptcy Code;
 ·
our and our parent companies’ ability to satisfy closing conditions under the agreements-in-principle with certain of our parent companies’ bondholders and amended pre-arranged Joint Plan of Reorganization (“the Plan”) and related documents and to have the Plan confirmed by the Bankruptcy Court;
 ·
the availability and access, in general, 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 on hand, cash flows from operating activities, further borrowings or other sources and, in particular, our and our parent companies’
ability to fund debt obligations (by dividend, investment or otherwise) to the applicable obligor of such debt;
 ·
our and our parent companies’ ability to comply with all covenants in our and our parent companies’ indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our and our parent companies’ other obligations under cross-default provisions;
 ·
our and our parent companies’ ability to repay debt prior to or when it becomes due and/or successfully access the capital or credit markets to refinance that debt through new issuances, exchange offers or otherwise, including restructuring our and our parent companies’ balance sheet and leverage position, especially given recent volatility
and disruption in the capital and credit markets;
 ·
the impact of competition from other distributors, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers, and digital subscriber line (“DSL”) providers;
 ·
difficulties in growing and operating our telephone services, while adequately meeting  customer expectations for the reliability of voice services;
 ·
our ability to adequately meet demand for installations and customer service;
 ·
our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed Internet, telephone and other services, and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition;
 ·
our ability to obtain programming at reasonable prices or to adequately raise prices to offset the effects of higher programming costs;
 ·
general business conditions, economic uncertainty or downturn, including the recent volatility and disruption in the capital and credit markets and the significant downturn in the housing sector and overall economy; and
 ·
the effects of governmental regulation on our business.




All forward-looking statements attributable to us or any 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







PART I. FINANCIAL INFORMATION.





Item 1.
Financial Statements.





CCO HOLDINGS, LLC AND SUBSIDIARIES


(DEBTOR-IN-POSSESSION)


CONDENSED CONSOLIDATED BALANCE SHEETS


(DOLLARS IN MILLIONS)





June 30,


December 31,2009


2008(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
976


$
948Accounts receivable, less allowance for doubtful accounts of $22 and $18, respectively


214



221Prepaid expenses and other current assets


55



23Total current assets


1,245



1,192INVESTMENT IN CABLE PROPERTIES:Property, plant and equipment, net of accumulated depreciation


4,845



4,959Franchises, net


7,377



7,384Total investment in cable properties, net


12,222



12,343OTHER NONCURRENT ASSETS


205



211Total assets

$
13,672


$
13,746LIABILITIES AND MEMBER’S DEFICITLIABILITIES NOT SUBJECT TO COMPROMISE:CURRENT LIABILITIES:Accounts payable and accrued expenses

$
1,271


$
909Payables to related party


189



236Current portion of long-term debt


11,757



70Total current liabilities


13,217



1,215LONG-TERM DEBT


--



11,719LOANS PAYABLE – RELATED PARTY


252



240DEFERRED MANAGEMENT FEES – RELATED PARTY


--



14OTHER LONG-TERM LIABILITIES


239



695LIABILITIES SUBJECT TO COMPROMISE (INCLUDING AMOUNTS DUE TORELATED PARTY OF $25 AND $0, RESPECTIVELY)


73



--TEMPORARY EQUITY


210



203MEMBER’S DEFICIT:Accumulated other comprehensive loss


(290
)


(303
)Member’s deficit


(517
)


(510
)Total CCO Holdings member’s deficit


(807
)


(813
)Noncontrolling interest


488



473Total member’s deficit


(319
)


(340
)Total liabilities and member’s deficit

$
13,672


$
13,746








The accompanying notes are an integral part of these condensed consolidated financial statements.
 4


CCO HOLDINGS, LLC AND SUBSIDIARIES


(DEBTOR-IN-POSSESSION)


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(DOLLARS IN MILLIONS)


Unaudited







Three Months Ended June 30,


Six Months Ended June 30,2009


2008


2009


2008REVENUES

$
1,690


$
1,623


$
3,352


$
3,187COSTS AND EXPENSES:Operating (excluding depreciation and amortization)


715



698



1,428



1,380Selling, general and administrative


343



342



687



687Depreciation and amortization


329



328



650



649Other operating (income) expenses, net


2



25



(48
)


361,389



1,393



2,717



2,752Income from operations


301



230



635



435OTHER INCOME (EXPENSES):Interest expense, net


(150
)


(202
)


(350
)


(395
)Change in value of derivatives


--



36



(4
)


6Reorganization items, net


(168
)


--



(260
)


--Other income (expense), net


--



(1
)


1



(2
)(318
)


(167
)


(613
)


(391
)Income (loss) before income taxes


(17
)


63



22



44INCOME TAX EXPENSE


(4
)


--



(7
)


(2
)Consolidated net income (loss)


(21
)


63



15



42Less: Net income – noncontrolling interest


(11
)


(6
)


(22
)


(12
)Net income (loss) – CCO Holdings member

$
(32
)

$
57


$
(7
)

$
30











The accompanying notes are an integral part of these condensed consolidated financial statements.
 5








CCO HOLDINGS, LLC AND SUBSIDIARIES


(DEBTOR-IN-POSSESSION)


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(DOLLARS IN MILLIONS)


Unaudited





Six Months Ended June 30,2009


2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) – CCO Holdings member

$
(7
)

$
30Adjustments to reconcile net income (loss) to net cash flows from operating
activities:Depreciation and amortization


650



649Noncash interest expense


12



10Change in value of derivatives


4



(6
)Noncash reorganization items, net


83



--Noncontrolling interest


22



12Other, net


22



20Changes in operating assets and liabilities, net of effects from dispositions:Accounts receivable


7



(22
)Prepaid expenses and other assets


(32
)


1Accounts payable, accrued expenses and other


(88
)


16Receivables from and payable to related party, including deferred management
fees


(52
)


(7
)Net cash flows from operating activities


621



703CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment


(540
)


(650
)Change in accrued expenses related to capital expenditures


(19
)


(41
)Net cash flows from investing activities


(559
)


(691
)CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings of long-term debt


--



1,765Repayments of long-term debt


(34
)


(1,118
)Repayments to related parties


--



(12
)Payments for debt issuance costs


--



(39
)Distributions


--



(539
)Other, net


--



(9
)Net cash flows from financing activities


(34
)


48NET INCREASE IN CASH AND CASH EQUIVALENTS


28



60CASH AND CASH EQUIVALENTS, beginning of period


948



2CASH AND CASH EQUIVALENTS, end of period

$
976


$
62CASH PAID FOR INTEREST

$
458


$
372






The accompanying notes are an integral part of these condensed consolidated financial statements.
 6
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)






1.
Organization, Basis of Presentation and Bankruptcy Proceedings





Organization





CCO Holdings, LLC ("CCO Holdings") is a holding company whose principal assets at June 30, 2009 are the equity interests in its operating subsidiaries.  CCO Holdings is a direct subsidiary of CCH II, LLC (“CCH II”), which is an indirect subsidiary of Charter Communications Holdings, LLC (“Charter Holdings”).  Charter
Holdings is an indirect subsidiary of Charter Communications, Inc. (“Charter”).  The consolidated financial statements include the accounts of CCO Holdings and all of its subsidiaries where the underlying operations reside, which are collectively referred to herein as the "Company."  All significant intercompany accounts and transactions among consolidated entities have been eliminated.





The Company is a broadband communications company operating in the United States.  The Company offers to residential and commercial customers traditional cable video programming (basic and digital video), high-speed Internet services, and telephone services, as well as advanced broadband services such as high definition television,
Charter OnDemandTM, and digital video recorder ("DVR") service.  The Company sells its cable video programming, high-speed Internet, telephone, and advanced broadband services primarily on a subscription basis.  The Company also sells local advertising on cable networks.





Basis of Presentation





The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and the rules
and regulations of the Securities and Exchange Commission (the "SEC").  Accordingly, certain information and footnote disclosures typically included in the Company’s Annual Report on Form 10-K 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 condensed consolidated financial statements have also been prepared in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), and on a going concern basis, which assumes the continuity of
operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business.  Continuation of the Company as a going concern is contingent upon, among other things, the Company’s ability (i) to obtain confirmation of a plan of reorganization under the U.S. Bankruptcy Code; (ii) to generate sufficient cash flow from operations; and (iii) to obtain financing sources to meet the Company’s future obligations.  These matters raise substantial
doubt about the Company’s ability to continue as a going concern.  The condensed consolidated financial statements reflect adjustments to record amounts in accordance with SOP 90-7.  However, they do not reflect all adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.  Additionally, a plan of reorganization could materially change amounts
reported in the condensed consolidated financial statements, which do not give effect to all adjustments of the carrying value of assets and liabilities that are necessary as a consequence of reorganization under Chapter 11.  If a plan of reorganization is approved by the Bankruptcy Court, upon emergence from bankruptcy, the Company and its parent companies will apply fresh start accounting in accordance with SOP 90-7 which requires assets and liabilities to be reflected at fair value.





The preparation of financial statements in conformity with GAAP 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.






7
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





Certain prior year amounts have been reclassified to conform with the 2009 presentation.





All subsequent events have been evaluated for disclosure in the financial statements through August 14, 2009, the date of filing.





Bankruptcy Proceedings





On March 27, 2009, the Company, its parent companies, and certain affiliates (collectively, the “Debtors”) filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 of the United States
Code (the “Bankruptcy Code”).  The Chapter 11 cases are being jointly administered under the caption In re Charter Communications, Inc., et al., Case No. 09-11435 (the “Chapter 11 Cases”).  The Debtors have continued to operate their businesses and manage their properties as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.





The filing was made to allow the Company and its parent companies to implement a restructuring pursuant to a pre-arranged joint plan of reorganization (as amended, the “Plan”) aimed at improving the Company’s and its parent companies’ capital structure (the “Proposed Restructuring”).  The Plan
essentially provides for a balance sheet restructuring that will leave intact the Company’s operations.





Under Chapter 11, the Company is operating its business as a debtor-in-possession (“DIP”) under bankruptcy court protection from creditors and claimants.  The Company and its parent companies have obtained orders from the Bankruptcy Court, which provide, among other things, flexibility in cash management, the ability
to use cash collateral, and in the normal course, the ability to pay certain trade creditor balances that are pre-petition claims.  During these Chapter 11 Cases, all transactions outside the ordinary course of business will require the prior approval of the Bankruptcy Court.  As a consequence of the Chapter 11 filing, pending litigation against the Company and its parent companies arising before March 27, 2009 is subject to the automatic stay under the Bankruptcy Code, and consequently no
party may take any action to collect pre-petition claims except pursuant to order of the Bankruptcy Court.





On May 5, 2009, the Bankruptcy Court approved the disclosure statement filed in connection with the Plan and authorized the Debtors to solicit votes on the Plan. The period of time for voting on the Plan has expired.  Charter has filed with the Bankruptcy Court the results of the voting on the Plan.  The Debtor’s
confirmation hearing, at which the Bankruptcy Court is considering approval of the Plan, began on July 20, 2009 and is ongoing.





The Plan is expected to be funded with cash from operations, an exchange of debt of CCH II for other debt at CCH II (the “Notes Exchange”), and estimated proceeds of approximately $1.6 billion of an equity rights offering (the “Rights Offering”).  In addition to separate restructuring agreements entered
into with certain holders of the Company’s parent companies’ notes (the “Noteholders”) pursuant to which the Company and its parent companies expect to implement the Plan (as amended July 31, 2009, the “Restructuring Agreements”), the Noteholders have entered into commitment letters with Charter (the “Commitment Letters”) pursuant to which they have agreed to exchange and/or purchase, as applicable, certain of the Company’s parent companies’ securities.
The holders of the CCH II notes have made their elections in the Notes Exchange.  As a result of the Notes Exchange, CCH II will exchange approximately $1.5 billion of old CCH II notes for new CCH II notes on the effective date of the Plan should the Bankruptcy Court approve the Plan and the Plan becomes effective.  The Rights Offering has also been concluded resulting in holders of CCH I, LLC (“CCH I”) notes electing to purchase approximately $1.6 billion of Charter’s new
Class A Common Stock and certain of the Noteholders electing to exercise an overallotment option to purchase an additional approximately $40 million of Charter’s new Class A Common Stock.  The Rights Offering will close on the effective date of the Plan should the Bankruptcy Court approve the Plan and the Plan becomes effective.






8
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





The Restructuring Agreements contemplate that upon the effective date of the Plan (i) the notes and credit facilities of Charter’s subsidiaries, Charter Communications Operating, LLC (“Charter Operating”) and CCO Holdings will remain outstanding, (ii) holders of notes issued by CCH II will receive new CCH II notes and/or
cash, (iii) holders of notes issued by CCH I will receive shares of Charter’s new Class A Common Stock, (iv) holders of notes issued by CCH I Holdings, LLC (“CIH”) will receive warrants to purchase shares of Charter’s new Class A Common Stock, (v) holders of notes of Charter Holdings will receive warrants to purchase shares of Charter’s new Class A Common Stock, (vi) holders of convertible notes issued by Charter will receive cash and preferred stock issued by Charter,  (vii)
holders of existing common stock will not receive any amounts on account of their common stock, which will be cancelled, and (viii) trade creditors will be paid in full.  In addition, as part of the Proposed Restructuring, it is expected that consideration will be paid by holders of CCH I notes to other entities participating in the financial restructuring.





Pursuant to a separate restructuring agreement among Charter, Mr. Paul G. Allen, Charter’s chairman and primary shareholder, and an entity controlled by Mr. Allen (as amended July 31, 2009, the “Allen Agreement”), in settlement and compromise of their legal, contractual and equitable rights, claims and remedies against
Charter and its subsidiaries, and in addition to any amounts received by virtue of their holding any claims of the type set forth above, upon the effective date of the Plan, Mr. Allen or his affiliates will be issued a number of shares of the new Class B Common Stock of Charter equal to 2% of the equity value of Charter, after giving effect to the Rights Offering, but prior to issuance of warrants and equity-based awards provided for by the Plan and 35% (determined on a fully diluted basis) of the total voting
power of all new capital stock of Charter.  Each share of new Class B Common Stock will be convertible, at the option of the holder, into one share of new Class A Common Stock, and will be subject to significant restrictions on transfer.  Certain holders of new Class A Common Stock and new Class B Common Stock will receive certain customary registration rights with respect to their shares.  Upon the effective date of the Plan, Mr. Allen or his affiliates will also receive (i) warrants
to purchase shares of new Class A Common Stock of Charter in an aggregate amount equal to 4% of the equity value of reorganized Charter, after giving effect to the Rights Offering, but prior to the issuance of warrants and equity-based awards provided for by the Plan, (ii) $85 million principal amount of new CCH II notes, (iii) $25 million in cash for amounts owing to Charter Investment, Inc. (“CII”) under a management agreement, (iv) up to $20 million in cash for reimbursement of fees and expenses
in connection with the Proposed Restructuring, and (v) an additional $150 million in cash.  The warrants described above shall have an exercise price per share based on a total equity value equal to the sum of the equity value of reorganized Charter, plus the gross proceeds of the Rights Offering, and shall expire seven years after the date of issuance. In addition, on the effective date of the Plan, CII will retain a 1% equity interest in reorganized Charter Communications Holding Company, LLC (“Charter
Holdco”) and a right to exchange such interest into new Class A Common Stock of Charter. Further, Mr. Allen will transfer his preferred equity interest in CC VIII, LLC (“CC VIII”) to Charter.  The Proposed Restructuring would result in the reduction of the Company’s parent companies’ debt by approximately $8 billion.





The Restructuring Agreements, Allen Agreement and Commitment Letters are subject to certain termination events.There is no assurance that the treatment of creditors outlined above will not change significantly.   For example, because the Proposed Restructuring is contingent
on reinstatement of the credit facilities and certain notes of Charter Operating and CCO Holdings, failure to reinstate such debt would require the Company and its parent companies to revise the Proposed Restructuring.  Moreover, if reinstatement does not occur and current capital market conditions persist, the Company and its parent companies may not be able to secure adequate new financing and the cost of new financing would likely be materially higher.





Interest Payments





Two of the Company’s parent companies, CIH and Charter Holdings, did not make scheduled payments of interest due on January 15, 2009 (the “January Interest Payment”) on certain of their outstanding senior notes (the “Overdue Payment Notes”).  Each of the respective governing indentures (the “Indentures”)
for the Overdue Payment Notes permits a 30-day grace period for such interest payments through (and including) February 15, 2009.  On February 11, 2009, in connection with the Commitment Letters and Restructuring Agreements, Charter and certain of its subsidiaries also entered into an Escrow Agreement with members of the ad-hoc committee of holders of the Overdue








9
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





Payment Notes (“Ad-Hoc Holders”) and Wells Fargo Bank, National Association, as Escrow Agent (the “Escrow Agreement”).  On February 13, 2009, the full amount of the January Interest Payment was paid to the Paying Agent for the Ad-Hoc Holders on their Overdue Payment Notes, which constitutes payment under
the Indentures.  As required under the Indentures, Charter set a special record date for payment of such interest payments of February 28, 2009.  Under the Escrow Agreement, the Ad-Hoc Holders agreed to deposit into an escrow account the amounts they received in respect of the January Interest Payment of approximately $47 million (the "Escrow Amount") and the Escrow Agent will hold such amounts subject to the terms of the Escrow Agreement.  Under the Escrow Agreement, if the transactions
contemplated by the Restructuring Agreements are consummated on or before December 15, 2009 or such transactions are not consummated on or before December 15, 2009 due to material breach of the Restructuring Agreements by Charter or its direct or indirect subsidiaries, then the Ad-Hoc Holders will be entitled to receive their pro-rata share of the Escrow Amount.  If the transactions contemplated by the Restructuring Agreements are not consummated on or prior to December 15, 2009 for any reason other
than material breach of the Restructuring Agreements by Charter or its direct or indirect subsidiaries, then Charter, Charter Holdings, CIH or their designee shall be entitled to receive the Escrow Amount.  No amount has been recorded on the Company’s or its parent companies’ condensed consolidated balance sheet for the Escrow Amount.





Charter Operating Credit Facility





On February 3, 2009, Charter Operating made a request to the administrative agent under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as amended and restated as of March 6, 2007 (the “Credit Agreement”), to borrow additional revolving loans under the Credit Agreement.  Such borrowing request
complied with the provisions of the Credit Agreement including section 2.2 (“Procedure for Borrowing”) thereof.  Subsequently, Charter received a notice from the administrative agent asserting that one or more Events of Default (as defined in the Credit Agreement) had occurred and was continuing under the Credit Agreement.  In response, Charter sent a letter to the administrative agent, among other things, stating that no event of default under the Credit Agreement occurred or
was continuing and requesting the administrative agent to rescind its notice of default and fund Charter Operating’s borrowing request.  The administrative agent subsequently sent a letter stating that it continues to believe that one or more Events of Default occurred and was continuing.  As a result, with the exception of one lender who funded approximately $0.4 million, the lenders under the Credit Agreement have failed to fund Charter Operating’s borrowing request.





Upon filing bankruptcy, Charter Operating no longer has access to its revolving credit facility and relies on cash on hand and cash flows from operating activities to fund its and its parent companies’ projected cash needs.  The Company’s projected cash needs and projected sources of liquidity depend upon, among other
things, its actual results, the timing and amount of its expenditures, and the outcome of various matters in its Chapter 11 Cases and financial restructuring.  The outcome of the Plan is subject to substantial risks.  See Note 15 for more information on the JPMorgan Adversary Proceeding.





Plan Objections





In addition to the JPMorgan Adversary Proceeding, certain parties-in-interest have filed objections to the confirmation of the Plan.  Objections have been filed by certain holders of Charter Operating and CCO Holdings debt resisting reinstatement of the terms and provisions of their debt instruments.  The holders of
Charter’s convertible notes and other parties have also filed objections to the Plan.





2.           Liabilities Subject to Compromise and Reorganization Items, Net





Liabilities Subject to Compromise





Under the Bankruptcy Code, certain claims against the Company in existence prior to the filling of the petitions for relief under the federal bankruptcy laws are stayed while the Company continues business operations as a DIP.  These estimated claims are reflected in condensed consolidated balance sheets as liabilities subject
to compromise at the








10
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





expected allowed claim amount as of June 30, 2009 and are summarized in the table below.  Such claims remain subject to future adjustments.  Adjustments may result from actions of the Bankruptcy Court, negotiations, rejection or acceptance of executory contracts, determination as to the value of any collateral securing
claims, proofs of claim or other events.





As of June 30, 2009, the amounts subject to compromise consisted of the following items.





Accrued expenses

$
48Deferred management fees – related party


25Total Liabilities Subject To Compromise

$
73





Reorganization Items, Net





Reorganization items, net is presented separately in the condensed consolidated statements of operations and represents items of income, expense, gain or loss that are realized or incurred by the Company because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code.





Reorganization items, net consisted of the following items:





Three Months Ended June 30, 2009


Six Months Ended June 30, 2009Penalty interest, net

$
101


$
104Loss on interest rate swap liabilities at allowed claim amount


--



49Professional fees


64



87Paul Allen management fee settlement – related party


--



11Other


3



9Total Reorganization Items, Net

$
168


$
260





Reorganization items, net consist of adjustments to record liabilities at the allowed claim amount and other expenses directly related to the Company’s bankruptcy proceedings.  Penalty interest primarily represents the 2% per annum penalty interest on the Company’s debt and credit facilities.





3.           Franchises, Goodwill and Other Intangible Assets





Franchise rights represent the value attributed to agreements or authorizations with local and state authorities that allow access to homes in cable service areas.  Management estimates the fair value of franchise rights at the date of acquisition and determines if the franchise has a finite life or an indefinite-life as defined
by GAAP.  Franchises that qualify for indefinite-life treatment are tested for impairment annually based on valuations, or more frequently as warranted by events or changes in circumstances.  Franchises are aggregated into essentially inseparable units of accounting to conduct the valuations.  The units of accounting generally represent clustering of the Company’s cable systems into groups by which such systems are managed.  Management believes such grouping represents
the highest and best use of those assets.






11
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





As of June 30, 2009 and December 31, 2008, indefinite-lived and finite-lived intangible assets are presented in the following table:





June 30, 2009


December 31, 2008Gross
Carrying
Amount


Accumulated
Amortization


Net
Carrying
Amount


Gross
Carrying
Amount


Accumulated Amortization


Net
Carrying
AmountIndefinite-lived intangible assets:Franchises with indefinite lives

$
7,371


$
--


$
7,371


$
7,377


$
--


$
7,377Goodwill


68



--



68



68



--



68$
7,439


$
--


$
7,439


$
7,445


$
--


$
7,445Finite-lived intangible assets:Franchises with finite lives

$
16


$
10


$
6


$
16


$
9


$
7Other intangible assets


78



44



34



71



41



30$
94


$
54


$
40


$
87


$
50


$
37





During the six months ended June 30, 2009, the net carrying amount of indefinite-lived franchises was reduced by $6 million related to cable asset sales completed in 2009.  If a plan of reorganization is approved by the Bankruptcy Court, upon emergence from bankruptcy, the Company and its parent companies will apply fresh start
accounting in accordance with SOP 90-7 and as such will adjust its franchise, goodwill, and other intangible assets, including any previously unrecorded assets, to reflect fair value and these adjustments may be material.





Franchise amortization expense represents the amortization relating to franchises that did not qualify for indefinite-life treatment including costs associated with franchise renewals.  Franchise amortization expense for each of the three months ended June 30, 2009 and 2008 was approximately $0.4 million and for each of the six
months ended June 30, 2009 and 2008 was approximately $1 million.  Other intangible assets amortization expense for each of the three months ended June 30, 2009 and 2008 was approximately $1 million and for the six months ended June 30, 2009 and 2008 was approximately $3 million and $2 million, respectively.  The Company expects that amortization expense on franchise assets and other intangible assets will be approximately $7 million annually for each of the next five years.  Actual
amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, the application of fresh start accounting and other relevant factors.






12
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





4.           Accounts Payable and Accrued Expenses





Accounts payable and accrued expenses not subject to compromise consist of the following as of June 30, 2009 and December 31, 2008:





June 30,
2009


December 31,
2008Accounts payable – trade

$
89


$
86Accrued capital expenditures


37



56Accrued expenses:Terminated interest rate swap liability


497



--Interest


102



122Programming costs


283



305Compensation


71



80Franchise-related fees


53



60Other


139



200$
1,271


$
909





5.           Debt





Debt consists of the following as of June 30, 2009 and December 31, 2008:





June 30, 2009


December 31, 2008Principal
Amount


Accreted
Value


Principal
Amount


Accreted
ValueCCO Holdings, LLC:8 3⁄4% senior notes due November 15, 2013

$
800


$
797


$
800


$
796Credit facility


350



350



350



350Charter Communications Operating, LLC:8.000% senior second-lien notes due April 30, 2012


1,100



1,100



1,100



1,1008 3/8% senior second-lien notes due April 30, 2014


770



770



770



77010.875% senior second-lien notes due September 15, 2014


546



528



546



527Credit facilities


8,212



8,212



8,246



8,246Total Debt

$
11,778


$
11,757


$
11,812


$
11,789





The accreted values presented above generally represent the principal amount of the notes less the original issue discount at the time of sale, plus the accretion to the balance sheet date.





Filing for bankruptcy is an event of default under the Company’s credit facilities and the indentures governing its debt. Therefore, in accordance with GAAP, debt has been classified as current as of June 30, 2009.  The Company does not intend to repay the current portion of long-term debt with current assets but intends to reinstate
this debt through the Proposed Restructuring.  Accordingly, should the Company's Proposed Restructuring be successful, upon the effective date of such Proposed Restructuring, $11.8 billion of the debt classified as current will be reclassified as long-term.  See Note 1.





Upon filing bankruptcy, the Company is not able to elect the Eurodollar rate on credit facilities but must pay interest at the prime rate plus the 1% per annum applicable margin plus 2% per annum penalty interest.  The incremental amounts are recorded within reorganization items, net in the condensed consolidated statements of
operations.






13
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





6.           Loans Payable-Related Party





Loans payable-related party as of June 30, 2009 consists of loans from Charter Holdco and CCH II to the Company of $13 million and $239 million, respectively.  Loans payable-related party as of December 31, 2008 consists of loans from Charter Holdco and CCH II to the Company of $13 million and $227 million, respectively.





7.           Temporary Equity





Temporary equity represents Mr. Allen’s 5.6% membership interests in CC VIII, an indirect subsidiary of the Company of $210 million and $203 million as of June 30, 2009 and December 31, 2008, respectively.  Mr. Allen’s CC VIII interest is classified as temporary equity as a result of Mr. Allen’s ability to put
his interest to the Company upon a change in control.





8.           Noncontrolling Interest





Noncontrolling interest represents CCH I’s 13% membership interests in CC VIII of $488 million and $473 million as of June 30, 2009 and December 31, 2008, respectively.  Noncontrolling interest in the accompanying condensed consolidated statements of operations represents the 2% accretion of the preferred membership interest
in CC VIII plus approximately 18.6% of CC VIII’s income, inclusive of Mr. Allen’s 5.6% membership interest accounted for as temporary equity.





9.
Comprehensive Income (Loss)





The Company reports changes in the fair value of interest rate agreements designated as hedging the variability of cash flows associated with floating-rate debt obligations, that meet the effectiveness criteria as outlined in GAAP, in accumulated other comprehensive loss.  Comprehensive loss was $10 million for the three months
ended June 30, 2009.  Comprehensive income was $179 million for the three months ended June 30, 2008, and $6 million and $48 million for the six months ended June 30, 2009 and 2008, respectively.





10.           Accounting for Derivative Instruments and Hedging Activities





The Company used interest rate swap agreements to manage its interest costs and reduce the Company’s exposure to increases in floating interest rates.  The Company’s policy is to manage its exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt within a targeted range.  Using
interest rate swap agreements, the Company agreed to exchange, at specified intervals through 2013, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.  At the banks’ option, certain interest rate swap agreements could have been extended through 2014.





Upon filing for Chapter 11 bankruptcy, the counterparties to the interest rate swap agreements terminated the underlying contracts and, upon emergence from bankruptcy, will receive payment for the market value of the interest rate swap agreements as measured on the date the counterparties terminated.  At June 30, 2009, the terminated
interest rate swap liabilities of $497 million are reflected at settlement amounts and were recorded in current liabilities in the condensed consolidated balance sheets.  The terminated interest rate swap liabilities were classified as not subject to compromise in the condensed consolidated balance sheets at June 30, 2009 as they are fully secured by the Company’s assets.  The amount remaining in accumulated other comprehensive loss related to these interest rate swap agreements will
be amortized over the original life of the interest rate agreements until emergence from Chapter 11 bankruptcy.





The Company’s hedging policy does not permit it to hold or issue derivative instruments for speculative trading purposes.  The Company did, however, have certain interest rate derivative instruments that were designated as cash flow hedging instruments.  Such instruments effectively converted variable interest
payments on certain debt instruments into fixed payments.  For qualifying hedges, GAAP allows derivative gains and losses to offset related








14
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





results on hedged items in the consolidated statements of operations.  The Company formally documented, designated and assessed the effectiveness of transactions that received hedge accounting.





Changes in the fair value of interest rate agreements that were designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, and that met the effectiveness criteria specified by GAAP were reported in accumulated other comprehensive loss.  The amounts were subsequently reclassified
as an increase or decrease to interest expense in the same periods in which the related interest on the floating-rate debt obligations affected earnings (losses).





Certain interest rate derivative instruments were not designated as hedges as they did not meet the effectiveness criteria specified by GAAP.  However, management believes such instruments were closely correlated with the respective debt, thus managing associated risk.  Interest rate derivative instruments not designated
as hedges were marked to fair value, with the impact recorded as a change in value of derivatives in the Company’s consolidated statements of operations.





As of December 31, 2008, the Company had outstanding $4.3 billion in notional amounts of interest rate swap agreements outstanding.  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 were
determined by reference to the notional amount and the other terms of the contracts.





The effect of derivative instruments on the Company’s consolidated statement of operations is presented in the table below.




Three Months Ended June 30,


Six Months Ended June 30,2009


2008


2009


2008Change in value of derivatives:Gain (loss) on interest rate derivatives not
designated as hedges

$
--


$
36


$
(4
)

$
6Accumulated other comprehensive loss:Gain (loss) on interest rate derivatives
designated as hedges (effective portion)

$
--


$
122


$
(9
)

$
18Amount of loss reclassified from
accumulated other comprehensive loss
into interest expense or reorganization
items, net

$
22


$
(21
)

$
(11
)

$
(32
)





11.           Fair Value of Financial Instruments





The Company has estimated the fair value of its financial instruments as of June 30, 2009 and December 31, 2008 using available market information or other appropriate valuation methodologies.  Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value.  Accordingly,
the estimates presented in the accompanying consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.





The carrying amounts of cash, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.






15
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





The estimated fair value of the Company’s notes at June 30, 2009 and December 31, 2008 are based on quoted market prices and the fair value of the credit facilities is based on dealer quotations.





A summary of the carrying value and fair value of the Company’s debt at June 30, 2009 and December 31, 2008 is as follows:





June 30, 2009

December 31, 2008Carrying

Fair

Carrying

FairValue

Value

Value

ValueCCO Holdings debt

$
797


$
761


$
796


$
505Charter Operating debt


2,398



2,361



2,397



1,923Credit facilities


8,562



7,632



8,596



6,187





The Company adopted SFAS No. 157, Fair Value Measurements, on its financial assets and liabilities effective January 1, 2008, and has an established process for determining fair value.  As permitted by FASB Staff Position (“FSP”) 157-2, the Company adopted SFAS
No. 157 effective January 1, 2009 on its nonfinancial assets and liabilities including fair value measurements of franchises, goodwill, property, plant, and equipment, and other long-term assets.  Fair value is based upon quoted market prices, where available.  If such valuation methods are not available, fair value is based on internally or externally developed models using market-based or independently-sourced market parameters, where available.  Fair value may be subsequently
adjusted to ensure that those assets and liabilities are recorded at fair value.  The Company’s methodology may produce a fair value that may not be indicative of net realizable value or reflective of future fair values, but the Company believes its methods are appropriate and consistent with other market peers.  The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value estimate as of the Company’s
reporting date.





SFAS No. 157 establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:





·
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.


·
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.


·
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.





Interest rate derivatives were valued at December 31, 2008 using a present value calculation based on an implied forward LIBOR curve (adjusted for Charter Operating’s credit risk) and were classified within level 2 of the valuation hierarchy.





The Company has no financial liabilities accounted for at fair value at June 30, 2009 due to the termination of the interest rate swap agreements.  At December 31, 2008, the Company’s financial liabilities that were accounted for at fair value on a recurring basis are presented in the table below:





Fair Value as of December 31, 2008Level 1

Level 2

Level 3

TotalOther long-term liabilities:Interest rate derivatives designated as hedges

$
--


$
303


$
--


$
303Interest rate derivatives not designated as hedges


--



108



--



108$
--


$
411


$
--


$
411











16
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





The weighted average interest pay rate for the Company’s interest rate swap agreements was 4.93% at December 31, 2008.





12.           Other Operating (Income) Expenses, Net





Other operating (income) expenses, net consist of the following for the three and six months ended June 30, 2009 and 2008:





Three Months
Ended June 30,


Six Months
Ended June 30,2009


2008


2009


2008Loss on sale of assets, net

$
1


$
2


$
3


$
4Special charges, net


1



23



(51
)


32$
2


$
25


$
(48
)

$
36





Loss on sale of assets, net





Loss on sale of assets represents the loss recognized on the sale of fixed assets and cable systems.





Special charges, net





Special charges, net for the three and six months ended June 30, 2009 primarily includes litigation settlements.  Special charges, net for the six months ended June 30, 2009 was offset by favorable litigation settlements.  Special charges, net for the three and six months ended June 30, 2008 primarily represent severance
charges and settlement costs associated with certain litigation, offset by favorable insurance settlements.





13.           Income Taxes





CCO Holdings is a single member limited liability company not subject to income tax.  CCO Holdings holds all operations through indirect subsidiaries.  The majority of these indirect subsidiaries are generally limited liability companies that are also not subject to income tax.  However, certain of the limited
liability companies are subject to state income tax.  In addition, certain of CCO Holdings’ indirect subsidiaries are corporations that are subject to income tax.





As of June 30, 2009 and December 31, 2008, the Company had net deferred income tax liabilities of approximately $182 million and $179 million, respectively. The deferred tax liabilities relate to certain of the Company’s indirect subsidiaries, which file separate income tax returns.





The Company recorded $4 million of income tax expense during the three months ended June 30, 2009 and $7 million and $2 million during the six months ended June 30, 2009 and 2008, respectively.  Income tax expense is recognized through current federal and state income tax expense as well as increases to the deferred tax liabilities
of certain of the Company’s indirect corporate subsidiaries.





No tax years for Charter or Charter Holdco are currently under examination by the Internal Revenue Service.  Tax years ending 2006, 2007 and 2008 remain subject to examination.






17
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)







14.           Related Party Transactions





The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved.  See also Note 6 for information regarding Loans Payable – Related Party.  Unless otherwise disclosed, management believes each of the transactions described below
was on terms no less favorable to the Company than could have been obtained from independent third parties.





In connection with the Plan, Charter, Mr. Allen and an entity controlled by Mr. Allen entered into the Allen Agreement, pursuant to which, among other things, Mr. Allen and such entity agreed to support the Plan, including the settlement of their rights, claims and remedies against Charter and its subsidiaries.  See Note 1.





Digeo, Inc.





Mr. Allen, through his 100% ownership of Vulcan Ventures Incorporated (“Vulcan Ventures”), owns a majority interest in Digeo, Inc. on a fully-converted fully-diluted basis.  Ms. Jo Allen Patton is a director of Charter and a director and Vice President of Vulcan Ventures.  Mr. Lance Conn is a director of
Charter and was Executive Vice President of Vulcan Ventures until his resignation in May 2009.  Currently, Charter Operating owns 1.8% of Digeo, Inc.’s common stock.





In May 2008, Charter Operating entered into an agreement with Digeo Interactive, LLC, a subsidiary of Digeo, Inc., for the minimum purchase of high-definition DVR units for approximately $21 million.  This minimum purchase commitment is subject to reduction as a result of certain specified events such as the failure to deliver
units timely and catastrophic failure.The software for these units is being supplied under a software license agreement with Digeo Interactive, LLC; the cost of which is expected to be approximately $2 million for the initial licenses and on-going maintenance fees of approximately $0.3 million annually, subject to reduction to coincide with any reduction in the minimum purchase commitment.  For the three and six months ended June
30, 2009, the Company purchased approximately $4 million and $11 million of DVR units from Digeo Interactive, LLC under these agreements, respectively.





15.           Contingencies





The Company has been subjected, in the normal course of business, to the assertion of employment law claims, including claims under the Fair Labor Standards Act and wage and hour laws of the states in which it operates and could be subjected to additional such claims the outcome of which the Company cannot predict.   The Company accrued
settlement costs associated with such a case in the second quarter of 2008 and such amounts were substantially paid in the first quarter of 2009.





On March 27, 2009, JPMorgan Chase Bank, N.A., for itself and as Administrative Agent under the Credit Agreement, filed an adversary proceeding (the “JPMorgan Adversary Proceeding”) in Bankruptcy Court against Charter Operating and CCO Holdings seeking a declaration that there have been events of default under the Credit Agreement.  Such
a judgment may prevent Charter Operating and CCO Holdings from reinstating the terms and provisions of the Credit Agreement through the bankruptcy proceeding.  On April 10, 2009, Charter Operating and CCO Holdings filed a motion to dismiss (the “Motion to Dismiss”) the JPMorgan Adversary Proceeding and argued that dismissal was proper because the JPMorgan Adversary Proceeding (i) is a core proceeding that is properly heard by the Bankruptcy Court; and (ii) fails to state a claim for default
under the Credit Agreement.  On May 5, 2009, the Bankruptcy Court ruled that the JPMorgan Adversary Proceeding is a core proceeding.  The JPMorgan Adversary Proceeding is being heard and decided by the Bankruptcy Court as a part of the hearing that began on July 20, 2009 to consider the confirmation of the Plan and which hearing is ongoing.  Charter denies the allegations made by JPMorgan and intends to vigorously contest this matter.





The Company and its parent companies are party to lawsuits and claims that arise in the ordinary course of conducting its business.  The ultimate outcome of these other legal matters pending against the Company or its parent companies








18
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s consolidated financial condition,
results of operations or liquidity.





16.           Stock Compensation Plans





Charter has stock compensation plans (the “Equity Plans”) which provide for the grant of non-qualified stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock and/or shares of restricted stock (shares of restricted stock not to exceed 20.0 million
shares of Charter Class A common stock), as each term is defined in the Equity Plans.  Employees, officers, consultants and directors of Charter and its subsidiaries and affiliates are eligible to receive grants under the Equity Plans.  Options granted generally vest over four years from the grant date, with 25% generally vesting on the first anniversary of the grant date and ratably thereafter.  Generally, options expire 10 years from the grant date.  Restricted stock
vests annually over a one to three-year period beginning from the date of grant.  The 2001 Stock Incentive Plan allows for the issuance of up to a total of 90.0 million shares of Charter Class A common stock (or units convertible into Charter Class A common stock).  In March 2008, Charter adopted an incentive program to allow for performance cash.  Under the incentive program, subject to meeting performance criteria, performance units under the 2001 Stock Incentive Plan and
performance cash are deposited into a performance bank of which one-third of the balance is paid out each year.  During the three and six months ended June 30, 2009, no equity awards were granted.  During the three and six months ended June 30, 2009, Charter granted $1 million and $12 million of performance cash and restricted cash, respectively, under Charter’s 2009 incentive program.  In the first quarter of 2009, the majority of restricted stock and performance units and
shares were voluntarily forfeited by participants without termination of the service period, and the remaining, along with all stock options, will be cancelled in connection with the Proposed Restructuring.  The Proposed Restructuring includes an allocation of not less than 3% of new equity for employee grants with 50% of the allocation to be granted within thirty days of the Company's emergence from bankruptcy.Such grant
of new awards is deemed to be a modification of old awards and will be accounted for as a modification of the original awards.  See Note 1.





The Company recorded $6 million and $8 million of stock compensation expense for the three months ended June 30, 2009 and 2008, respectively, and $17 million and $16 million for the six months ended June 30, 2009 and 2008, respectively, which is included in selling, general, and administrative expense.





17.           Recently Issued Accounting Standards





In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  FSP FAS 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.The Company adopted FSP FAS 141(R)-1 effective
January 1, 2009.  The adoption of FSP FAS 141(R)-1 did not have a material impact on the Company’s financial statements.





In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in accordance
with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.  FSP FAS 157-4 is effective for reporting periods ending after June 15, 2009.The Company adopted FSP FAS 157-4 effective April 1, 2009.  The adoption of FSP FAS 157-4 did not have a material impact on the Company’s
financial statements.






19
 CCO HOLDINGS, LLC AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (dollars in millions)





In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require
disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting,to require those disclosures in summarized financial information at interim reporting periods.  FSP FAS 107-1 and APB 28-1 are effective for reporting periods ending after June 15, 2009.The
Company adopted FSP FAS 107-1 and APB 28-1 effective April 1, 2009.  The adoption of FSP FAS 107-1 did not have a material impact on the Company’s financial statements.





In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events, to establish principles and requirements for the evaluation and disclosure of subsequent events.  SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009.  The
Company adopted SFAS No. 165 effective April 1, 2009 and has included the appropriate disclosure in its financial statements.





The Company does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its accompanying financial statements.






20







Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.





General





CCO Holdings, LLC (“CCO Holdings”) is a holding company whose principal assets at June 30, 2009 are the equity interests in its operating subsidiaries.  CCO Holdings is a direct subsidiary of CCH II, LLC (“CCH II”), which is an indirect subsidiary of Charter Communications Holdings, LLC (“Charter
Holdings”).  Charter Holdings is an indirect subsidiary of Charter Communications, Inc. (“Charter”).





We are a broadband communications company operating in the United States with approximately 5.4 million customers at June 30, 2009.  Through our hybrid fiber and coaxial cable network, we offer our customers traditional cable video programming (basic and digital, which we refer to as “video” services), high-speed Internet
services, and telephone services, as well as advanced broadband services (such as Charter OnDemandTM (“OnDemand”) high definition television service, and digital video recorder (“DVR”) service).





The following table summarizes our customer statistics for basic video, digital video, residential high-speed Internet, and telephone as of June 30, 2009 and 2008:





Approximate as ofJune 30,


June 30,2009 (a)


2008 (a)Video Cable Services:Basic Video:Residential (non-bulk) basic video customers (b)


4,672,100



4,897,100Multi-dwelling (bulk) and commercial unit customers (c)


257,800



256,900Total basic video customers (b)(c)


4,929,900



5,154,000Digital Video:Digital video customers (d)


3,152,000



3,056,900Non-Video Cable Services:Residential high-speed Internet customers (e)


2,957,700



2,787,300Telephone customers (f)


1,480,000



1,175,500Total Revenue Generating Units (g)


12,519,600



12,173,700





After giving effect to sales of cable systems in 2008 and 2009, basic video customers, digital video customers, high-speed Internet customers and telephone customers would have been approximately 5,128,500, 3,048,300, 2,781,800, and 1,175,200, respectively, as of June 30, 2008.





(a)
"Customers" include all persons our corporate billing records show as receiving service (regardless of their payment status), except for complimentary accounts.  At June 30, 2009 and 2008, "customers" include approximately 37,200 and 34,200 persons, respectively, whose accounts were over 60 days past due in payment, approximately 6,200 and 5,300 persons, respectively, whose accounts were over 90 days past
due in payment, and approximately 2,900 and 2,600 persons, respectively, of which were over 120 days past due in payment.




(b)
"Basic video customers" include all residential customers who receive video cable services.


(c)
Included within "basic video customers" are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit (“EBU”) basis.  In the second quarter of 2009, we began calculating EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service rather
than the most prevalent price charged as was used previously.  This EBU method of estimating basic video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators (“MSOs”).  As of June 30, 2008, EBUs decreased by 8,000 as a result of the change in methodology.  As we increase our published video rates to residential customers






21


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 basic video customers that have one or more digital set-top boxes or cable cards deployed.





(e)
"Residential high-speed Internet customers" represent those residential customers who subscribe to our high-speed Internet service.




(f)
“Telephone customers" include all customers receiving telephone service.


(g)
"Revenue generating units" represent the sum total of all basic video, digital video, high-speed Internet and telephone customers, not counting additional outlets within one household.  For example, a customer who receives two types of service (such as basic video and digital video) would be treated as two revenue generating units and, if that
customer added on high-speed Internet service, the customer would be treated as three revenue generating units.  This statistic is computed in accordance with the guidelines of the National Cable & Telecommunications Association (“NCTA”).


Overview





Charter and its subsidiaries, including us, filed petitions under Chapter 11 of the United States Bankruptcy Code on March 27, 2009.  See “—Bankruptcy Proceedings,” for more information on our financial restructuring.  Information concerning status of the ongoing bankruptcy proceedings may be obtained
from Charter’s website at www.charter.com and at www.kccllc.net/charter.





For the three months ended June 30, 2009 and 2008, our income from operations was $301 million and $230 million, respectively, and for the six months ended June 30, 2009 and 2008, our income from operations was $635 million and $435 million, respectively.  We had operating margins of 18% and 14% for the three months ended June
30, 2009 and 2008, respectively, and 19% and 14% for the six months ended June 30, 2009 and 2008, respectively.  The increase in income from operations and operating margins for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 was principally due to increased sales of our bundled services, improved cost efficiencies and favorable litigation settlements in 2009.  The favorable litigation settlements in 2009 increased operating margin for
the six months ended June 30, 2009 by two percentage points.





We cannot assure you that we will be able to continue to grow revenues at historical rates, if at all.  Declines in the housing market over the past year, including falling home prices and increasing foreclosures, together with increases in unemployment, have negatively affected consumer confidence and may cause increased delinquencies
or cancellations by our customers or lead to unfavorable changes in the mix of products purchased.  The general economic downturn has affected advertising sales, as companies are advertising less. Any of these events may adversely affect our cash flow, results of operations and financial condition.





We have a history of net losses.  Our net losses are principally attributable to insufficient revenue to cover the combination of operating expenses and interest expenses we incur because of our debt, and depreciation expenses resulting from the capital investments we have made and continue to make in our cable properties.






22





Critical Accounting Policies and Estimates





For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Charter’s 2008 Annual Report on Form 10-K.





RESULTS OF OPERATIONS





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 June 30,


Six Months Ended June 30,2009


2008


2009


2008REVENUES

$
1,690


100
%

$
1,623


100
%

$
3,352


100
%

$
3,187


100
%COSTS AND EXPENSES:Operating (excluding depreciation and
amortization)


715


42
%


698


43
%


1,428


43
%


1,380


43
%Selling, general and administrative


343


20
%


342


21
%


687


20
%


687


22
%Depreciation and amortization


329


20
%


328


20
%


650


19
%


649


20
%Other operating (income) expenses, net


2


--



25


2
%


(48
)

(1
%)


36


1
%1,389


82
%


1,393


86
%


2,717


81
%


2,752


86
%Income from operations


301


18
%


230


14
%


635


19
%


435


14
%OTHER INCOME (EXPENSES):Interest expense, net


(150
)





(202
)





(350
)





(395
)Change in value of derivatives


--






36






(4
)





6Reorganization items, net


(168
)





--






(260
)





--Other income (expense), net


--






(1
)





1






(2
)(318
)





(167
)





(613
)





(391
)Income (loss) before income taxes


(17
)





63






22






44INCOME TAX EXPENSE


(4
)





--






(7
)





(2
)Consolidated net income (loss)


(21
)





63






15






42Less: Net income –  noncontrolling
interest


(11
)





(6
)





(22
)





(12
)Net income (loss) – CCO Holdings
member

$
(32
)




$
57





$
(7
)




$
30





Revenues.  Average monthly revenue per basic video customer increased to $113 for the three months ended June 30, 2009 from $104 for the three months ended June 30, 2008 and increased to $112 for the six months ended June 30, 2009 from $102 for the six
months ended June 30, 2008.  Average monthly revenue per basic video customer represents total revenue, divided by the number of respective months, divided by the average number of basic video customers during the respective period.  Revenue growth primarily reflects increases in the number of telephone, high-speed Internet, and digital video customers, price increases, and incremental video revenues from OnDemand, DVR, and high-definition television services, offset by a decrease in basic
video customers.  Cable system sales in 2008 and 2009 reduced the increase in revenues for the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008 by approximately $5 million and $8 million, respectively.






23





Revenues by service offering were as follows (dollars in millions):





Three Months Ended June 30,2009


2008


2009 over 2008Revenues

% of
Revenues


Revenues

% of
Revenues


Change

% ChangeVideo

$
873


52
%

$
874


54
%

$
(1
)

--High-speed Internet


367


22
%


339


21
%


28


8
%Telephone


177


10
%


134


8
%


43


32
%Commercial


110


6
%


96


6
%


14


15
%Advertising sales


62


4
%


75


5
%


(13
)

(17
%)Other


101


6
%


105


6
%


(4
)

(4
%)$
1,690


100
%

$
1,623


100
%

$
67


4
%





Six Months Ended June 30,2009


2008


2009 over 2008Revenues

% of
Revenues


Revenues

% of
Revenues


Change

% ChangeVideo

$
1,745


52
%

$
1,732


54
%

$
13


1
%High-speed Internet


727


22
%


667


21
%


60


9
%Telephone


346


10
%


255


8
%


91


36
%Commercial


217


6
%


189


6
%


28


15
%Advertising sales


116


4
%


143


5
%


(27
)

(19
%)Other


201


6
%


201


6
%


--


--$
3,352


100
%

$
3,187


100
%

$
165


5
%





Video revenues consist primarily of revenues from basic and digital video services provided to our non-commercial customers.  Basic video customers decreased by 224,100 customers from June 30, 2008 compared to June 30, 2009, 25,500 of which were related to asset sales.  Digital video customers increased by 95,100 during
the same period, reduced by the sale of assets with 8,600 customers.  The increases in video revenues are attributable to the following (dollars in millions):





Three months ended
June 30, 2009
compared to
three months ended
June 30, 2008
Increase / (Decrease)


Six months ended
June 30, 2009
compared to
six months ended
June 30, 2008
Increase / (Decrease)Incremental video services and rate adjustments

$
14


$
35Increase in digital video customers


11



27Decrease in basic video customers


(23
)


(44
)Asset sales


(3
)


(5
)$
(1
)

$
13








24





High-speed Internet customers grew by 170,400 customers, reduced by the sale of assets with 5,500 customers, from June 30, 2008 to June 30, 2009.  The increase in high-speed Internet revenues from our residential customers is attributable to the following (dollars in millions):





Three months ended
June 30, 2009
compared to
three months ended
June 30, 2008
Increase / (Decrease)


Six months ended
June 30, 2009
compared to
six months ended
June 30, 2008
Increase / (Decrease)Increase in high-speed Internet customers

$
23


$
46Rate adjustments and service upgrades


6



15Asset sales


(1
)


(1
)$
28


$
60





Revenues from telephone services increased by $43 million and $91 million for the three and six months ended June 30, 2009, respectively, as a result of an increase of 304,500 telephone customers, reduced by the sale of assets with 300 customers, and by $7 million and $13 million, respectively, as a result of higher average rates.





Commercial revenues consist primarily of revenues from services provided to our commercial customers.  Commercial revenues increased primarily as a result of increased sales of the Charter Business Bundle® primarily to small and medium-sized businesses, as well as growth in our fiber-based data services, offset by asset sales
of $1 million for the three and six months ended June 30, 2009.





Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers, and other vendors.  Advertising sales revenues for the three and six months ended June 30, 2009 decreased primarily as a result of significant decreases in revenues from the political, automotive and retail sectors.  The
decrease for the six months ended June 30, 2009 included $1 million as a result of asset sales.  For the three months ended June 30, 2009 and 2008, we received $10 million and $8 million, respectively, and for the six months ended June 30, 2009 and 2008, we received $18 million and $14 million, respectively, in advertising sales revenues from vendors.





Other revenues consist of franchise fees, regulatory fees, customer installations, home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues.  For the three months ended June 30, 2009 and 2008, franchise fees represented approximately 45% and 48%, respectively, of total other revenues.  For
the six months ended June 30, 2009 and 2008, franchise fees represented approximately 45% and 47%, respectively, of total other revenues.  The decrease in other revenues for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008 was primarily the result of decreases in franchise and other regulatory fees.





Operating expenses.  The increase in operating expenses is attributable to the following (dollars in millions):





Three months ended
June 30, 2009
compared to
three months ended
June 30, 2008
Increase / (Decrease)


Six months ended
June 30, 2009
compared to
six months ended
June 30, 2008
Increase / (Decrease)Programming costs

$
24


$
49Maintenance costs


5



9Vehicle costs


(6
)


(8
)Franchise costs


(6
)


(4
)Other, net


1



5Asset sales, net of acquisition


(1
)


(3
)$
17


$
48








25





Programming costs were approximately $433 million and $410 million, representing 61% and 59% of total operating expenses for the three months ended June 30, 2009 and 2008, respectively, and were approximately $865 million and $819 million, representing 61% and 59% of total operating expenses for the six months ended June 30, 2009 and 2008,
respectively.  Programming costs consist primarily of costs paid to programmers for basic, premium, digital, OnDemand, and pay-per-view programming.  The increase in programming costs is primarily a result of annual contractual rate adjustments and increases in amounts paid for retransmission consent, offset in part by asset sales and customer losses.  Programming costs were also offset by the amortization of payments received from programmers of $7 million for each of the three
months ended June 30, 2009 and 2008, and $14 million and $12 million for the six months ended June 30, 2009 and 2008, respectively.  We expect programming expenses to continue to increase, and at a higher rate than 2008, due to a variety of factors, including amounts paid for retransmission consent, annual increases imposed by programmers, and additional programming, including high-definition, OnDemand, and pay-per-view programming, being provided to our customers.





Selling, general and administrative expenses.The decrease in selling, general and administrative expenses is attributable to the following (dollars in millions):





Three months ended
June 30, 2009
compared to
three months ended
June 30, 2008
Increase / (Decrease)


Six months ended
June 30, 2009
compared to
six months ended
June 30, 2008
Increase / (Decrease)Marketing costs

$
3


$
7Employee costs


(1
)


(5
)Stock compensation costs


(2
)


1Other, net


3



(1
)System sales, net of acquisitions


(2
)


(2
)$
1


$
--





Depreciation and amortization.Depreciation and amortization expense increased by $1 million for each of the three and six months ended June 30, 2009 compared to June 30, 2008, respectively, primarily
representing depreciation on capital expenditures, offset by certain assets becoming fully depreciated.





Other operating (income) expenses, net.For the three months ended June 30, 2009 compared to June 30, 2008, the decrease in other operating expense was primarily attributable to a decrease in unfavorable litigation settlements.  For the six
months ended June 30, 2009 compared to June 30, 2008, the increase in other operating income was primarily attributable to favorable litigation settlements in 2009, as opposed to unfavorable litigation settlements in 2008.  For more information, see Note 12 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”





Interest expense, net.For the three and six months ended June 30, 2009 compared to June 30, 2008, net interest expense decreased by $52 million and $45 million, respectively, due to a decrease in the
weighted average interest rate during the three and six months ended June 30, 2009 compared to June 30, 2008, excluding the effect of interest being calculated at a prime rate compared to LIBOR and 2% penalty interest, the incremental cost of which is being recorded in reorganization items, net.





Change in value of derivatives.Interest rate swaps were held to manage our interest costs and reduce our exposure to increases in floating interest rates.  We expensed the change in fair value
of derivatives that did not qualify for hedge accounting and cash flow hedge ineffectiveness on interest rate swap agreements.  Upon filing for Chapter 11 bankruptcy, the counterparties to the interest rate swap agreements terminated the underlying contracts and, upon emergence from bankruptcy, will receive payment for the market value of the interest rate swap agreement as measured on the date the counterparties terminated.  We recognized
a gain from the change in value of the interest rate swaps of $36 million for the first quarter of 2008.  For the six months ended June 30, 2009 and 2008, we recognized a loss of $4 million and a gain of $6 million, respectively, from the change in value of the interest rate swaps.






26





Reorganizations items, net.Reorganization items, net of $168 million and $260 million for the three and six months ended June 30, 2009 represent items of income, expense, gain or loss that we realized or incurred because we are in reorganization under
Chapter 11 of the U.S. Bankruptcy Code.  For more information, see Note 2 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”





Income tax expense.Income tax expense was recognized for the three and six months ended June 30, 2009 and 2008, through increases in deferred tax liabilities and current federal and state income tax
expense of certain of our indirect subsidiaries.





Net income – noncontrolling interest.Noncontrolling interest includes the 2% accretion of the preferred membership interests in CC VIII, LLC (“CC VIII”) plus approximately 18.6% of CC VIII’s income, net of accretion.





Net income (loss) – CCO Holdings member.Net loss of $32 million and $7 million for the three and six months ended June 30, 2009 and 2008, respectively, compared to net income of $57 million and
$30 million for the three and six months ended June 30, 2008 was primarily a result of the factors described above.





Bankruptcy Proceedings





On March 27, 2009, we, our parent companies and certain affiliates (collectively, the “Debtors”) filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”).  The Chapter 11 cases are being jointly administered under the caption In re Charter Communications, Inc., et al., Case No. 09-11435 (the “Chapter 11 Cases”).  The Debtors have continued to operate their businesses and manage their properties as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.





The filing was made to allow us and our parent companies to implement a restructuring pursuant to a pre-arranged joint plan of reorganization (as amended, the “Plan”) aimed at improving our and our parent companies’ capital structure (the “Proposed Restructuring”). The Plan essentially provides for a balance
sheet restructuring that will leave intact our operations.





Under Chapter 11, we are operating our business as a debtor-in-possession (“DIP”) under bankruptcy court protection from creditors and claimants.  We have obtained orders from the Bankruptcy Court, which provide, among other things, flexibility in cash management, the ability to use cash collateral, and in the normal
course, the ability to pay certain trade creditor balances that are pre-petition claims.  During these Chapter 11 Cases, all transactions outside the ordinary course of business will require the prior approval of the Bankruptcy Court.  As a consequence of the Chapter 11 filing, pending litigation against us and our parent companies arising before March 27, 2009 is subject to the automatic stay under the Bankruptcy Code, and consequently no party may take any action to collect pre-petition
claims except pursuant to order of the Bankruptcy Court.





On May 5, 2009, the Bankruptcy Court approved the disclosure statement filed in connection with the Plan and authorized the Debtors to solicit votes on the Plan. The period of time for voting on the Plan has expired.  Charter has filed with the Bankruptcy Court the results of the voting on the Plan.  The report is available
at www.kccllc.net/charter.  The Debtors’ confirmation hearing, at which the Bankruptcy Court is considering approval of the Plan, began on July 20, 2009 and is ongoing.





The Plan is expected to be funded with cash from operations, an exchange of debt of CCH II for other debt at CCH II (the “Notes Exchange”), the issuance of additional debt (the “New Debt Commitment”), and the proceeds of an equity offering (the “Rights Offering”).  In addition to separate restructuring
agreements entered into with certain holders of our parent companies’ notes (the “Noteholders”) pursuant to which we and our parent companies expect to implement the Plan (as amended July 31, 2009, the “Restructuring Agreements”), the Noteholders have entered into commitment letters (the “Commitment Letters”), pursuant to which they have agreed to exchange and/or purchase, as applicable, certain of our parent companies’ securities, as described in more detail below.
The holders of the CCH II notes have made their elections in the Notes Exchange.  As a result of the Notes Exchange, CCH II will exchange approximately $1.5 billion of old CCH II notes for new CCH II notes on the effective date of the Plan should the Bankruptcy Court approve the Plan and the Plan becomes effective.  The Rights Offering has also been concluded resulting in holders of CCH I, LLC (“CCH I”) notes electing to purchase approximately $1.6 billion of








27





Charter’s new Class A Common Stock and certain of the Noteholders electing to exercise an overallotment option to purchase an additional approximately $40 million of Charter’s new Class A Common Stock.  The Rights Offering will close on the effective date of the Plan should the Bankruptcy Court approve the Plan and
the Plan becomes effective.





Under the Notes Exchange, existing holders of senior notes of CCH II and CCH II Capital Corp. (“CCH II Notes”) were entitled to elect to exchange their CCH II Notes for new 13.5% Senior Notes of CCH II and CCH II Capital Corp. (the “New CCH II Notes”).  CCH II Notes that are not exchanged in the Notes Exchange
will be paid in cash in an amount equal to the outstanding principal amount of such CCH II Notes plus accrued but unpaid interest to the bankruptcy petition date plus post-petition interest, but excluding any call premiums or prepayment penalties and for the avoidance of doubt, any unmatured interest.  The aggregate principal amount of New CCH II Notes to be issued pursuant to the Plan is expected to be approximately $1.5 billion plus accrued but unpaid interest to the bankruptcy petition date plus
post-petition interest, but excluding any call premiums or prepayment penalties (collectively, the “Target Amount”), plus an additional $85 million.





Under the Commitment Letters, certain holders of CCH II Notes committed to exchange, pursuant to the Notes Exchange, an aggregate of approximately $1.2 billion in aggregate principal amount of CCH II Notes, plus accrued but unpaid interest to the bankruptcy petition date plus post-petition interest, but excluding any call premiums or any
prepayment penalties.  Because the aggregate principal amount of New CCH II Notes to be issued pursuant to the Notes Exchange exceeds the Target Amount, each Noteholder participating in the Notes Exchange will receive a pro rata portion of such Target Amount of New CCH II Notes, based upon the ratio of (i) the aggregate principal amount of CCH II Notes it has tendered into the Notes Exchange to (ii) the total aggregate principal amount of CCH II Notes tendered into the Notes Exchange.  Participants
in the Notes Exchange will receive a commitment fee equal to 1.5% of the principal amount plus interest on the CCH II Notes exchanged by such participant in the Notes Exchange.





Under the New Debt Commitment, certain holders of CCH II Notes had committed to purchase an additional amount of New CCH II Notes in an aggregate principal amount of up to $267 million depending on the outcome of the Notes Exchange.  Participants in the New Debt Commitment will receive a commitment fee equal to the greater of
(i) 3.0% of their respective portion of the New Debt Commitment or (ii) 0.83% of its respective portion of the New Debt Commitment for each month beginning April 1, 2009 during which its New Debt Commitment remains outstanding.  Because the holders of CCH II Notes elected to exchange in excess of $1.5 billion of CCH II Notes for New CCH II Notes, we do not expect to issue any New CCH II Notes for cash under the New Debt Commitment.





The period for electing to participate in the Rights Offering has expired.  Under the Rights Offering, Charter offered to existing holders of senior notes of CCH I, LLC (“CCH I Notes”) that are accredited investors (as defined in Regulation D promulgated under the Securities Act) or qualified institutional buyers (as
defined under Rule 144A of the Securities Act), the right (the “Rights”) to purchase shares of the new Class A Common Stock of Charter, to be issued upon our and our parent companies’ emergence from bankruptcy, in exchange for a cash payment at a discount to the equity value of Charter upon emergence.  Upon emergence from bankruptcy, Charter’s new Class A Common Stock is not expected to be listed on any public or over-the-counter exchange or quotation system and will
be subject to transfer restrictions.  It is expected, however, that Charter will thereafter apply for listing of Charter’s new Class A Common Stock on the NASDAQ Stock Market as provided in a term sheet describing the Proposed Restructuring (the “Term Sheet”).  The Rights Offering is expected to generate proceeds of up to approximately $1.6 billion and will be used to pay holders of CCH II Notes that do not participate in the Notes Exchange, repayment of certain amounts
relating to the satisfaction of certain swap agreement claims against Charter Communications Operating, LLC (“Charter Operating”) and for general corporate purposes.





The Restructuring Agreements further contemplate that upon the effective date of the Plan (i) CCO Holdings’ and Charter Operating’s notes and credit facilities will remain outstanding, (ii) holders of notes issued by CCH II will receive New CCH II Notes pursuant to the Notes Exchange and/or cash, (iii) holders of notes issued
by CCH I, LLC will receive shares of Charter’s new Class A Common Stock, (iv) holders of notes issued by CCH I Holdings, LLC (“CIH”) will receive warrants to purchase shares of Charter’s new Class A Common Stock, (v) holders of notes of Charter Holdings will receive warrants to purchase shares of Charter’s new Class A Common Stock, (vi) holders of convertible notes issued by Charter will receive cash and preferred stock issued by Charter,  (vii) holders of existing common
stock will not receive any amounts on account of their common stock, which will be cancelled, and (viii) trade creditors will be paid in full.  In addition, as part of the Proposed Restructuring, it is expected that








28





consideration will be paid by holders of CCH I Notes to other entities participating in the financial restructuring.  The recoveries summarized above are more fully described in the Plan.





Pursuant to a separate restructuring agreement among Charter, Mr. Allen, and an entity controlled by Mr. Allen (as amended July 31, 2009, the “Allen Agreement”), in settlement of their rights, claims and remedies against Charter and its subsidiaries, and in addition to any amounts received by virtue of their holding any claims
of the type set forth above, upon the effective date of the Plan, Mr. Allen or his affiliates will be issued a number of shares of the new Class B Common Stock of Charter equal to 2% of the equity value of Charter, after giving effect to the Rights Offering, but prior to issuance of warrants and equity-based awards provided for by the Plan and 35% (determined on a fully diluted basis) of the total voting power of all new capital stock of Charter.   Each share of new Class B Common Stock will be convertible,
at the option of the holder, into one share of new Class A Common Stock, and will be subject to significant restrictions on transfer.  Certain holders of new Class A Common Stock and new Class B Common Stock will receive certain customary registration rights with respect to their shares.  Upon the effective date of the Plan, Mr. Allen or his affiliates will also receive (i) warrants to purchase shares of new Class A Common Stock of Charter in an aggregate amount equal to 4% of the equity value
of reorganized Charter, after giving effect to the Rights Offering, but prior to the issuance of warrants and equity-based awards provided for by the Plan, (ii) $85 million principal amount of New CCH II Notes, (iii) $25 million in cash for amounts owing to Charter Investment, Inc. (“CII”) under a management agreement, (iv) up to $20 million in cash for reimbursement of fees and expenses in connection with the Proposed Restructuring, and (v) an additional $150 million in cash.  The warrants
described above shall have an exercise price per share based on a total equity value equal to the sum of the equity value of reorganized Charter, plus the gross proceeds of the Rights Offering, and shall expire seven years after the date of issuance.  In addition, on the effective date of the Plan, CII will retain a 1% equity interest in reorganized Charter Communications Holding Company, LLC (“Charter Holdco”) and a right to exchange such interest into new Class A Common Stock of Charter.
Further, Mr. Allen will transfer his preferred equity interest in CC VIII to Charter.  The Proposed Restructuring would result in the reduction of our parent companies’ debt by approximately $8 billion.





The Restructuring Agreements also contemplate that upon emergence from bankruptcy each holder of 10% or more of the voting power of Charter will have the right to nominate one member of the initial board of directors for each 10% of voting power; and that at least Charter’s current Chief Executive Officer and Chief Operating Officer
will continue in their same positions.  The Restructuring Agreements require Noteholders to cast their votes in favor of the Plan and generally support the Plan and contain certain customary restrictions on the transfer of claims by the Noteholders.





The Restructuring Agreements and Commitment Letters are subject to certain termination events, including, among others:





·
the commitments set forth in the respective Noteholder’s Commitment Letter shall have expired or been terminated;


·
Charter’s board of directors shall have been advised in writing by its outside counsel that continued pursuit of the Plan is inconsistent with its fiduciary duties, and the board of directors determines in good faith that, (A) a proposal or offer from a third party is reasonably likely to be more favorable to us than is proposed under the Plan, taking
into account, among other factors, the identity of the third party, the likelihood that any such proposal or offer will be negotiated to finality within a reasonable time, and the potential loss to us if the proposal or offer were not accepted and consummated, or (B) the Plan is no longer confirmable or feasible;


·
the Plan or any subsequent plan filed by us with the Bankruptcy Court (or a plan supported or endorsed by us) is not reasonably consistent in all material respects with the terms of the Restructuring Agreements;


·
a confirmation order reasonably acceptable to Charter, the Requisite Holders and Mr. Allen is not entered by the Bankruptcy Court;


·
the effective date of the Plan (the “Effective Date”) shall not have occurred on or before September 30, 2009; except that in the case that certain consents, approvals or waivers required to be obtained from governmental authorities have not been obtained on or before September 30, 2009, and all other conditions precedent to the Effective Date
shall have been satisfied before September 30, 2009 or waived by the Requisite Holders (other than those conditions that by their nature are to be satisfied on the Effective Date), the Effective Date shall not have occurred on or before December 15, 2009;


·
any of our Chapter 11 Cases is converted to cases under Chapter 7 of the Bankruptcy Code if as a result of such conversion the Plan is not confirmable;

















29







·
any of our Chapter 11 Cases are dismissed if, as a result of such dismissal, the Plan is not confirmable;
·
the order confirming the Plan is reversed on appeal or vacated; and
·
any Restructuring Agreement or the Allen Agreement has terminated or been breached in any material respect subject to notice and cure provisions.





The Allen Agreement contains similar provisions to those provisions of the Restructuring Agreements.  There is no assurance that the treatment of creditors outlined above will not change significantly.  For example, because the Proposed Restructuring is contingent on reinstatement of the credit facilities and certain
notes of Charter Operating and CCO Holdings, failure to reinstate such debt would require us and our parent companies to revise the Proposed Restructuring.  Moreover, if reinstatement does not occur and current capital market conditions persist, we and our parent companies may not be able to secure adequate new financing and the cost of new financing would likely be materially higher.





The above summary of the Restructuring Agreements, Commitment Letters, Term Sheet and Allen Agreement is qualified in its entirety by the full text of the Restructuring Agreements, Commitment Letters, Term Sheet and Allen Agreement copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to our 2008 Annual Report on
Form 10-K, and the Plan filed herewith as Exhibit 10.2.  See “Part II. Item 1A - Risk Factors – Risks Relating to Bankruptcy.”





Interest Payments





Two of our parent companies, CIH and Charter Holdings, did not make scheduled payments of interest due on January 15, 2009 (the “January Interest Payment”) on certain of their outstanding senior notes (the “Overdue Payment Notes”).  Each of the respective governing indentures (the “Indentures”)
for the Overdue Payment Notes permits a 30-day grace period for such interest payments through (and including) February 15, 2009.  On February 11, 2009, in connection with the Commitment Letters and Restructuring Agreements, Charter and certain of its subsidiaries also entered into an Escrow Agreement with members of the ad-hoc committee of holders of the Overdue Payment Notes (“Ad-Hoc Holders”) and Wells Fargo Bank, National Association, as Escrow Agent (the “Escrow Agreement”).  On
February 13, 2009, the full amount of the January Interest Payment was paid to the Paying Agent for the Ad-Hoc Holders on their Overdue Payment Notes, which constitutes payment under the Indentures.  As required under the Indentures, Charter set a special record date for payment of such interest payments of February 28, 2009.  Under the Escrow Agreement, the Ad-Hoc Holders agreed to deposit into an escrow account the amounts they received in respect of the January Interest Payment (the "Escrow
Amount") and the Escrow Agent will hold such amounts subject to the terms of the Escrow Agreement.  Under the Escrow Agreement, if the transactions contemplated by the Restructuring Agreements are consummated on or before December 15, 2009 or such transactions are not consummated on or before December 15, 2009 due to material breach of the Restructuring Agreements by us or our parent companies, then the Ad-Hoc Holders will be entitled to receive their pro-rata share of the Escrow Amount.  If
the transactions contemplated by the Restructuring Agreements are not consummated on or prior to December 15, 2009 for any reason other than material breach of the Restructuring Agreements by us or our parent companies, then Charter, Charter Holdings, CIH or their designee shall be entitled to receive the Escrow Amount.  No amount has been recorded on our or our parent companies’ condensed consolidated balance sheet for the Escrow Amount.





Charter Operating Credit Facility





On February 3, 2009, Charter Operating made a request to the administrative agent under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as amended and restated as of March 6, 2007 (the “Credit Agreement”), to borrow additional revolving loans under the Credit Agreement.  Such borrowing request
complied with the provisions of the Credit Agreement including section 2.2 (“Procedure for Borrowing”) thereof.  On February 5, 2009, we received a notice from the administrative agent asserting that one or more Events of Default (as defined in the Credit Agreement) had occurred and was continuing under the Credit Agreement.  In response, we sent a letter to the administrative agent on February 9, 2009, among other things, stating that no event of default under the Credit Agreement
occurred or was continuing and requesting the administrative agent to rescind its notice of default and fund Charter Operating’s borrowing request.  The administrative agent sent a letter to us on February 11, 2009, stating that it continues to believe that one or more Events of Default occurred and was continuing.   As a result, with the exception of one lender who funded approximately $0.4 million, the lenders under the Credit Agreement have failed to fund Charter Operating’s
borrowing request.






30





Upon filing bankruptcy, Charter Operating no longer has access to its revolving credit facility and relies on cash on hand and cash flows from operating activities to fund its and its parent companies’ projected cash needs.  Our projected cash needs and projected sources of liquidity depend upon, among other things, our
actual results, the timing and amount of our expenditures, and the outcome of various matters in our Chapter 11 Cases and financial restructuring.  The outcome of the Plan is subject to substantial risks.  See “Part II. Item 1. Legal Proceedings” for more information on the JPMorgan Adversary Proceeding.





Plan Objections





In addition to the JPMorgan Adversary Proceeding, certain parties-in-interest have filed objections to the confirmation of the Plan.  Objections have been filed by certain holders of Charter Operating and CCO Holdings debt resisting reinstatement of the terms and provisions of their debt instruments.  The holders of
Charter’s convertible notes have also filed objections to the Plan.  These objections, among others, may be found at www.kccllc.net/charter at the “Confirmation Documents” tab.





Historical Operating, Investing and Financing Activities





Cash and Cash Equivalents.We held $976 million in cash and cash equivalents as of June 30, 2009 compared to $948 million as of December 31, 2008.




Operating Activities.Net cash provided by operating activities decreased $82 million from $703 million for the six months ended June 30, 2008 to $621 million for the six months ended June 30, 2009, primarily
as a result of changes in operating assets and liabilities that used $153 million more cash during the six months ended June 30, 2009 than the corresponding period in 2008, offset by revenues increasing at a faster rate than cash expenses.





Investing Activities.Net cash used in investing activities was $559 million and $691 million for the six months ended June 30, 2009 and 2008, respectively.  The decrease is primarily due to
a decrease of $110 million in purchases of property, plant, and equipment.




Financing Activities.Net cash used in financing activities was $34 million for the six months ended June 30, 2009 and net cash provided by financing activities was $48 million for the six months ended
June 30, 2008.  The decrease in cash provided during the six months ended June 30, 2009 as compared to the corresponding period in 2008, was primarily the result of no borrowings of long-term debt in 2009.





Capital Expenditures





We have significant ongoing capital expenditure requirements.  Capital expenditures were $540 million and $650 million for the six months ended June 30, 2009 and 2008, respectively.  See the table below for more details.





Our capital expenditures are funded primarily from cash flows from operating activities and the issuance of debt.  In addition, our liabilities related to capital expenditures decreased $19 million and $41 million for the six months ended June 30, 2009 and 2008 compared to year end, respectively.





During 2009, we expect capital expenditures to be approximately $1.2 billion.  We expect the nature of these expenditures will continue to be composed primarily of purchases of customer premise equipment related to telephone and other advanced services, support capital, and scalable infrastructure.  The actual amount
of our capital expenditures depends, among other things, on the deployment of advanced broadband services and offerings.  We may need additional capital if there is accelerated growth in high-speed Internet, telephone or digital customers or there is an increased need to respond to competitive pressures by expanding the delivery of other advanced services.




We have adopted capital expenditure disclosure guidance, which was developed by eleven then publicly traded cable system operators, including Charter, with the support of the National Cable & Telecommunications Association ("NCTA").  The disclosure is intended to provide more consistency in the reporting of capital expenditures
among peer companies in the cable industry.  These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP.






31





The following table presents our major capital expenditures categories in accordance with NCTA disclosure guidelines for the three and six months ended June 30, 2009 and 2008 (dollars in millions):





Three Months Ended
June 30,


Six Months Ended
June 30,2009


2008


2009


2008Customer premise equipment (a)

$
141


$
158


$
308


$
323Scalable infrastructure (b)


50



52



95



133Line extensions (c)


17



23



31



44Upgrade/Rebuild (d)


9



12



14



29Support capital (e)


54



71



92



121Total capital expenditures

$
271


$
316


$
540


$
650





(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 and customer premise equipment (e.g., set-top boxes 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).





Item 3.  Quantitative and Qualitative Disclosures About Market Risk.





No material changes in reported market risks have occurred since the filing of our December 31, 2008 Form 10-K.





As of June 30, 2009 and December 31, 2008, our total debt was approximately $11.8 billion.  As of June 30, 2009 and December 31, 2008, the weighted average interest rate on the credit facility debt was approximately 6.4% and 5.5%, respectively, including 2% penalty interest as of June 30, 2009.  As of June 30, 2009 and December
31, 2008, the weighted average interest rate on the high-yield notes was approximately 10.8% and 8.8%, respectively, including 2% penalty interest as of June 30, 2009.  As of June 30, 2009, the interest rate on approximately 27% of the total principal amount of our debt was fixed.  Upon filing for Chapter 11 bankruptcy, the interest rate hedge agreements were terminated.  For more information, see Note 10 to the accompanying condensed consolidated financial statements contained in “Item 1.
Financial Statements.”





Item 4.   Controls and Procedures.





As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have 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 certifications 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 SEC’s rules and forms.





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








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evaluating the cost-benefit relationship of possible controls and procedures.  Based upon the above evaluation, we believe that our controls provide such reasonable assurances.





There was no change in our internal control over financial reporting during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.






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PART II. OTHER INFORMATION.





Item 1.
Legal Proceedings.





On August 28, 2008, a complaint, which was subsequently amended, was filed against Charter and Charter Communications, LLC (“Charter LLC”) in the United States District Court for the Western District of Wisconsin (now entitled, Marc Goodell et al.  v. Charter Communications,
LLC and Charter Communications, Inc.).  The plaintiffs seek to represent a class of current and former broadband, system and other types of technicians who are or were employed by Charter or Charter LLC in the states of Michigan, Minnesota, Missouri or California.  Plaintiffs allege that Charter and Charter LLC violated certain wage and hour statutes of those four states by failing to pay technicians for all hours worked.   Charter and Charter LLC continue to deny all liability,
believe that they have substantial defenses, and intend, after Charter’s plan of reorganization, as amended, is approved and becomes effective and the automatic stay is lifted, to vigorously contest the claims asserted.  We have been subjected, in the normal course of business, to the assertion of other wage and hour claims and could be subjected to additional such claims in the future.  We cannot predict the outcome of any such claims.





On or about March 16, 2009, Gerald Paul Bodet, Jr. filed, but did not appropriately serve, a class action against Charter and Charter Holdco (Gerald Paul Bodet, Jr. v. Charter Communications, Inc. and Charter Communications Holding Company, LLC).  Plaintiff alleges that
the defendants violated the Sherman Act and Louisiana Unfair Trade Practices Act by tying the provision of premium cable programming to the purchase or rental of a set top box from us.  We understand similar claims have been made against other multiple system cable operators.  At the appropriate time, Charter and Charter Holdco intend to deny any liability, are advised that they have substantial defenses, and intend to vigorously defend this case.





On March 27, 2009, JPMorgan Chase Bank, N.A., for itself and as Administrative Agent under the Credit Agreement, filed an adversary proceeding (the “JPMorgan Adversary Proceeding”) in Bankruptcy Court against Charter Operating and CCO Holdings seeking a declaration that there have been events of default under the Credit Agreement.  Such
a judgment may prevent Charter Operating and CCO Holdings from reinstating the terms and provisions of the Credit Agreement through the bankruptcy proceeding.  On April 10, 2009, Charter Operating and CCO Holdings filed a motion to dismiss (the “Motion to Dismiss”) the JPMorgan Adversary Proceeding and argued that dismissal was proper because the JPMorgan Adversary Proceeding (i) is a core proceeding that is properly heard by the Bankruptcy Court; and (ii) fails to state a claim for default
under the Credit Agreement.  On May 5, 2009, the Bankruptcy Court ruled that the JPMorgan Adversary Proceeding is a core proceeding.   The JPMorgan Adversary Proceeding is being heard and decided by the Bankruptcy Court as a part of the hearing that began on July 20, 2009 to consider the confirmation of the Plan and which hearing is ongoing.    Charter denies the allegations made by JPMorgan and intends to vigorously contest this matter.





We are also aware of three suits filed by holders of securities issued by us or our parent companies.  Key Colony Fund, LP v. Charter Communications, Inc and Paul W. Allen(sic), was filed on or about February 26, 2009 in the Circuit Court of Pulaski County, Arkansas and
alleges violations of the Arkansas Deceptive Trade Practices Act and fraud.  Similarly, Clifford James Smith v. Charter Communications, Inc. and Paul Allen, was filed in the United States District Court for the Central District of California on May 26, 2009.  Mr. Smith claims to have purchased Charter common stock in late 2007, resulting in the loss of the value of his stock.  Herb
Lair v. Neil Smit, Eloise Schmitz, and Paul G. Allen was filed in the United States District Court for the Eastern District of Arkansas on June 1, 2009.  Mr. Smit and Ms. Schmitz are the Chief Executive Officer and Chief Financial Officer, respectively, of Charter.  Mr. Lair, who seeks to represent a class of plaintiffs who acquired Charter stock between October 23, 2006 and February 12, 2009, claims he and others similarly situated were misled by statements by Ms. Schmitz, Mr. Smit, and/or Mr.
Allen.  Charter denies the allegations made by the plaintiffs in these matters and intends to vigorously contest these cases.




We and our parent companies are party to lawsuits and claims that arise in the ordinary course of conducting their business.  The ultimate outcome of these other legal matters pending against us cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on our consolidated
financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or liquidity.






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Item 1A.
Risk Factors.





Our Annual Report on Form 10-K for the year ended December 31, 2008 includes “Risk Factors” under Item 1A of Part I.  Except for the updated risk factors described below, there have been no material changes from the risk factors described in our Form 10-K.  The information below updates, and should be read
in conjunction with, the risk factors and information disclosed in our Form 10-K.





Risks Relating to Bankruptcy





As mentioned above, we and our parent companies filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code on March 27, 2009, in order to implement what we refer to herein as our Plan with certain of our and our parent companies’ bondholders.  A Chapter 11 filing involves many risks including, but not
limited to the following.





We may not be able to obtain confirmation of the Plan.




To emerge successfully from Chapter 11 bankruptcy protection as a viable entity, we, like any debtor, must obtain approval of a plan of reorganization from our creditors, confirmation of the plan through the Bankruptcy Court and successfully implement this confirmed plan.  The foregoing process requires us to (a) meet certain
statutory requirements with respect to the adequacy of disclosure with respect to the Plan, (b) solicit and obtain creditor acceptances of the Plan and (c) fulfill other statutory conditions with respect to plan confirmation. The hearing before the Bankruptcy Court concerning confirmation of the Plan commenced July 20, 2009 and is ongoing.





In order to confirm a plan against a dissenting class, the Bankruptcy Court must find that at least one impaired class has accepted the plan, with such acceptance being determined without including the acceptance of any “insider” in such class. We have filed with the Bankruptcy Court the voting results for the Plan. The Bankruptcy
Court may confirm the Plan pursuant to the “cramdown” provisions of the Bankruptcy Code, which allow the Bankruptcy Court to confirm a plan that has been rejected by an impaired class of claims if it determines that the plan satisfies section 1129(b) of the Bankruptcy Code.





We will seek under the Plan to reinstate and render unimpaired certain classes of claims based on notes and credit facilities pursuant to section 1124 of the Bankruptcy Code.  The creditor banks and/or other interested parties are challenging reinstatement and unimpairment.  In particular, the JPMorgan Adversary Proceeding
was commenced seeking a declaratory judgment that certain defaults and events of default have occurred and are continuing under the Credit Agreement.  JPMorgan, the Administrative Agent under the Credit Agreement, contends that the alleged existence of such defaults and events of default prevent reinstatement of the claims arising under the Credit Agreement, and other parties have asserted that the alleged defaults and events of default would prevent the notes issued by Charter Operating and CCO Holdings
and CCO Holding’s credit facility from being reinstated.  Such parties have made additional arguments against reinstatement including that the Plan results in a change of control as defined in the governing debt agreements.  Because the Plan is contingent on reinstatement and unimpairment, failure to reinstate the credit facilities, indentures and certain notes would require us and our parent companies to revise or abandon the Plan.  Moreover, if reinstatement and unimpairment
does not occur and current capital market conditions persist, we may not be able to secure adequate new financing and the cost of any such new financing would likely be materially higher.





In addition, several other objections to the Plan have been filed with the Bankruptcy Court or otherwise alleged.  We cannot predict the ultimate resolution of these objections.





Even if the requisite acceptances of a proposed plan are received, the Bankruptcy Court may not confirm the plan as proposed.  A dissenting holder of a claim against us could challenge the balloting procedures and results as not being in compliance with the Bankruptcy Code.  Finally, even if the Bankruptcy Court determined
that the balloting procedures and results were appropriate, the Bankruptcy Court could still decline to confirm a proposed plan if it found that any of the statutory requirements for confirmation had not been met.  Specifically, section 1129 of the Bankruptcy Code sets forth the requirements for confirmation and requires, among other things, a finding by the Bankruptcy Court that (a) the debtor’s plan “does not unfairly discriminate” and is “fair and equitable” with respect
to any non-accepting classes, (b) confirmation of the debtor’s plan is not likely to be followed by a liquidation or a need for further financial reorganization and (c) the value of distributions to non-accepting holders of claims within a particular class under the debtor’s plan will not be less than the value of distributions such holders would receive if








35





the debtor was liquidated under Chapter 7 of the Bankruptcy Code.  The Bankruptcy Court may determine that a proposed plan does not satisfy one or more of these requirements, in which case the proposed plan would not be confirmed by the Bankruptcy Court.





If the Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our businesses and what, if any, distributions holders of claims against or holders of our common stock or other equity interests ultimately would receive with respect to their claims or equity interests. There also can be no assurance
that we will be able to successfully develop, prosecute, confirm, and consummate an alternative plan of reorganization with respect to the Chapter 11 Cases that is acceptable to the Bankruptcy Court and our creditors, equity holders and other parties-in-interest. Additionally, it is possible that third parties may seek and obtain approval to terminate or shorten the exclusivity period during which only we may propose and confirm a plan of reorganization. Finally, our emergence from bankruptcy is not assured.
While we expect to emerge from bankruptcy in the future, there can be no assurance that we will successfully reorganize or when this reorganization will occur.





The Restructuring Agreements and the separate restructuring agreement among Charter, Mr. Allen and CII may terminate.




Pursuant to the Restructuring Agreements and the separate restructuring agreement among Charter, Mr. Allen and CII, the various bondholders and Mr. Allen have agreed to support the Plan; subject, however to certain termination events not having occurred, including, without limitation:





·
Charter’s board of directors shall have been advised in writing by its outside counsel that continued pursuit of the Plan is inconsistent with its fiduciary duties because, and the board of directors determines in good faith that, (A) a proposal or offer from a third party is reasonably likely to be more favorable to us than is proposed under the
Plan, taking into account, among other factors, the identity of the third party, the likelihood that any such proposal or offer will be negotiated to finality within a reasonable time, and the potential loss to us if the proposal or offer were not accepted and consummated, or (B) the Plan is no longer confirmable or feasible;


·
the Plan or any subsequent plan filed by us with the Bankruptcy Court (or a plan supported or endorsed by us) is not reasonably consistent in all material respects with the terms of the Restructuring Agreements;


·
a confirmation order reasonably acceptable to Charter, the Requisite Holders and Mr. Allen is not entered by the Bankruptcy Court;


·
the Effective Date shall not have occurred on or before September 30, 2009, except that in the case that certain consents, approvals or waivers required to be obtained from governmental authorities have not been obtained on or before September 30, 2009, and all other conditions precedent to the Effective Date shall have been satisfied before September
30, 2009 or waived by the Requisite Holders (other than those conditions that by their nature are to be satisfied on the Effective Date), the Effective Date shall not have occurred on or before December 15, 2009;


·
any of our Chapter 11 Cases is converted to cases under Chapter 7 of the Bankruptcy Code if as a result of such conversion the Plan is not confirmable;


·
the Bankruptcy Court enters an order in any of our Chapter 11 Cases appointing (i) a trustee under Chapter 7 or Chapter 11 of the Bankruptcy Code, (ii) a responsible officer or (iii) an examiner, in each case with enlarged powers relating to the operation of the business under the Bankruptcy Code;


·
any of our Chapter 11 Cases are dismissed if, as a result of such dismissal, the Plan is not confirmable;


·
the order confirming the Plan is reversed on appeal or vacated;


·
any party breaches any material provision of the Restructuring Agreements or the Plan and any such breach has not been duly waived or cured after a period of five days;


·
Charter withdraws the Plan or publicly announces its intention not to support the Plan; and


·
any Restructuring Agreement or the separate restructuring agreement among Charter, Mr. Allen and CII has terminated or been breached in any material respect, subject to notice and cure provisions.





To the extent the terms or conditions of the Restructuring Agreements and the separate restructuring agreement among Charter, Mr. Allen and CII are not satisfied, or to the extent events of termination arise under the agreements, the Restructuring Agreements and the separate restructuring agreement among Charter, Mr. Allen and CII may terminate
prior to the confirmation or effective date of the Plan, which could result in the loss of support for the Plan by important creditor constituents.  Any such loss of support could adversely affect our ability to confirm and consummate the Plan.






36





Our operations will be subject to the risks and uncertainties of bankruptcy.





For the duration of the bankruptcy, our operations will be subject to the risks and uncertainties associated with bankruptcy which include, among other things:





·
The actions and decisions of our and our parent companies’ creditors and other third parties with interests in our bankruptcy, including official and unofficial committees of creditors, which may be inconsistent with our plans;


·
objections to or limitations on our ability to obtain Bankruptcy Court approval with respect to motions in the bankruptcy that we may seek from time to time or potentially adverse decisions by the Bankruptcy Court with respect to such motions;


·
objections to or limitations on our ability to avoid or reject contracts or leases that are burdensome or uneconomical;


·
our ability to obtain customers and obtain and maintain normal terms with regulators, franchise authorities, vendors and service providers;


·
our ability to maintain contracts and leases that are critical to our operations; and


·
our ability to retain key employees.





These risks and uncertainties could negatively affect our business and operations in various ways. For example, negative events or publicity associated with our bankruptcy filings and events during the bankruptcy could adversely affect our relationships with franchise authorities, customers, vendors and employees, which in turn could adversely
affect our operations and financial condition, particularly if the bankruptcy is protracted. Also, transactions by us and our parent companies will generally be subject to the prior approval of the applicable Bankruptcy Court, which may limit our ability to respond on a timely basis to certain events or take advantage of certain opportunities.





Because of the risks and uncertainties associated with our and our parent companies’ bankruptcy, the ultimate impact the events that occur during these cases will have on our business, financial condition and results of operations cannot be accurately predicted or quantified at this time.





The bankruptcy may adversely affect our operations going forward. Our seeking bankruptcy protection may adversely affect our ability to negotiate favorable terms from suppliers, landlords, contract or trading counterparties and others and to attract and retain customers and counterparties. For example, certain competitors have created advertising
that attempt to use the bankruptcy to attract our customers.  The failure to obtain such favorable terms and to attract and retain customers and employees, as well as other contract or trading counterparties could adversely affect our financial performance.  In addition, we expect to incur substantial professional and other fees related to our restructuring.





Transfers of Charter’s equity, or issuances of equity by Charter in connection with our restructuring, may impair Charter’s ability to utilize its federal income tax net operating loss carryforwards in the future.





Under federal income tax law, a corporation is generally permitted to deduct from taxable income in any year net operating losses carried forward from prior years. Charter has net operating loss carryforwards of approximately $8.9 billion as of June 30, 2009. Charter’s ability to deduct net operating loss carryforwards will be subject
to a significant limitation if it were to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, during or as a result of the bankruptcy and would be reduced by the amount of any cancellation of debt income resulting from the Proposed Restructuring that is allocable to Charter.  See “—For tax purposes, it is anticipated that Charter will experience a deemed ownership change upon emergence from Chapter 11 bankruptcy, resulting
in a material limitation on Charter’s future ability to use a substantial amount of Charter’s existing net operating loss carryforwards.”





Our successful reorganization will depend on our ability to motivate key employees.





Our success is largely dependent on the skills, experience and efforts of our people. In particular, the successful implementation of our business plan and our ability to successfully consummate a plan of reorganization will be highly dependent upon our management. Our ability to attract, motivate and retain key employees is restricted
by provisions of the Bankruptcy Code, which limit or prevent our ability to implement a retention program or take other measures intended to motivate key employees to remain with the Company during the pendency of the bankruptcy. In addition, we must obtain Bankruptcy Court approval of employment contracts and other employee compensation programs.  The








37





loss of the services of such individuals or other key personnel could have a material adverse effect upon the implementation of our business plan, including our restructuring program, and on our ability to successfully reorganize and emerge from bankruptcy.





The prices of our debt securities are volatile and, in connection with our reorganization, holders of our securities may receive no payment, or payment that is less than the face value or purchase price of such securities.





Prices for our debt securities are volatile and prices for such securities have generally been substantially below par.  We can make no assurance that the price of our securities will not fluctuate or decrease substantially in the future.  Trading in our securities is highly speculative and poses substantial risks to
purchasers of such securities, as holders may not be able to resell such securities or, in connection with our reorganization, may receive no payment, or a payment or other consideration that is less than the par value or the purchase price of such securities.





Our emergence from bankruptcy is not assured, including on what terms we emerge.





While we expect the terms of our emergence from bankruptcy will reflect our filed Plan, there is no assurance that we will be able to consummate the Plan, which is subject to numerous closing conditions.  For example, because the Proposed Restructuring is contingent on reinstatement of the credit facilities and certain of CCO
Holdings’ and Charter Operating’s notes, failure to reinstate such debt would require us and our parent companies to revise the Proposed Restructuring.  Moreover, if reinstatement does not occur and current capital market conditions persist, we may not be able to secure adequate new financing and the cost of new financing would likely be materially higher.  In addition, as set forth above, a Chapter 11 proceeding is subject to numerous factors which could interfere with our ability
to effectuate the Plan.





Risks Related to Our Business





We operate in a very competitive business environment, which affects our ability to attract and retain customers and can adversely affect our business and operations.





The industry in which we operate is highly competitive and has become more so in recent years.  In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater personnel resources, greater resources for marketing, greater and more favorable 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 have provided additional benefits to certain of our competitors, either through access to financing, resources, or efficiencies of scale.





Our principal competitors for video services throughout our territory are DBS providers.  The two largest DBS providers are DirecTV and Echostar.  Competition from DBS, including intensive marketing efforts with aggressive pricing, exclusive programming and increased high definition broadcasting has had an adverse impact
on our ability to retain customers. DBS has grown rapidly over the last several years.  DBS companies have also recently announced plans and technical actions to expand their activities in the multi-dwelling unit (“MDU”) market.  The cable industry, including us, has lost a significant number of video customers to DBS competition, and we face serious challenges in this area in the future.





Telephone companies, including AT&T and Verizon, and utility companies can offer video and other services in competition with us, and we expect they will increasingly do so in the future.  Upgraded portions of these networks carry two-way video and data services and digital voice services that are similar to ours.  In
the case of Verizon, high-speed data services operate at speeds as high as or higher than ours.  These services are offered at prices similar to those for comparable Charter services.  Based on our internal estimates, we believe that AT&T and Verizon are offering these services in areas serving approximately 17% to 21% of our estimated homes passed as of June 30, 2009.  AT&T and Verizon have also launched campaigns to capture more of the MDU market.  Additional
upgrades and product launches are expected in markets in which we operate. With respect to our Internet access services, we face competition, including intensive marketing efforts and aggressive pricing, from telephone companies and other providers of DSL.  DSL service is competitive with high-speed Internet service and is often offered at prices lower than our Internet services, although often at speeds lower than the speeds we offer.  In addition, in many of our markets, these companies
have entered into co-marketing arrangements with DBS providers to offer service bundles combining video services provided by a DBS provider with DSL and traditional telephone and wireless services offered by the telephone companies and their affiliates.  These service bundles substantially resemble our bundles.








38





Moreover, as we expand our telephone offerings, we will face considerable competition from established telephone companies and other carriers.





The existence of more than one cable system operating in the same territory is referred to as an overbuild.  Overbuilds could adversely affect our growth, financial condition, and results of operations, by creating or increasing competition.  Based on internal estimates and excluding telephone companies, as of June 30,
2009, we are aware of traditional overbuild situations impacting approximately 8% to 9% of our estimated homes passed, and potential traditional overbuild situations in areas servicing approximately an additional 1% of our estimated homes passed.  Additional overbuild situations may occur in other systems.





In order to attract new customers, from time to time we make promotional offers, including offers of temporarily reduced price or free service.  These promotional programs result in significant advertising, programming and operating expenses, and also require us to make capital expenditures to acquire and install customer premise
equipment.  Customers who subscribe to our services as a result of these offerings may not remain customers following the end of the promotional period.  A failure to retain customers could have a material adverse effect on our business.





Mergers, joint ventures, and alliances among franchised, wireless, or private cable operators, DBS providers, local exchange carriers, and others, 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.


In addition to the various competitive factors discussed above, our business is subject to risks relating to increasing competition for the leisure and entertainment time of consumers. Our business competes with all other sources of entertainment and information delivery, including broadcast television, movies, live events, radio broadcasts,
home video products, console games, print media, and the Internet.  Technological advancements, such as video-on-demand, new video formats, and Internet streaming and downloading, have increased the number of entertainment and information delivery choices available to consumers, and intensified the challenges posed by audience fragmentation. The increasing number of choices available to audiences could also negatively impact advertisers’ willingness to purchase advertising from us, as well as
the price they are willing to pay for advertising.  If we do not respond appropriately to further increases in the leisure and entertainment choices available to consumers, our competitive position could deteriorate, and our financial results could suffer.





We cannot assure you that the services we provide will allow us to compete effectively.  Additionally, as we expand our offerings to include other telecommunications services, and to introduce new and enhanced services, we will be subject to competition from other providers of the services we offer.  Competition may
reduce our expected growth of future cash flows.  We cannot predict the extent to which competition may affect our business and results of operations.





For tax purposes, it is anticipated that Charter will experience a deemed ownership change upon emergence from Chapter 11 bankruptcy, resulting in a material limitation on Charter’s future ability to use a substantial amount of Charter’s existing net operating loss carryforwards.





As of June 30, 2009, Charter had approximately $8.9 billion of federal tax net operating losses, resulting in a gross deferred tax asset of approximately $3.1 billion, expiring in the years 2009 through 2028.  In addition, Charter also has state tax net operating losses, resulting in a gross deferred tax asset (net of federal tax benefit)
of approximately $330 million, generally expiring in years 2009 through 2028.  Due to uncertainties in projected future taxable income and the bankruptcy filing, valuation allowances have been established against the gross deferred tax assets for book accounting purposes, except for deferred benefits available to offset certain deferred tax liabilities. Currently, such tax net operating losses can accumulate and be used to offset most of Charter’s future taxable income. However, an “ownership
change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended, would place significant annual limitations on the use of such net operating losses to offset future taxable income Charter may generate.  Most notably, the bankruptcy filing will generate an ownership change upon emergence from Chapter 11 for purposes of Section 382 and Charter’s net operating loss carryforwards will be reduced by the amount of any cancellation of debt income resulting from the Proposed Restructuring
that is allocable to Charter.  A limitation on Charter’s ability to use its net operating losses, in conjunction with the net operating loss expiration provisions, could reduce its ability to use a significant portion of Charter’s net operating losses to offset any future taxable income.






39





Item 6.
Exhibits.





The index to the exhibits begins on page E-1 of this quarterly report.






40





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, CCO Holdings, LLC and CCO Holdings Capital Corp. have duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.





CCO
HOLDINGS, LLC


Registrant








By:
CHARTER COMMUNICATIONS, INC., Sole Manager


Registrant





Dated:  August 14, 2009
By: /s/ Kevin D. HowardName:
Kevin D. HowardTitle:
Vice President, Controller andChief Accounting Officer





CCO
HOLDINGS CAPITAL CORP.


Registrant





Dated:  August 14, 2009
By: /s/ Kevin D. HowardName:
Kevin D. HowardTitle:
Vice President, Controller andChief Accounting Officer









S-1











EXHIBIT INDEX


Exhibit
Number

Description of Document10.1

Debtors' Disclosure Statement filed pursuant to Chapter 11 of the United States Bankruptcy Code filed on May 1, 2009 with the United States Bankruptcy Court for the Southern District of New York in Case No. 09-11435 (Jointly Administered) (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q of Charter Communications,
Inc. filed on August 6, 2009 (File No. 000-27927)).10.2

Debtors' Joint Plan of Reorganization filed pursuant to Chapter 11 of the United States Bankruptcy Code filed on July 15, 2009 with the United States Bankruptcy Court for the Southern District of New York in Case No. 09-11435 (Jointly Administered) (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q of
Charter Communications, Inc. filed on August 6, 2009 (File No. 000-27927)).12.1*

CCO Holdings, LLC’s Computation of Ratio of Earnings to Fixed Charges31.1*

Certificate of Chief Executive Officer of CCO Holdings, LLC pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.31.2*

Certificate of Chief Financial Officer of CCO Holdings, LLC pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.32.1*

Certification of CCO Holdings, LLC 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 of CCO Holdings, LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
 * Document attached




E-1