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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 or o
    
    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:
    
    333-112593333-112593-01
 CCO HOLDINGS, LLC*
CCO HOLDINGS Capital Corp.* 
 (Exact name of registrants as specified in their charters)
 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 reports), and (2) have been subject to such
filing requirements for the past 90 days.  YES  þ  NO  o Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  þ Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the lates practicable date: All of the issued and outstanding shares of capital stock of CCO Holdings
Capital Corp. are held by CCO Holdings, LLC. All of the limited liability
company membership interests of CCO Holdings, LLC are held by CCH II, LLC (an
indirect subsidiary of Charter Communications Holdings, LLC, a reporting
company under the Exchange Act). There is no public trading market for any of
the aforementioned limited liability company membership interests of shares of
capital stock. * CCO Holdings, LLC and CCO Holdings Capital Corp. meet the conditions set
forth in General Instruction H(1)(a) and (b) to Form 10-Q and are therefore
filing with the reduced disclosure format.




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CCO Holdings, LLC
CCO Holdings Capital Corp.
Quarterly Report for the Period ended September 30, 2004 Table of Contents PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements  CCO Holdings, LLC and SubsidiariesCondensed Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    43PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 6.
    
    Exhibits
    
    
    45SIGNATURES
    
    
    46EXHIBIT INDEX
    
    
    47Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a)Certificate of Interim Co-Chief Financial Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a)Certificate of Interim Co-Chief Financial Officer Pursuant to Rule 13a-14(a)/Rule 15d-14(a)Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer)Certification Pursuant to 18 U.S.C. Section 1350 (Interim Co-Chief Financial Officer)Certification Pursuant to 18 U.S.C. Section 1350 (Interim Co-Chief Financial Officer)
  This quarterly report on Form 10-Q is for the three and nine months ended
September 30, 2004. The Securities and Exchange Commission (SEC) allows us
to incorporate by reference information that we file with the SEC, which
means that we can disclose important information to you by referring you
directly to those documents. Information incorporated by reference is
considered to be part of this quarterly report. In addition, information that
we file with the SEC in the future will automatically update and supersede
information contained in this quarterly report. In this quarterly report,
we, us and our refer to CCO Holdings, LLC and its subsidiaries.




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS: This quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the Results of Operations and
Liquidity and Capital Resources sections under Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations in
this quarterly report. Although we believe that our plans, intentions and
expectations reflected in or suggested by these forward-looking statements are
reasonable, we cannot assure you that we will achieve or realize these plans,
intentions or expectations. Forward-looking statements are inherently subject
to risks, uncertainties and assumptions including, without limitation, the
factors described under Certain Trends and Uncertainties under Part I, Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations in this quarterly report. Many of the forward-looking statements
contained in this quarterly report may be identified by the use of
forward-looking words such as believe, expect, anticipate, should,
planned, will, may, intend, estimated and potential, among others.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this quarterly report are set forth in
this quarterly report and in other reports or documents that we file from time
to time with the SEC, and include, but are not limited to:  
    
    our and our parent companies ability to pay or refinance debt as
it becomes due;
    
    our ability to sustain and grow revenues and cash flows from
operating activities by offering video, high-speed data, telephony and
other services and to maintain a stable customer base, particularly in
the face of increasingly aggressive competition from other service
providers;
    
    the availability of funds to meet interest payment obligations
under our and our parent companies debt and to fund our operations and
necessary capital expenditures, either through cash flows from
operating activities, further borrowings or other sources;
    
    our ability to comply with all covenants in our indentures and
credit facilities, any violation of which would result in a violation
of the applicable facility or indenture and could trigger a default of
other obligations of our affiliates under cross-default provisions;
    
    any adverse consequences arising out of our and our parent
companies restatements of the respective 2000, 2001 and 2002
financial statements;
    
    the results of the pending grand jury investigation by the United
States Attorneys Office for the Eastern District of Missouri, and the
ability to reach a final approved settlement with respect to the
putative class action, the unconsolidated state action, and derivative
shareholders litigation against Charter Communications, Inc., our
indirect parent, on the terms of the memoranda of understanding
described herein;
    
    our ability to obtain programming at reasonable prices or to pass
programming cost increases on to our customers;
    
    general business conditions, economic uncertainty or slowdown; and
    
    the effects of governmental regulation, including but not limited
to local franchise taxing authorities, on our business. All forward-looking statements attributable to us or 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




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PART I. FINANCIAL INFORMATION. 
 Item 1. Financial Statements. CCO HOLDINGS, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (DOLLARS IN MILLIONS)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    91
    
    
    $
    85Accounts receivable, less allowance for doubtful accounts of
$16 and $17, respectively
    
    
    176
    
    
    
    178Receivables from related party
    
    
    
    
    
    
    60Prepaid expenses and other current assets
    
    
    20
    
    
    
    21Total current assets
    
    
    287
    
    
    
    344INVESTMENT IN CABLE PROPERTIES:Property, plant and equipment, net of accumulated
depreciation of $4,778 and $3,834, respectively
    
    
    6,230
    
    
    
    6,808Franchises, net of accumulated amortization
of $3,300 and $3,445, respectively
    
    
    9,885
    
    
    
    13,680Total investment in cable properties, net
    
    
    16,115
    
    
    
    20,488OTHER NONCURRENT ASSETS
    
    
    226
    
    
    
    162Total assets
    
    $
    16,628
    
    
    $
    20,994LIABILITIES AND MEMBERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    927
    
    
    $
    996Payables to related party
    
    
    13
    
    
    
    Total current liabilities
    
    
    940
    
    
    
    996LONG-TERM DEBT
    
    
    7,622
    
    
    
    7,956LOANS PAYABLE  RELATED PARTY
    
    
    39
    
    
    
    37DEFERRED MANAGEMENT FEES  RELATED PARTY
    
    
    14
    
    
    
    14OTHER LONG-TERM LIABILITIES
    
    
    515
    
    
    
    687MINORITY INTEREST
    
    
    650
    
    
    
    719MEMBERS EQUITY:Members equity
    
    
    6,874
    
    
    
    10,642Accumulated other comprehensive loss
    
    
    (26
    )
    
    
    (57
    )Total members equity
    
    
    6,848
    
    
    
    10,585Total liabilities and members equity
    
    $
    16,628
    
    
    $
    20,994
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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CCO HOLDINGS, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (DOLLARS IN MILLIONS)

Unaudited
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003REVENUES
    
    $
    1,248
    
    
    $
    1,207
    
    
    $
    3,701
    
    
    $
    3,602COSTS AND EXPENSES:Operating (excluding depreciation and amortization)
    
    
    525
    
    
    
    484
    
    
    
    1,552
    
    
    
    1,457Selling, general and administrative
    
    
    252
    
    
    
    235
    
    
    
    735
    
    
    
    702Depreciation and amortization
    
    
    371
    
    
    
    352
    
    
    
    1,105
    
    
    
    1,095Impairment of franchises
    
    
    2,433
    
    
    
    
    
    
    
    2,433
    
    
    
    (Gain) loss on sale of assets, net
    
    
    
    
    
    
    10
    
    
    
    (104
    )
    
    
    23Option compensation expense, net
    
    
    8
    
    
    
    1
    
    
    
    34
    
    
    
    1Special charges, net
    
    
    3
    
    
    
    8
    
    
    
    100
    
    
    
    183,592
    
    
    
    1,090
    
    
    
    5,855
    
    
    
    3,296Income (loss) from operations
    
    
    (2,344
    )
    
    
    117
    
    
    
    (2,154
    )
    
    
    306OTHER INCOME AND EXPENSE:Interest expense, net
    
    
    (148
    )
    
    
    (121
    )
    
    
    (406
    )
    
    
    (375
    )Gain (loss) on derivative instruments and hedging
activities, net
    
    
    (8
    )
    
    
    31
    
    
    
    48
    
    
    
    35Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    Other, net
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )(156
    )
    
    
    (92
    )
    
    
    (379
    )
    
    
    (343
    )Income (loss) before minority interest, income taxes and
cumulative effect of accounting change
    
    
    (2,500
    )
    
    
    25
    
    
    
    (2,533
    )
    
    
    (37
    )MINORITY INTEREST
    
    
    34
    
    
    
    (4
    )
    
    
    25
    
    
    
    (11
    )Income (loss) before income taxes and cumulative effect of
accounting change
    
    
    (2,466
    )
    
    
    21
    
    
    
    (2,508
    )
    
    
    (48
    )INCOME TAX BENEFIT (EXPENSE)
    
    
    45
    
    
    
    (1
    )
    
    
    41
    
    
    
    (3
    )Income (loss) before cumulative effect of accounting
change
    
    
    (2,421
    )
    
    
    20
    
    
    
    (2,467
    )
    
    
    (51
    )CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX
    
    
    (840
    )
    
    
    
    
    
    
    (840
    )
    
    
    Net income (loss)
    
    $
    (3,261
    )
    
    $
    20
    
    
    $
    (3,307
    )
    
    $
    (51
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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CCO HOLDINGS, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (DOLLARS IN MILLIONS)

Unaudited
 Nine Months Ended September 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,307
    )
    
    $
    (51
    )Adjustments to reconcile net loss to net cash flows from operating activities:Minority interest
    
    
    (25
    )
    
    
    11Depreciation and amortization
    
    
    1,105
    
    
    
    1,095Impairment of franchises
    
    
    2,433
    
    
    
    Option compensation expense, net
    
    
    25
    
    
    
    Special charges, net
    
    
    85
    
    
    
    Noncash interest expense
    
    
    15
    
    
    
    27Gain on derivative instruments and hedging activities, net
    
    
    (48
    )
    
    
    (35
    )(Gain) loss on sale of assets, net
    
    
    (104
    )
    
    
    23Loss on extinguishment of debt
    
    
    18
    
    
    
    Deferred income taxes
    
    
    (41
    )
    
    
    3Cumulative effect of accounting change, net
    
    
    840
    
    
    
    Other, net
    
    
    (1
    )
    
    
    (2
    )Changes in operating assets and liabilities, net of effects from dispositions:Accounts receivable
    
    
    (1
    )
    
    
    75Prepaid expenses and other assets
    
    
    (1
    )
    
    
    7Accounts payable, accrued expenses and other
    
    
    (116
    )
    
    
    (132
    )Receivables from and payables to related party, including deferred management fees
    
    
    (68
    )
    
    
    (79
    )Net cash flows from operating activities
    
    
    809
    
    
    
    942CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (616
    )
    
    
    (481
    )Change in accrued expenses related to capital expenditures
    
    
    (11
    )
    
    
    (102
    )Proceeds from sale of assets
    
    
    727
    
    
    
    Purchases of investments
    
    
    (4
    )
    
    
    Other, net
    
    
    (2
    )
    
    
    (2
    )Net cash flows from investing activities
    
    
    94
    
    
    
    (585
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings of long-term debt
    
    
    2,873
    
    
    
    452Repayments of long-term debt
    
    
    (4,707
    )
    
    
    (646
    )Proceeds from issuance of debt
    
    
    1,500
    
    
    
    Payments for debt issuance costs
    
    
    (97
    )
    
    
    (15
    )Repayments to related parties
    
    
    
    
    
    
    (96
    )Capital contributions
    
    
    
    
    
    
    10Distributions
    
    
    (466
    )
    
    
    (327
    )Net cash flows from financing activities
    
    
    (897
    )
    
    
    (622
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    6
    
    
    
    (265
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    85
    
    
    
    310CASH AND CASH EQUIVALENTS, end of period
    
    $
    91
    
    
    $
    45CASH PAID FOR INTEREST
    
    $
    339
    
    
    $
    347
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) 1. Organization and Basis of Presentation CCO Holdings, LLC (CCO Holdings) is
a holding company whose primary assets at September 30, 2004 are equity
interests in its operating subsidiaries. CCO Holdings was formed in June 2003
and is a wholly owned subsidiary of CCH II, LLC (CCH II). CCH II is a wholly
owned subsidiary of CCH I, LLC (CCH I), which is a wholly owned subsidiary of
Charter Communications Holdings, LLC (Charter Holdings). Charter Holdings is
a wholly owned subsidiary of Charter Communications Holding Company, LLC
(Charter Holdco), which is a subsidiary of Charter Communications, Inc.
(Charter). CCO Holdings is the sole owner of Charter Communications Operating, LLC
(Charter Operating). Charter Operating was formed in February 1999 to own and
operate its cable systems. In June and July of 2003, Charter Holdings entered
into a series of transactions and contributions which had the effect of i)
creating CCH I, CCH II and CCO Holdings and ii)
combining/contributing all of Charter Holdings interest in cable operations not previously owned by Charter
Operating to Charter Operating (the Systems Transfer). The Systems Transfer
was accounted for as a reorganization of entities under common control.
Accordingly, the accompanying financial statements combine the historical
financial condition and results of operations of Charter Operating, and the
operations of subsidiaries contributed by Charter Holdings for the three and
nine months ended September 30, 2003. CCO Holdings and its subsidiaries 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 its customers traditional cable video programming
(analog and digital video) as well as high-speed data services and, in some
areas, advanced broadband services such as high definition television, video on
demand, telephony and interactive television. The Company sells its cable
video programming, high-speed data and advanced broadband services on a
subscription basis. The accompanying condensed consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the rules and
regulations of the Securities and Exchange Commission (SEC). Accordingly,
certain information and footnote disclosures typically included in the
Companys Amendment No. 1 to the Registration Statement on Form S-4 filed on
June 4, 2004 have been condensed or omitted for this quarterly report. The
accompanying condensed consolidated financial statements are unaudited and are
subject to review by regulatory authorities. However, in the opinion of
management, such financial statements include all adjustments, which consist of
only normal recurring adjustments, necessary for a fair presentation of the
results for the periods presented. Interim results are not necessarily
indicative of results for a full year. The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Areas involving
significant judgments and estimates include capitalization of labor and
overhead costs; depreciation and amortization costs; impairments of property,
plant and equipment, franchises and goodwill; income taxes; and contingencies.
Actual results could differ from those estimates. Reclassifications Certain 2003
amounts have been reclassified to conform with the 2004 presentation. 2. Liquidity and Capital Resources The Company incurred net losses of $3.3 billion
for each of the three and nine months ended September 30, 2004, respectively,
and $51 million for the nine months ended September 30, 2003. The Company
achieved net income of 7




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) $20 million for the three months ended September 30, 2003. The Companys net
cash flows from operating activities were $809 million and $942 million for the
nine months ended September 30, 2004 and 2003, respectively. The Company has historically required significant cash to fund capital
expenditures, distributions to its parent companies and debt service costs.
Historically, the Company has funded these requirements through cash flows from
operating activities, borrowings under its credit facilities, equity
contributions from its parent companies, borrowings from its parent companies,
issuances of debt securities and cash on hand. The mix of funding sources
changes from period to period, but for the nine months ended September 30,
2004, approximately 67% of the Companys funding requirements were met from
cash flows from operating activities and 33% from proceeds from the sale of
systems. This gives effect to the use of proceeds from the sale of systems,
described below, to repay long-term debt. For the nine months ended September
30, 2004, the Company had net cash flows used in financing activities of $897
million, reflecting a net repayment of $334 million of debt. Additionally, the
Company increased cash on hand by $6 million to $91 million. The Companys long-term financing as of September 30, 2004 consists of $5.4
billion of credit facility debt and $2.2 billion principal amount of high-yield
notes. In the fourth quarter of 2004, $7.5 million of the Companys debt will
mature and an additional $30 million will mature in each of 2005 and 2006. In
addition, the Charter Operating credit facilities require the CC V Holdings,
LLC notes to be redeemed within 45 days after the Charter Holdings leverage
ratio, discussed below, is determined to be below 8.75 to 1.0. The Companys ability to operate depends upon, among other things, its
continued access to capital, including credit under the Charter Operating
credit facilities. The Company expects that cash on hand, cash flows from
operating activities and the amounts available under its credit facilities will
be adequate to meet its cash needs for the foreseeable future. The Companys
borrowing availability under the credit facilities totaled $957 million as of
September 30, 2004, none of which was restricted due to covenants. The Charter Operating credit facilities are subject to certain restrictive
covenants, some of which require the Company to achieve specified operating
results. The Company expects to maintain compliance with these covenants in
2004. If the Companys operating performance results in non-compliance with
these covenants, or if any of certain other events of non-compliance under
these credit facilities or indentures governing the Companys debt occurs,
funding under the credit facilities may not be available and defaults on some
or potentially all of the Companys debt obligations could occur. Any financial or liquidity problems of CCO Holdings parent companies could
cause serious disruption to the Companys business and have a material adverse
effect on its business and results of operations. Charters ability to make
interest payments on its convertible senior notes, and, in 2005 and 2006, to
repay the outstanding principal of its convertible senior notes will depend on
its ability to raise additional capital and/or on receipt of payments or
distributions from Charter Holdco or its subsidiaries, including CCH II, CCO
Holdings and Charter Operating. The indentures governing the CCH II notes, CCO
Holdings notes, and Charter Operating notes, however, restrict these entities
and their subsidiaries from making distributions to their parent companies
(including Charter and Charter Holdco) for payment of principal on Charters
convertible senior notes, in each case unless there is no default under the
applicable indenture and a specified leverage ratio test is met. In addition,
each of CCH II, CCO Holdings and Charter Operating must independently assess
whether such payments or distributions are advisable. CCH II, CCO Holdings and
Charter Operating currently meet the applicable leverage ratio test under each
of their respective indentures, and therefore are not currently prohibited from
making any such distributions to their respective direct parent. The indentures governing the Charter Holdings notes permit Charter Holdings to
make distributions to Charter Holdco for payment of interest or principal on
Charters convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings could incur additional debt under a leverage
ratio test of 8.75 to 1.0, there is no default under Charter Holdings
indentures and the other specified tests are met. For the quarter ended
September 8




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) 30, 2004, there were no defaults under the Charter Holdings indentures and the
other specified tests were met. However, Charter Holdings continued not to
meet the leverage ratio test of 8.75 to 1.0 at September 30, 2004. As a
result, distributions from Charter Holdings to Charter or Charter Holdco have
been restricted and will continue to be restricted until that test is met. During this restriction period, the indentures governing the Charter Holdings
notes permit Charter Holdings and its subsidiaries to make specified
investments in Charter Holdco or Charter, up to an amount determined by a
formula, as long as there is no default under the indentures. As of September
30, 2004, Charter Holdco had $31 million in cash on hand and was owed $39
million in intercompany loans from its subsidiaries, which were available to
Charter Holdco to pay interest on Charters convertible senior notes, which is
expected to be approximately $21 million for the remainder of 2004. Currently, Charter does not expect that cash flows from operating activities
and amounts available under its credit facilities will be sufficient to fund
its operations and permit Charter to satisfy its principal repayment
obligations that come due in 2005 and thereafter. In the event that Charter is
not able to demonstrate that it has access to liquidity in an amount sufficient
to fund its business and to make principal repayment obligations that come due
in 2005 and thereafter, Charter and its subsidiaries ability to receive an
unqualified opinion from an independent registered public accounting firm may
be adversely affected. The failure of Charter Operating to receive an
unqualified opinion would constitute a default under Charter Operatings credit
facilities. An event of default under the covenants governing any of the
Companys debt instruments could result in the acceleration of its payment
obligations under that debt and, under certain circumstances, in cross-defaults
under its other debt obligations, which would have a material adverse effect on
the Companys consolidated financial condition or results of operations. As a result of the foregoing, it is likely that Charter or Charter Holdco will
require additional funding to repay debt maturing in 2005 and 2006. The
Company understands that Charter is working with its financial advisors to
address such funding requirements. However, there can be no assurance that
such funding will be available to Charter. Although Mr. Allen and his
affiliates have purchased equity from Charter and its subsidiaries in the past,
Mr. Allen and his affiliates are not obligated to purchase equity from,
contribute to or loan funds to Charter or its subsidiaries in the future. On March 1, 2004, the Company closed the sale of certain cable systems in
Florida, Pennsylvania, Maryland, Delaware and West Virginia to Atlantic
Broadband Finance, LLC. The Company closed on the sale of an additional cable
system in New York to Atlantic Broadband Finance, LLC in April 2004. These
transactions resulted in a $105 million pretax gain recorded as a gain on sale
of assets in the Companys condensed consolidated statements of operations.
Subject to post-closing contractual adjustments, the Company expects the total
net proceeds from the sale of all of these systems to be approximately $733
million, of which $5 million is currently held in an indemnity escrow account
(with the unused portion thereof to be released by March 1, 2005). The
proceeds received to date have been used to repay a portion of amounts
outstanding under the Companys credit facilities. 3. Franchises and Goodwill On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, which eliminates the amortization of
indefinite-lived intangible assets. Accordingly, beginning January 1, 2002,
all franchises that qualify for indefinite-life treatment under SFAS No. 142
are no longer amortized against earnings but instead are tested for impairment
annually, or more frequently as warranted by events or changes in
circumstances. Based on the guidance prescribed in Emerging Issues Task Force
(EITF) Issue No. 02-7, Unit of Accounting for Testing of Impairment of
Indefinite-Lived Intangible Assets,franchises are aggregated into essentially
inseparable asset groups to conduct the valuations. The asset groups generally
represent geographic 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. Fair value is determined based on
estimated discounted future cash flows using assumptions that are consistent
with internal forecasts. The Company has historically followed a residual
method of 9




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) valuing its franchise assets, which had the effect of including goodwill with
the franchise assets. In September 2004, the SEC staff issued Topic D-108, Use of the Residual Method
to Value Acquired Assets Other than Goodwill, which requires the direct method
of separately valuing all intangible assets and does not permit goodwill to be
included in franchise assets. On September 30, 2004, the Company adopted Topic
D-108 which resulted in the Company recording a cumulative effect of accounting
change of $840 million (approximately $875 million before tax effects of $16
million and minority interest effects of $19 million) for the three and nine
months ended September 30, 2004. The Company performed an impairment assessment during the third quarter 2004
using an independent third-party appraiser and following the guidance of EITF
Issue 02-17, Recognition of Customer Relationship Intangible Assets Acquired in
a Business Combination, and Topic D-108. The use of lower projected growth
rates and the resulting revised estimates of future cash flows in the Companys
valuation, primarily as a result of increased competition, led to the
recognition of a $2.4 billion impairment charge for the three and nine months
ended September 30, 2004. The independent third-party appraisers valuation as of September 30, 2004
yielded a total enterprise value of approximately $19.3 billion, which included
approximately $2.0 billion assigned to customer relationships and approximately
$0.9 billion assigned to goodwill. At October 1, 2003, the independent
third-party appraisers valuation yielded an enterprise value of approximately
$24.7 billion, which included approximately $3.2 billion assigned to customer
relationships and approximately $1.1 billion assigned to goodwill. The
valuation completed at October 1, 2003 resulted in no impairment. SFAS No. 142
does not permit the recognition of intangible assets not previously recognized. As of September 30, 2004 and December 31, 2003, indefinite-lived and
finite-lived intangible assets are presented in the following table: September 30, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountIndefinite-lived
intangible assets:Franchises with
indefinite lives
    
    $
    13,129
    
    
    $
    3,287
    
    
    $
    9,842
    
    
    $
    17,018
    
    
    $
    3,412
    
    
    $
    13,606Goodwill
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    52
    
    
    
    
    
    
    
    52$
    13,181
    
    
    $
    3,287
    
    
    $
    9,894
    
    
    $
    17,070
    
    
    $
    3,412
    
    
    $
    13,658Finite-lived
intangible assets:Franchises with
finite lives
    
    $
    56
    
    
    $
    13
    
    
    $
    43
    
    
    $
    107
    
    
    $
    33
    
    
    $
    74
 For the nine months ended September 30, 2004, the net carrying amount of
indefinite-lived intangible assets was reduced by $484 million as a result of
the sale of cable systems to Atlantic Broadband Finance, LLC discussed in Note
2. Additionally, in the first quarter of 2004, approximately $29 million of
franchises that were previously classified as finite-lived were reclassified to
indefinite-lived, based on the Companys renewal of these franchise assets in
2003. Franchise amortization expense for the three and nine months ended
September 30, 2004 was $1 million and $3 million, respectively, and franchise
amortization expense for the three and nine months ended September 30, 2003 was
$2 million and $6 million, respectively, which represents the amortization
relating to franchises that did not qualify for indefinite-life treatment under
SFAS No. 142, including costs associated with franchise renewals. The Company
expects that amortization expense on franchise assets will be approximately $4
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 and
other 10




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) relevant factors. 4. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following as of September
30, 2004 and December 31, 2003: September 30,
    
    December 31,2004
    
    2003Accounts payable  trade
    
    $
    73
    
    
    $
    144Accrued capital expenditures
    
    
    82
    
    
    
    93Accrued expenses:Interest
    
    
    151
    
    
    
    97Programming costs
    
    
    303
    
    
    
    319Franchise-related fees
    
    
    55
    
    
    
    70State sales tax
    
    
    45
    
    
    
    61Other
    
    
    218
    
    
    
    212$
    927
    
    
    $
    996
 5. Long-Term Debt Long-term debt consists of the following as of September 30, 2004 and December 31, 2003: September 30, 2004
    
    December 31, 2003Face Value
    
    Accreted 
Value
    
    Face Value
    
    Accreted 
ValueLong-Term DebtCCO Holdings:8-3/4% senior notes due 2013
    
    $
    500
    
    
    $
    500
    
    
    $
    500
    
    
    $
    500Charter Operating:8.000% senior second lien notes due 2012
    
    
    1,100
    
    
    
    1,100
    
    
    
    
    
    
    
    8.375% senior second lien notes due 2014
    
    
    400
    
    
    
    400
    
    
    
    
    
    
    
    Renaissance:10.00% senior discount notes due 2008
    
    
    114
    
    
    
    116
    
    
    
    114
    
    
    
    116CC V Holdings:11.875% senior discount notes due 2008
    
    
    113
    
    
    
    113
    
    
    
    113
    
    
    
    113Credit FacilitiesCharter Operating
    
    
    5,393
    
    
    
    5,393
    
    
    
    4,459
    
    
    
    4,459CC VI Operating
    
    
    
    
    
    
    
    
    
    
    868
    
    
    
    868Falcon Cable
    
    
    
    
    
    
    
    
    
    
    856
    
    
    
    856CC VIII Operating
    
    
    
    
    
    
    
    
    
    
    1,044
    
    
    
    1,044$
    7,620
    
    
    $
    7,622
    
    
    $
    7,954
    
    
    $
    7,956
 In April 2004, the Companys subsidiaries, Charter Operating and Charter
Communications Operating Capital Corp., sold $1.5 billion of senior second lien
notes in a private transaction. Additionally, Charter Operating amended and
restated its $5.1 billion credit facilities, among other things, to defer
maturities and increase availability under those facilities to approximately
$6.5 billion, consisting of a $1.5 billion six-year revolving credit facility,
a $2.0 billion six-year term loan facility and a $3.0 billion seven-year term
loan facility. Charter Operating used the additional borrowings under the
amended and restated credit facilities, together with proceeds from the sale of
the Charter 11




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) Operating senior second lien notes to refinance the credit facilities of its
subsidiaries, CC VI Operating Company, LLC (CC VI Operating), Falcon Cable
Communications, LLC (Falcon Cable), and CC VIII Operating, LLC (CC VIII
Operating), all in concurrent transactions. In addition, Charter Operating
was substituted as the lender in place of the banks under those subsidiaries
credit facilities. 6. Comprehensive Loss Certain marketable equity securities are classified as available-for-sale and
reported at market value with unrealized gains and losses recorded as
accumulated other comprehensive loss on the accompanying consolidated balance
sheets. Additionally, 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 of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in accumulated other comprehensive loss. Comprehensive loss for
each of the three and nine months ended September 30, 2004 was $3.3 billion,
and $21 million for the nine months ended September 30, 2003. Comprehensive
income for the three months months ended September 30, 2003 was $41 million. 7. Accounting for Derivative Instruments and Hedging Activities The Company uses interest rate derivative instruments, such as interest rate
swap agreements and interest rate collar agreements (collectively referred to
herein as interest rate agreements) to manage its interest costs. The
Companys policy is to manage interest costs using a mix of fixed and variable
rate debt. Using interest rate swap agreements, the Company has agreed to
exchange, at specified intervals through 2007, the difference between fixed and
variable interest amounts calculated by reference to an agreed-upon notional
principal amount. Interest rate collar agreements are used to limit the
Companys exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates. The Company does not hold or issue derivative instruments for trading purposes.
The Company does, however, have certain interest rate derivative instruments
that have been designated as cash flow hedging instruments. Such instruments
are those that effectively convert variable interest payments on certain debt
instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows
derivative gains and losses to offset related results on hedged items in the
consolidated statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For the three months ended September 30, 2004 and 2003, net gain
(loss) on derivative instruments and hedging activities includes gains of $1
million and $0, respectively, and for the nine months ended September 30, 2004
and 2003, includes gains of $3 million and $8 million, respectively, which
represent cash flow hedge ineffectiveness on interest rate hedge agreements
arising from differences between the critical terms of the agreements and the
related hedged obligations. Changes in the fair value of interest rate
agreements designated as hedging instruments of the variability of cash flows
associated with floating-rate debt obligations that meet the effectiveness
criteria of SFAS No. 133 are reported in accumulated other comprehensive loss.
For the three and nine months ended September 30, 2004, a gain of $2 million
and $31 million, respectively, and for the three and nine months ended
September 30, 2003, a gain of $21 million and $30 million, respectively,
related to derivative instruments designated as cash flow hedges, was recorded
in accumulated other comprehensive loss. The amounts are subsequently
reclassified into interest expense as a yield adjustment in the same period in
which the related interest on the floating-rate debt obligations affects
earnings (losses). Certain interest rate derivative instruments are not designated as hedges as
they do not meet the effectiveness criteria specified by SFAS No. 133.
However, management believes such instruments are closely correlated with the
respective debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as gain (loss) on derivative instruments and hedging activities in the
Companys condensed consolidated statements of operations. For the three
months ended September 30, 2004 and 2003, net gain (loss) on derivative
instruments and hedging activities includes losses of $9 million and gains of
$31 million, respectively, and for the nine months ended September 30, 2004 and
2003, includes gains of $45 million and 12




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) $27 million, respectively, for interest rate derivative instruments not
designated as hedges. As of September 30, 2004 and December 31, 2003, the Company had outstanding
$2.7 billion and $3.0 billion and $20 million and $520 million, respectively,
in notional amounts of interest rate swaps and collars, respectively. The
notional amounts of interest rate instruments do not represent amounts
exchanged by the parties and, thus, are not a measure of exposure to credit
loss. The amounts exchanged are determined by reference to the notional amount
and the other terms of the contracts. 8. Revenues Revenues consist of the following for the three and nine months ended September
30, 2004 and 2003: Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Video
    
    $
    839
    
    
    $
    866
    
    
    $
    2,534
    
    
    $
    2,607High-speed data
    
    
    189
    
    
    
    145
    
    
    
    538
    
    
    
    403Advertising sales
    
    
    73
    
    
    
    64
    
    
    
    205
    
    
    
    188Commercial
    
    
    61
    
    
    
    52
    
    
    
    175
    
    
    
    149Other
    
    
    86
    
    
    
    80
    
    
    
    249
    
    
    
    255$
    1,248
    
    
    $
    1,207
    
    
    $
    3,701
    
    
    $
    3,602
 9. Operating Expenses Operating expenses consist of the following for the three and nine months ended
September 30, 2004 and 2003: Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Programming
    
    $
    328
    
    
    $
    307
    
    
    $
    991
    
    
    $
    934Advertising sales
    
    
    24
    
    
    
    21
    
    
    
    72
    
    
    
    65Service
    
    
    173
    
    
    
    156
    
    
    
    489
    
    
    
    458$
    525
    
    
    $
    484
    
    
    $
    1,552
    
    
    $
    1,457
 13




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##### Table of Contents



10. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of the following for the
three and nine months ended September 30, 2004 and 2003: Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003General and administrative
    
    $
    220
    
    
    $
    204
    
    
    $
    636
    
    
    $
    622Marketing
    
    
    32
    
    
    
    31
    
    
    
    99
    
    
    
    80$
    252
    
    
    $
    235
    
    
    $
    735
    
    
    $
    702
 Components of selling expense are included in general and administrative and
marketing expense. 11. Special Charges In the fourth quarter of 2002, the Company recorded a special charge of $31
million associated with the Companys workforce reduction and the consolidation
of its operations from three divisions and ten regions into five operating
divisions, elimination of redundant practices and streamlining its management
structure. During the year ended December 31, 2003, additional
severance-related costs of $26 million were incurred and recorded as a special
charge. During the three and nine months ended September 30, 2004, an
additional 300 and 450 employees, respectively, were identified for
termination, and severance costs of $6 million and $9 million, respectively,
were recorded in special charges. Severance payments are made over a period of
up to two years with approximately $3 million and $14 million paid during the
three and nine months ended September 30, 2004, respectively, and $43 million
paid during the year ended December 31, 2003. As of September 30, 2004 and
December 31, 2003, a liability of approximately $9 million and $14 million,
respectively, is recorded on the accompanying condensed consolidated balance
sheets related to the reorganization activities discussed above. For the nine
months ended September 30, 2004, special charges also includes approximately
$85 million, representing the aggregate value of the Charter Class A common
stock and warrants to purchase Charter Class A common stock contemplated to be
issued as part of a settlement of consolidated federal and state class actions
and federal derivative action lawsuits and approximately $9 million of
litigation costs related to the tentative settlement of a national class action
suit, all of which are subject to final documentation and court approval (see
note 13). For the three and nine months ended September 30, 2004, the
severance costs were offset by $3 million received from a third party in
settlement of a dispute. During the three and nine months ended September 30, 2003, the Company recorded
severance costs of $8 million and $23 million, respectively, in special
charges. For the nine months ended September 30, 2003, the severance costs
were offset by a $5 million settlement from the Internet service provider
Excite@Home related to the conversion of approximately 145,000 high-speed data
customers to our Charter High Speed service in 2001. 12. Income Taxes The Company is a single member limited liability company not subject to income
tax. The Company holds all operations through indirect subsidiaries. The
majority of these indirect subsidiaries are limited liability companies that
are not subject to income tax. However, certain of the Companys indirect
subsidiaries are corporations that are subject to income tax. As of September 30, 2004 and December 31, 2003, the Company had net deferred
income tax liabilities of 14




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) approximately $204 million and $267 million, respectively. The net deferred
income tax liabilities relate to certain of the Companys indirect
subsidiaries, which file separate income tax returns. During the three and nine months ended September 30, 2004, the Company recorded
$61 million and $57 million of income tax benefit, respectively. The Company
recorded the portion of the income tax benefit associated with the adoption of
Topic D-108 as a $16 million reduction of the cumulative effect of accounting
change on the accompanying statement of operations for the three and nine
months ended September 30, 2004. The income tax benefits were realized as a
result of decreases in the deferred tax liabilities of certain of the Companys
indirect corporate subsidiaries. During the three and nine months ended
September 30, 2003, the Company recorded $1 million and $3 million of income
tax expense, respectively. The income tax expense is recognized through
increases in deferred tax liabilities of certain of the Companys indirect
corporate subsidiaries. Charter Holdco is currently under examination by the Internal Revenue Service
for the tax years ending December 31, 2000 and 1999. Management does not
expect the results of this examination to have a material adverse effect on the
Companys financial position or results of operations. 13. Contingencies As previously reported in the Companys Amendment No. 1 to the Registration
Statement on Form S-4 filed on June 4, 2004 and 2004 Quarterly Report on Form
10-Q for the quarter ended June 30, 2004, fourteen putative federal class
action lawsuits (the Federal Class Actions) were filed against Charter and
certain of its former and present officers and directors in various
jurisdictions allegedly on behalf of all purchasers of Charters securities
during the period from either November 8 or November 9, 1999 through July 17 or
July 18, 2002. In general, the lawsuits alleged that Charter utilized
misleading accounting practices and failed to disclose these accounting
practices and/or issued false and misleading financial statements and press
releases concerning Charters operations and prospects. The Federal Class
Actions were specifically and individually identified in public filings made by
Charter prior to the date of this quarterly report. On September 12, 2002, a
shareholders derivative suit (the State Derivative
Action) was filed in the Circuit Court of the City of St. Louis, State of
Missouri (the Missouri State Court) against Charter and its then current
directors, as well as its former auditors. A substantively identical
derivative action was later filed and consolidated into the State Derivative
Action. The plaintiffs allege that the individual defendants breached their
fiduciary duties by failing to establish and maintain adequate internal
controls and procedures. An action substantively identical to the State
Derivative Action was filed in March 2004. The State Derivative Actions were
specifically and individually identified in public filings made by Charter
prior to the date of this quarterly report. Separately, on
February 12, 2003, a shareholders derivative suit (the Federal
Derivative Action) was filed against Charter and its then current directors
in the United States District Court for the Eastern District of Missouri. The
plaintiff in that suit alleged that the individual defendants breached their
fiduciary duties and grossly mismanaged Charter by failing to establish and
maintain adequate internal controls and procedures. The Federal Derivative
Action was identified in public filings made by Charter prior to the date of
this quarterly report. On August 5, 2004, Charter entered into Memoranda of Understanding setting
forth agreements in principle regarding settlement of the Federal Class
Actions, the State Derivative Action(s) and the Federal Derivative Action (the
Actions). In exchange for a release of all claims by plaintiffs against
Charter and its former and present officers and directors named in the Actions,
Charter will pay to the plaintiffs a combination of cash and equity
collectively valued at $144 million, which will include the fees and expenses
of plaintiffs counsel. Of this amount, $64 million will be paid in cash (by
Charters insurance carriers) and the balance will be paid in shares of Charter
Class A common stock having an aggregate value of $40 million and ten-year
warrants to purchase shares of Charter Class A common stock having an aggregate
warrant value of $40 million. The warrants would have an exercise price equal
to 150% of the fair market value (as defined) of Charter Class A common stock
as of the date of the entry 15




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) of the order of final judgment approving the settlement. In addition, Charter
expects to issue additional shares of its Class A common stock to its insurance
carrier having an aggregate value of $5 million. As a result, in the second
quarter of 2004, the Company recorded an $85 million special charge on its
consolidated statement of operations (see note 11). Additionally, as part of
the settlements, Charter will also commit to a variety of corporate governance
changes, internal practices and public disclosures, some of which have already
been undertaken and none of which are inconsistent with measures Charter is
taking in connection with the recent conclusion of the SEC investigation
described below. The settlement of each of the lawsuits is conditioned upon,
among other things, the parties approval and execution of definitive
settlement agreements with respect to the matters described above, judicial
approval of the settlements by the Court following notice to the class, and
dismissal of the consolidated derivative actions now pending in Missouri State
Court, which are related to the Federal Derivative Action. In August 2002, Charter became aware of a grand jury investigation being
conducted by the U.S. Attorneys Office for the Eastern District of Missouri
into certain of its accounting and reporting practices, focusing on how Charter
reported customer numbers, and its reporting of amounts received from digital
set-top terminal suppliers for advertising. The U.S. Attorneys Office has
publicly stated that Charter is not a target of the investigation. Charter has
also been advised by the U.S. Attorneys office that no member of its board of
directors, including its Chief Executive Officer, is a target of the
investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated customer account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. Charter has
advised the Company that it is fully cooperating with the investigation. On November 4, 2002, Charter received an informal, non-public inquiry from the
staff of the SEC. The SEC issued a formal order of investigation dated January
23, 2003, and subsequently served document and testimony subpoenas on Charter
and a number of its former employees. The investigation and subpoenas
generally concerned Charters prior reports with respect to its determination
of the number of customers, and various of its accounting policies and
practices including its capitalization of certain expenses and dealings with
certain vendors, including programmers and digital set-top terminal suppliers.
On July 27, 2004, the SEC and Charter reached a final agreement to settle the
investigation. In the Settlement Agreement and Cease and Desist Order, Charter
agreed to entry of an administrative order prohibiting any future violations of
United States securities laws and requiring certain other remedial internal
practices and public disclosures. Charter neither admitted nor denied any
wrongdoing, and the SEC assessed no fine against Charter. Charter is generally required to indemnify each of the named individual
defendants in connection with the matters described above pursuant to the terms
of its bylaws and (where applicable) such individual defendants employment
agreements. In accordance with these documents, in connection with the pending
grand jury investigation, the now settled SEC investigation and the above
described lawsuits, some of Charters current and former directors and current
and former officers have been advanced certain costs and expenses incurred in
connection with their defense. In October 2001, two customers, Nikki Nicholls and Geraldine M. Barber, filed a
class action suit against Charter Holdco in South Carolina Court of Common
Pleas (the South Carolina Class Action), purportedly on behalf of a class
of Charter Holdcos customers, alleging that Charter Holdco improperly charged
them a wire maintenance fee without request or permission. They also claimed
that Charter Holdco improperly required them to rent analog and/or digital
set-top terminals even though their television sets were cable
ready. A
substantively identical case was filed in the Superior Court of Athens  Clarke
County, Georgia by Emma S. Tobar on March 26, 2002 (the Georgia Class
Action), alleging a nationwide class for these claims. The South Carolina
Class Action and the Georgia Class Action were identified in public filings
made by Charter prior to the date of this quarterly report. In April 2004, the parties to both the Georgia and South Carolina Class Actions
participated in a mediation. The mediator made a proposal to the parties to
settle the lawsuits. In May 2004, the parties accepted the mediators proposal
and reached a tentative settlement, subject to final documentation and court
approval. As a result of the 16




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##### Table of Contents



CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) tentative settlement, the Company recorded a special charge of $9 million in
its consolidated statement of operations in the first quarter of 2004 (see note
11). On July 8, 2004, the Superior Court of Athens  Clarke County, Georgia
granted a motion to amend the Tobar complaint to add Nicholls, Barber and April
Jones as plaintiffs in the Georgia Class Action and to add any potential class
members in South Carolina. The court also granted preliminary approval of the
proposed settlement on that date. A hearing to consider final approval of the
settlement is scheduled to occur on November 10, 2004. On August 2, 2004, the
parties submitted a joint request to the South Carolina Court of Common Pleas
to stay the South Carolina Class Action pending final approval of the
settlement and on August 17, 2004, that court granted the parties request. In addition to the matters set forth above, Charter is also party to other
lawsuits and claims that arose in the ordinary course of conducting its
business. In the opinion of management, after taking into account recorded
liabilities, the outcome of these other lawsuits and claims are not expected to
have a material adverse effect on the Companys financial condition, results of
operations or its liquidity. 14. Stock Compensation Plans The Company has historically accounted for stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, as permitted by
SFAS No. 123, Accounting for Stock-Based Compensation. On January 1, 2003, the
Company adopted the fair value measurement provisions of SFAS No. 123 using the
prospective method, under which the Company recognizes compensation expense of
a stock-based award to an employee over the vesting period based on the fair
value of the award on the grant date consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
Adoption of these provisions resulted in utilizing a preferable accounting
method as the condensed consolidated financial statements will present the
estimated fair value of stock-based compensation in expense consistently with
other forms of compensation and other expense associated with goods and
services received for equity instruments. In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,the fair
value method is being applied only to awards granted or modified after January
1, 2003, whereas awards granted prior to such date will continue to be
accounted for under APB No. 25, unless they are modified or settled in cash.
The ongoing effect on consolidated results of operations or financial condition
will depend on future stock-based compensation awards granted by Charter. SFAS No. 123 requires pro forma disclosure of the impact on earnings as if the
compensation expense for these plans had been determined using the fair value
method. The following table presents the Companys net income (loss) as
reported and the pro forma amounts that would have been reported using the fair
value method under SFAS No. 123 for the periods presented: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (3,261
    )
    
    $
    20
    
    
    $
    (3,307
    )
    
    $
    (51
    )Add back stock-based compensation expense related to stock
options included in reported net loss
    
    
    8
    
    
    
    1
    
    
    
    34
    
    
    
    1Less employee stock-based compensation expense determined
under fair
value based method for all employee stock option awards
    
    
    (6
    )
    
    
    (3
    )
    
    
    (37
    )
    
    
    (11
    )Effects of unvested options in stock option exchange
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    Pro forma
    
    $
    (3,259
    )
    
    $
    18
    
    
    $
    (3,262
    )
    
    $
    (61
    )
 In January 2004, Charter began an option exchange program in which the
employees of Charter and its subsidiaries were offered the right to exchange
all stock options (vested and unvested) under the 1999 Charter Communications 17




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) Option Plan and 2001 Stock Incentive Plan that had an exercise price over $10
per share for shares of restricted Charter Class A common stock or, in some
instances, cash. Based on a sliding exchange ratio, which varied depending on
the exercise price of an employees outstanding options, if an employee would
have received more than 400 shares of restricted stock in exchange for tendered
options, Charter issued to that employee shares of restricted stock in the
exchange. If, based on the exchange ratios, an employee would have received
400 or fewer shares of restricted stock in exchange for tendered options,
Charter instead paid the employee cash in an amount equal to the number of
shares the employee would have received multiplied by $5.00. The offer applied
to options (vested and unvested) to purchase a total of 22,929,573 shares of
Charter Class A common stock, or approximately 48% of Charters 47,882,365
total options (vested and unvested) issued and outstanding as of December 31,
2003. Participation by employees was voluntary. Those members of Charters
board of directors who were not also employees of the Company were not eligible
to participate in the exchange offer. In the closing of the exchange offer on February 20, 2004, Charter accepted for
cancellation eligible options to purchase approximately 18,137,664 shares of
Charter Class A common stock. In exchange, Charter granted 1,966,686 shares of
restricted stock, including 460,777 performance shares to eligible employees of
the rank of senior vice president and above, and paid a total cash amount of
approximately $4 million (which amount includes applicable withholding taxes)
to those employees who received cash rather than shares of restricted stock.
The restricted stock was granted on February 25, 2004. Employees tendered
approximately 79% of the options exchangeable under the program. The cost to the Company of the stock option exchange program was approximately
$12 million, with a 2004 cash compensation expense of approximately $4 million
and a non-cash compensation expense of approximately $8 million to be expensed
ratably over the three-year vesting period of the restricted stock issued in
the exchange. In January 2004, the Compensation Committee of the board of directors of
Charter approved Charters Long-Term Incentive Program (LTIP), which is a
program administered under the 2001 Stock Incentive Plan. Employees of Charter
and its subsidiaries whose pay classifications exceed a certain level are
eligible to receive stock options, and more senior level employees are eligible
to receive stock options and performance shares. Under the LTIP, the stock
options vest 25% on each of the first four anniversaries of the date of grant.
The performance units vest on the third anniversary of the grant date and
shares of Charter Class A common stock are issued, conditional upon Charters
performance against financial performance targets established by Charters
management and approved by its board of directors as of the time of the award. 15. Related Parties CC VIII, LLC.As part of the acquisition of the cable systems owned by Bresnan
Communications Company Limited Partnership in February 2000, CC VIII, LLC (CC
VIII), CCO Holdings indirect limited liability company subsidiary, issued,
after adjustments, 24,273,943 Class A preferred membership units (collectively,
the CC VIII interest) with a value and an initial capital account of
approximately $630 million to certain sellers affiliated with AT&T Broadband,
subsequently owned by Comcast Corporation (the Comcast
sellers). While
held by the Comcast sellers, the CC VIII interest was entitled to a 2% priority
return on its initial capital account and such priority return was entitled to
preferential distributions from available cash and upon liquidation of CC VIII.
While held by the Comcast sellers, the CC VIII interest generally did not
share in the profits and losses of CC VIII. Mr. Allen granted the Comcast
sellers the right to sell to him the CC VIII interest for approximately $630
million plus 4.5% interest annually from February 2000 (the
Comcast put
right). In April 2002, the Comcast sellers exercised the Comcast put right
in full, and this transaction was consummated on June 6, 2003. Accordingly,
Mr. Allen has become the holder of the CC VIII interest, indirectly through an
affiliate. Consequently, subject to the matters referenced in the next
paragraph, Mr. Allen generally thereafter will be allocated his pro rata share
(based on number of membership interests outstanding) of profits or losses of
CC VIII. In the event of a liquidation of CC VIII, Mr. Allen would be entitled
to a priority distribution with respect to the 2% priority return (which will
continue to accrete). Any remaining distributions in liquidation would be
distributed to CC V Holdings, LLC and Mr. Allen in 18




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) proportion to CC V Holdings, LLCs capital account and Mr. Allens capital
account (which will equal the initial capital account of the Comcast sellers of
approximately $630 million, increased or decreased by Mr. Allens pro rata
share of CC VIIIs profits or losses (as computed for capital account purposes)
after June 6, 2003). The limited liability company agreement of CC VIII does
not provide for a mandatory redemption of the CC VIII interest. The CC VIII
interest is recorded as minority interest in the consolidated balance sheets. An issue has arisen as to whether the documentation for the Bresnan transaction
was correct and complete with regard to the ultimate ownership of the CC VIII
interest following consummation of the Comcast put right. Specifically, under
the terms of the Bresnan transaction documents that were entered into in June
1999, the Comcast sellers originally would have received, after adjustments,
24,273,943 Charter Holdco membership units, but due to an FCC regulatory issue
raised by the Comcast sellers shortly before closing, the Bresnan transaction
was modified to provide that the Comcast sellers instead would receive the
preferred equity interests in CC VIII represented by the CC VIII interest. As
part of the last-minute changes to the Bresnan transaction documents, a draft
amended version of the Charter Holdco limited liability company agreement was
prepared, and contract provisions were drafted for that agreement that would
have required an automatic exchange of the CC VIII interest for 24,273,943
Charter Holdco membership units if the Comcast sellers exercised the Comcast
put right and sold the CC VIII interest to Mr. Allen or his affiliates.
However, the provisions that would have required this automatic exchange did
not appear in the final version of the Charter Holdco limited liability company
agreement that was delivered and executed at the closing of the Bresnan
transaction. The law firm that prepared the documents for the Bresnan
transaction brought this matter to the attention of Charter and representatives
of Mr. Allen in 2002. Thereafter, the board of directors of Charter formed a Special Committee
(currently comprised of Messrs. Merritt, Tory and Wangberg) to investigate the
matter and take any other appropriate action on behalf of Charter with respect
to this matter. After conducting an investigation of the relevant facts and
circumstances, the Special Committee determined that a
scriveners error
had occurred in February 2000 in connection with the preparation of the
last-minute revisions to the Bresnan transaction documents and that, as a
result, Charter should seek the reformation of the Charter Holdco limited
liability company agreement, or alternative relief, in order to restore and
ensure the obligation that the CC VIII interest be automatically exchanged for
Charter Holdco units. The Special Committee further determined that, as part
of such contract reformation or alternative relief, Mr. Allen should be
required to contribute the CC VIII interest to Charter Holdco in exchange for
24,273,943 Charter Holdco membership units. The Special Committee also
recommended to the board of directors of Charter that, to the extent the
contract reformation is achieved, the board of directors should consider
whether the CC VIII interest should ultimately be held by Charter Holdco or
Charter Holdings or another entity owned directly or indirectly by them. Mr. Allen disagrees with the Special Committees determinations described above
and has so notified the Special Committee. Mr. Allen contends that the
transaction is accurately reflected in the transaction documentation and
contemporaneous and subsequent company public disclosures. The parties engaged in a process of non-binding mediation to seek to resolve
this matter, without success. The Special Committee is evaluating what further
actions or processes it may undertake to resolve this dispute. To accommodate
further deliberation, each party has agreed to refrain from initiating legal
proceedings over this matter until it has given at least ten days prior notice
to the other. In addition, the Special Committee and Mr. Allen have determined
to utilize the Delaware Court of Chancerys program for mediation of complex
business disputes in an effort to resolve the CC VIII interest dispute. If the
Special Committee and Mr. Allen are unable to reach a resolution through that
mediation process or to agree on an alternative dispute resolution process, the
Special Committee intends to seek resolution of this dispute through judicial
proceedings in an action that would be commenced, after appropriate notice, in
the Delaware Court of Chancery against Mr. Allen and his affiliates seeking
contract reformation, declaratory relief as to the respective rights of the
parties regarding this dispute and alternative forms of legal and equitable
relief. The ultimate resolution and financial impact of the dispute are not
determinable at this time. 19




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##### Table of Contents



CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) TechTV, Inc.TechTV, Inc. (TechTV) operated a cable television network
that offered programming mostly related to technology. Pursuant to an
affiliation agreement that originated in 1998 and that terminates in 2008,
TechTV has provided the Company with programming for distribution via its cable
systems. The affiliation agreement provides, among other things, that TechTV
must offer Charter certain terms and conditions that are no less favorable in
the affiliation agreement than are given to any other distributor that serves
the same number of or fewer TechTV viewing customers. Additionally, pursuant
to the affiliation agreement, the Company was entitled to incentive payments
for channel launches through December 31, 2003. In March 2004, Charter Holdco entered into agreements with Vulcan Programming
and TechTV, which provide for (i) Charter Holdco and TechTV to amend the
affiliation agreement which, among other things, revises the description of the
TechTV network content, provides for Charter Holdco to waive certain claims
against TechTV relating to alleged breaches of the affiliation agreement and
provides for TechTV to make payment of outstanding launch receivables due to
Charter Holdco under the affiliation agreement, (ii) Vulcan Programming to pay
approximately $10 million and purchase over a 24-month period, at fair market
rates, $2 million of advertising time across various cable networks on Charter
cable systems in consideration of the agreements, obligations, releases and
waivers under the agreements and in settlement of the aforementioned claims and
(iii) TechTV to be a provider of content relating to technology and video
gaming for Charters interactive television platforms through December 31, 2006
(exclusive for the first year). The Company recognized approximately $5
million of the Vulcan Programming payment as an offset to programming expense
during the nine months ended September 30, 2004 with the remaining $5 million
to be recognized over the term of the agreement. The Company believes that
Vulcan Programming, which is 100% owned by Mr. Allen, owned an approximate 98%
equity interest in TechTV at the time of the transaction. Until September
2003, Mr. Savoy, a former Charter director, was the president and director of
Vulcan Programming and was a director of TechTV. Mr. Wangberg, one of Charters
directors, was the chairman, chief executive officer and a director of TechTV.
Mr. Wangberg resigned as the chief executive officer of TechTV in July 2002.
He remained a director of TechTV along with Mr. Allen until Vulcan Programming
sold TechTV to an unrelated third party in May 2004. Digeo, Inc.On June 30, 2003, Charter Holdco entered into an agreement with
Motorola, Inc. for the purchase of 100,000 digital video recorder (DVR)
units. The software for these DVR units is being supplied by Digeo
Interactive, LLC (Digeo Interactive), a wholly owned subsidiary of Digeo,
Inc. (Digeo), under a license agreement entered into in April 2004. Under
the license agreement Digeo Interactive granted to Charter Holdco the right to
use Digeos proprietary software for the number of DVR units that Charter
deploys from a maximum of 10 headends through year-end 2004. This maximum
number of headends was increased from 10 to 15 pursuant to a letter agreement
executed on June 11, 2004 and was increased again from 15 to 20 pursuant to a
second letter agreement dated August 4, 2004. The license granted for each
unit deployed under the agreement is valid for five years. In addition,
Charter will pay certain other fees including a per-headend license fee and
maintenance fees. Total license and maintenance fees during the term of the
agreement are expected to be approximately $3 million. The agreement provides
that Charter is entitled to receive contract terms, considered on the whole,
and license fees, considered apart from other contract terms, no less favorable
than those accorded to any other Digeo customer. In April 2004, the Company
launched DVR service utilizing the Digeo proprietary software in its Rochester,
Minnesota market. In May 2004, Charter Holdco entered into a binding term sheet with Digeo
Interactive for the purchase of 70,000 Digeo PowerKey DVR units. The term
sheet provides that the parties will proceed in good faith to negotiate, prior
to year-end 2004, definitive agreements for the purchase of the DVR units and
that the parties will enter into a license agreement for Digeos proprietary
software on terms substantially similar to the terms of the license agreement
described above. Total purchase price and license and maintenance fees during
the term of the definitive agreements are expected to be approximately $40
million. The term sheet and any definitive agreements will be terminable at no
penalty to Charter in certain circumstances. Charter and Digeo entered into a letter agreement effective September 28, 2004
amending the April 2004 license 20




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) agreement to reduce certain fees payable to Digeo by Charter and to increase
the maximum number of headends in which Charter has the right to deploy the DVR
units from a maximum of 20 by year end 2004, to a maximum of 30 by June 30,
2005. The Company believes that Vulcan Ventures, an entity controlled by Mr. Allen,
owns an approximate 60% equity interest in Digeo, Inc. Messrs. Allen and Vogel
are directors of Digeo. Mr. Vogel owns options to purchase 10,000 shares of
Digeo common stock. Oxygen Media LLC.Oxygen Media LLC (Oxygen) provides programming content
aimed at the female audience for distribution over cable systems and satellite.
On July 22, 2002, Charter Holdco entered into a carriage agreement with
Oxygen, whereby the Company agreed to carry programming content from Oxygen.
Under the carriage agreement, the Company currently makes Oxygen programming
available to approximately 5 million of its video customers. The term of the
carriage agreement was retroactive to February 1, 2000, the date of launch of
Oxygen programming by the Company, and runs for a period of five years from
that date. For the nine months ended September 30, 2004 and 2003, the Company
paid Oxygen approximately $10 million and $6 million, respectively, for
programming content. In addition, Oxygen pays the Company marketing support
fees for customers launched after the first year of the term of the carriage
agreement up to a total of $4 million. The Company recorded approximately $1
million and $696 million related to these launch incentives as a reduction of
programming expense for each of the nine months ended September 30, 2004 and
2003, respectively. Concurrently with the execution of the carriage agreement, Charter Holdco
entered into an equity issuance agreement pursuant to which Oxygens parent
company, Oxygen Media Corporation (Oxygen Media), granted a subsidiary of
Charter Holdco a warrant to purchase 2.4 million shares of Oxygen Media common
stock for an exercise price of $22.00 per share. Charter Holdco was also to
receive unregistered shares of Oxygen Media common stock with a guaranteed fair
market value on the date of issuance of $34 million, on or prior to February 2,
2005, with the exact date to be determined by Oxygen Media. The Company recognizes the guaranteed value of the investment over the life of
the carriage agreement as a reduction of programming expense. For the nine
months ended September 30, 2004 and 2003, the Company recorded approximately
$10 million and $6 million, respectively, as a reduction of programming
expense. The carrying value of the Companys investment in Oxygen was
approximately $29 million and $19 million as of September 30, 2004 and December
31, 2003, respectively. In August 2004, Charter Holdco and Oxygen entered into agreements that amend
and renew the carriage agreement. The amendment to the carriage agreement (a)
revises the number of the Companys customers to which Oxygen programming must
be carried and for which the Company must pay, (b) releases Charter Holdco from
any claims related to the failure to achieve distribution benchmarks under the
carriage agreement, (c) requires Oxygen to make payment on outstanding
receivables for marketing support fees due to the Company under the affiliation
agreement; and (d) requires that Oxygen provide its programming content to the
Company on economic terms no less favorable than Oxygen provides to any other
cable or satellite operator having fewer subscribers than the Company. The
renewal of the carriage agreement (a) extends the period that the Company will
carry Oxygen programming to its customers through January 31, 2008, and (b)
requires license fees to be paid based on customers receiving Oxygen
programming, rather than for specific customer benchmarks. In August 2004, Charter Holdco and Oxygen also amended the equity issuance
agreement to provide for the issuance of 1 million shares of Oxygen Preferred
Stock with a liquidation preference of $33.10 per share plus accrued dividends
to Charter Holdco on February 1, 2005 in place of the $34 million of
unregistered shares of Oxygen Media common stock. The preferred stock is
convertible into common stock after December 31, 2007 at a conversion ratio,
the numerator of which is the liquidation preference and the denominator which
is the fair market value per share of Oxygen Media common stock on the
conversion date. 21




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##### Table of Contents



CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions) As of September 30, 2004, through Vulcan Programming, Mr. Allen owned an
approximate 31% interest in Oxygen assuming no exercises of outstanding
warrants or conversion or exchange of convertible or exchangeable securities. Marc Nathanson has an indirect beneficial interest of less than 1% in Oxygen. 22




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##### Table of Contents



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
as of September 30, 2004 are equity interests in its operating subsidiaries.
CCO Holdings was formed in June 2003 and is a wholly owned subsidiary of CCH
II, LLC (CCH II). CCH II is a wholly owned subsidiary of
CCH I, LLC (CCH I),
which is a wholly owned subsidiary of Charter Communications Holdings, LLC
(Charter Holdings), which is a subsidiary of Charter Communications Holding
Company, LLC (Charter Holdco), which is a subsidiary of Charter
Communications, Inc. (Charter). Our parent companies are CCH II, CCH I,
Charter Holdings, Charter Holdco and Charter. We, us and our refer to CCO
Holdings and its subsidiaries. We are a broadband communications company
operating in the United States. We offer our customers traditional cable video
programming (analog and digital video) as well as high-speed data services and
in some areas advanced broadband services such as high definition television,
video on demand, telephony and interactive television. We sell our cable video
programming, high-speed data and advanced broadband services on a subscription
basis. The following table summarizes our customer statistics for analog and digital
video, residential high-speed data and residential telephony as of September
30, 2004 and 2003: Approximate as ofSeptember 30,
    
    September 30,2004 (a)
    
    2003 (a)Cable Video Services:Analog Video:Residential (non-bulk) analog video customers (b)
    
    
    5,825,000
    
    
    
    6,240,000Multi-dwelling (bulk) and commercial unit customers (c)
    
    
    249,600
    
    
    
    258,100Analog video customers (b)(c)
    
    
    6,074,600
    
    
    
    6,498,100Digital Video:Digital video customers (d)
    
    
    2,688,900
    
    
    
    2,664,800Digital percentage of analog video customers (b)(c)(d)(e)
    
    
    44
    %
    
    
    41
    %Non-Video Cable Services:Residential high-speed data customers (f)
    
    
    1,819,900
    
    
    
    1,489,700Dial-up customers
    
    
    7,300
    
    
    
    10,900Telephony customers (g)
    
    
    40,200
    
    
    
    24,100
 Pro forma for the sale of systems to Atlantic Broadband Finance, LLC in March
and April 2004 and to WaveDivision Holdings, LLC in October 2003, as if all of
these sales had occurred as of January 1, 2003, analog video customers, digital
video customers and residential high-speed data customers would have been
6,239,000, 2,570,300 and 1,441,500, respectively, as of September 30, 2003.  (a)
    
    Customers include all persons our corporate billing records show
as receiving service (regardless of their payment status), except for
complimentary accounts (such as our employees). Further, customers
include persons receiving service under promotional programs that
offered up to two months of service for free, some of whom had not
requested to be disconnected, but had not become paying customers as of
September 30, 2004. If such persons do not become paying customers, we
do not believe this would have a material impact on our consolidated
financial condition or consolidated results of operations. In
addition, at September 30, 2004 and 2003, customers include
approximately 46,000 and 64,600 persons whose accounts were over 60
days past due in payment, approximately 5,500 and 7,100 persons whose
accounts were over 90 days past due in payment, and approximately 2,000
and 2,300 of which were over 120 days past due in payment,
respectively. 23




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##### Table of Contents



(b)
    
    Residential (non-bulk) analog video customers include all
residential customers who receive video services, except for
complimentary accounts (such as our employees).  (c)
    
    Included within video customers are those in commercial and
multi-dwelling structures, which are calculated on an equivalent bulk
unit (EBU) basis. EBU is calculated for a system by dividing the
bulk price charged to accounts in an area by the most prevalent price
charged to non-bulk residential customers in that market for the
comparable tier of service. The EBU method of estimating analog video
customers is consistent with the methodology used in determining costs
paid to programmers and has been consistently applied year over year.
As we increase our effective analog video prices to residential
customers without a corresponding increase in the prices charged to
commercial service or multi-dwelling customers, our EBU count will
decline even if there is no real loss in commercial service or
multi-dwelling customers.(d)
    
    Digital video customers include all households that have one or
more digital set-top terminals. Included in digital video customers
on September 30, 2004 and 2003 are approximately 10,700 and 12,600
customers, respectively, that receive digital video service directly
through satellite transmission.(e)
    
    Represents the number of digital video customers as a percentage of
analog video customers.(f)
    
    All of these customers also receive video service and are included
in the video statistics above. However, the video statistics do not
include approximately 205,500 and 75,200 of these customers at
September 30, 2004 and 2003, respectively, who were residential
high-speed data only customers.(g)
    
    Telephony customers include all households receiving telephone
service. Overview of Operations We have a history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally attributable
to insufficient revenue to cover the combination of operating costs and
interest costs we incur, depreciation expenses that we incur resulting from the
capital investments we have made and continue to make in our business, and
amortization and impairment of our franchise intangibles. We expect that these
expenses (other than amortization and impairment of franchises) will remain
significant, and we therefore expect to continue to report net losses for the
foreseeable future. For the nine months ended September 30, 2004, our loss from operations, which
includes depreciation and amortization expense and impairment of franchises but
excludes interest expense, was $2.2 billion. For the nine months ended
September 30, 2003, our income from operations was $306 million. We had a
negative operating margin of 58% for the nine months ended September 30, 2004,
and an operating margin of 8% for the nine months ended September 30, 2003.
The decrease in income from operations and operating margins from 2003 to 2004
was principally due to the impairment of franchises of $2.4 billion recorded in
the third quarter of 2004. The nine months ended September 30, 2004 includes a
gain on the sale of certain cable systems to Atlantic Broadband Finance, LLC
which is offset by an increase in option compensation expense and special
charges when compared to the nine months ended September 30, 2003. Operating
margins for the nine months ended September 30, 2004 compared to the nine
months ended September 30, 2003 were also negatively impacted by increases in
programming and service costs. Since our inception, and currently, our ability to conduct operations has been
and continues to be dependent on our access to capital, including credit under
our credit facilities. The occurrence of an event of default under our credit
facilities could result in borrowings from these credit facilities being
unavailable to us and could, in the event of a payment default or acceleration,
also trigger events of default under the indentures governing our outstanding
public notes and would have a material adverse effect on us. Approximately
$7.5 million of our debt matures during the remainder of 2004, which we expect
to fund through borrowings under our credit facilities. See
 Liquidity and
Capital Resources. 24




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##### Table of Contents



RESULTS OF OPERATIONS Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003 The following table sets forth the percentages of revenues that items in the
accompanying consolidated statements of operations constituted for the periods
presented (dollars in millions): Nine Months Ended September 30,2004
    
    2003Revenues
    
    $
    3,701
    
    
    
    100
    %
    
    $
    3,602
    
    
    
    100
    %Costs and expenses:Operating (excluding depreciation and amortization)
    
    
    1,552
    
    
    
    42
    %
    
    
    1,457
    
    
    
    41
    %Selling, general and administrative
    
    
    735
    
    
    
    20
    %
    
    
    702
    
    
    
    19
    %Depreciation and amortization
    
    
    1,105
    
    
    
    30
    %
    
    
    1,095
    
    
    
    30
    %Impairment of franchises
    
    
    2,433
    
    
    
    66
    %
    
    
    
    
    
    
    (Gain) loss on sale of assets, net
    
    
    (104
    )
    
    
    (3
    )%
    
    
    23
    
    
    
    1
    %Option compensation expense, net
    
    
    34
    
    
    
    1
    %
    
    
    1
    
    
    
    Special charges, net
    
    
    100
    
    
    
    2
    %
    
    
    18
    
    
    
    1
    %5,855
    
    
    
    158
    %
    
    
    3,296
    
    
    
    92
    %Income (loss) from operations
    
    
    (2,154
    )
    
    
    (58
    )%
    
    
    306
    
    
    
    8
    %Interest expense, net
    
    
    (406
    )
    
    
    
    
    
    
    (375
    )Gain on derivative instruments and hedging activities, net
    
    
    48
    
    
    
    
    
    
    
    35Loss on extinguishment of debt
    
    
    (21
    )
    
    
    
    
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    (3
    )(379
    )
    
    
    
    
    
    
    (343
    )Loss before minority interest, income taxes and
cumulative effect of accounting change
    
    
    (2,533
    )
    
    
    
    
    
    
    (37
    )Minority interest
    
    
    25
    
    
    
    
    
    
    
    (11
    )Loss before income taxes and cumulative effect of
accounting change
    
    
    (2,508
    )
    
    
    
    
    
    
    (48
    )Income tax benefit (expense)
    
    
    41
    
    
    
    
    
    
    
    (3
    )Loss before cumulative effect of accounting change
    
    
    (2,467
    )
    
    
    
    
    
    
    (51
    )Cumulative effect of accounting change, net of tax
    
    
    (840
    )
    
    
    
    
    
    
    Net loss
    
    $
    (3,307
    )
    
    
    
    
    
    $
    (51
    )
 Revenues.Revenues increased by $99 million, or 3%, from $3.6 billion for the
nine months ended September 30, 2003 to $3.7 billion for the nine months ended
September 30, 2004. This increase is principally the result of an increase of
330,200 and 24,100 high-speed data and digital video customers, respectively,
as well as price increases for video and high-speed data services, and is
offset partially by a decrease of 423,500 analog video customers. Included in
the reduction in analog video customers and reducing the increase in digital
video and high-speed data customers are 259,100 analog video customers, 94,500
digital video customers and 48,200 high-speed data customers related to the
Systems Sales. The Systems Sales reduced the increase in revenues by $116
million. Our goal is to increase revenues by stabilizing our analog video
customer base, implementing price increases on certain services and packages
and increasing revenues from incremental high-speed data services, digital
video and advanced products and services such as telephony using VOIP, VOD,
high definition television and digital video 25




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##### Table of Contents



recorder service provided to our customers. Revenues by service offering were as follows (dollars in millions): Nine Months Ended September 30,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofRevenues
    
    Revenues
    
    Revenues
    
    Revenues
    
    Change
    
    % ChangeVideo
    
    $
    2,534
    
    
    
    68
    %
    
    $
    2,607
    
    
    
    73
    %
    
    $
    (73
    )
    
    
    (3
    )%High-speed data
    
    
    538
    
    
    
    14
    %
    
    
    403
    
    
    
    11
    %
    
    
    135
    
    
    
    33
    %Advertising sales
    
    
    205
    
    
    
    6
    %
    
    
    188
    
    
    
    5
    %
    
    
    17
    
    
    
    9
    %Commercial
    
    
    175
    
    
    
    5
    %
    
    
    149
    
    
    
    4
    %
    
    
    26
    
    
    
    17
    %Other
    
    
    249
    
    
    
    7
    %
    
    
    255
    
    
    
    7
    %
    
    
    (6
    )
    
    
    (2
    )%$
    3,701
    
    
    
    100
    %
    
    $
    3,602
    
    
    
    100
    %
    
    $
    99
    
    
    
    3
    %
 Video revenues consist primarily of revenues from analog and digital video
services provided to our non-commercial customers. Video revenues decreased by
$73 million, or 3%, from $2.6 billion for the nine months ended September 30,
2003 to $2.5 billion for the nine months ended September 30, 2004.
Approximately $84 million of the decrease was the result of the Systems Sales,
while the offsetting increase of approximately $11 million was primarily the
result of price increases and an increase in digital video customers, partially
offset by a decline in analog video customers. Revenues from high-speed data services provided to our non-commercial customers
increased $135 million, or 33%, from $403 million for the nine months ended
September 30, 2003 to $538 million for the nine months ended September 30,
2004. Approximately 88% of the increase related to the increase in the average
number of customers receiving high-speed data services, whereas approximately
12% related to the increase in average price of the service. We were also able
to offer this service to more of our customers, as the estimated percentage of
homes passed that could receive high-speed data service increased from 85% as
of September 30, 2003 to 88% as of September 30, 2004 as a result of our system
upgrades. The increase in high-speed data revenues was reduced by
approximately $9 million as a result of the Systems Sales. Advertising sales revenues consist primarily of revenues from commercial
advertising customers, programmers and other vendors. Advertising sales
increased $17 million, or 9%, from $188 million for the nine months ended
September 30, 2003 to $205 million for the nine months ended September 30,
2004, primarily as a result of an increase in national advertising campaigns
and election related advertising. The increase in advertising sales was
reduced by approximately $5 million as a result of the Systems Sales. For the
nine months ended September 30, 2004 and 2003, we received $9 million and $10
million, respectively, in advertising revenue from vendors. Commercial revenues consist primarily of revenues from cable video and
high-speed data services to our commercial customers. Commercial revenues
increased $26 million, or 17%, from $149 million for the nine months ended
September 30, 2003 to $175 million for the nine months ended September 30,
2004, primarily as a result of an increase in commercial high-speed data
revenues. The increase was reduced by approximately $10 million as a result of
the Systems Sales. Other revenues consist of revenues from franchise fees, telephony revenue,
equipment rental, customer installations, home shopping, dial-up Internet
service, late payment fees, wire maintenance fees and other miscellaneous
revenues. Other revenues decreased $6 million, or 2%, from $255 million for the
nine months ended September 30, 2003 to $249 million for the nine months ended
September 30, 2004. Approximately $8 million of the decrease was the result of
the Systems Sales, while the offsetting increase was primarily the result of an
increase in home shopping and infomercial revenue. Operating Expenses.Operating expenses increased $95 million, or 7%, from $1.5
billion for the nine months ended September 30, 2003 to $1.6 billion for the
nine months ended September 30, 2004. The increase in operating 26




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##### Table of Contents



expenses was reduced by approximately $42 million as a result of the System
Sales. Programming costs included in the accompanying condensed consolidated
statements of operations were $991 million and $934 million, representing 17%
and 28% of total costs and expenses for the nine months ended September 30,
2004 and 2003, respectively. Key expense components as a percentage of
revenues were as follows (dollars in millions): Nine Months Ended September 30,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofExpenses
    
    Revenues
    
    Expenses
    
    Revenues
    
    Change
    
    % ChangeProgramming
    
    $
    991
    
    
    
    27
    %
    
    $
    934
    
    
    
    26
    %
    
    $
    57
    
    
    
    6
    %Advertising sales
    
    
    72
    
    
    
    2
    %
    
    
    65
    
    
    
    2
    %
    
    
    7
    
    
    
    11
    %Service
    
    
    489
    
    
    
    13
    %
    
    
    458
    
    
    
    13
    %
    
    
    31
    
    
    
    7
    %$
    1,552
    
    
    
    42
    %
    
    $
    1,457
    
    
    
    41
    %
    
    $
    95
    
    
    
    7
    %
 Programming costs consist primarily of costs paid to programmers for analog,
premium and digital channels and pay-per-view programming. The increase in
programming costs of $57 million, or 6%, for the nine months ended September
30, 2004 over the nine months ended September 30, 2003 was a result of price
increases, particularly in sports programming, an increased number of channels
carried on our systems and an increase in digital video customers, partially
offset by decreases in analog video customers. Additionally, the increase in
programming costs was reduced by $30 million as a result of the Systems Sales.
Programming costs were offset by the amortization of payments received from
programmers in support of launches of new channels of $43 million and $47
million for the nine months ended September 30, 2004 and 2003, respectively.
Programming costs for the nine months ended September 30, 2004 also include a
$5 million reduction related to the settlement of a dispute with TechTV, Inc.
See note 15 to the condensed consolidated financial statements. Our cable programming costs have increased in every year we have operated in
excess of customary inflationary and cost-of-living type increases, and we
expect them to continue to increase because of a variety of factors, including
additional programming being provided to customers as a result of system
rebuilds that increase channel capacity, increased costs to produce or purchase
programming, increased costs for previously discounted programming and
inflationary or negotiated annual increases. Our increasing programming costs
will result in declining operating margins for our video services to the extent
we are unable to pass on cost increases to our customers. We expect to
partially offset any resulting margin compression from our traditional video
services with revenue from advanced video services, increased high-speed data
revenues, advertising revenues and commercial service revenues. Advertising sales expenses consist of costs related to traditional advertising
services provided to advertising customers, including salaries, benefits and
commissions. Advertising sales expenses increased $7 million, or 11%,
primarily due to increased salary, benefit and commission costs. Service costs
consist primarily of service personnel salaries and benefits, franchise fees,
system utilities, Internet service provider fees, maintenance and pole rent
expense. The increase in service costs of $31 million, or 7%, resulted
primarily from additional activity associated with ongoing infrastructure
maintenance. 27




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##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased by $33 million, or 5%, from $702 million for
the nine months ended September 30, 2003 to $735 million for the nine months
ended September 30, 2004. The increase in selling, general and administrative
expenses was reduced by $16 million as a result of the System Sales. Key
components of expense as a percentage of revenues were as follows (dollars in
millions): Nine Months Ended September 30,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofExpenses
    
    Revenues
    
    Expenses
    
    Revenues
    
    Change
    
    % ChangeGeneral and
administrative
    
    $
    636
    
    
    
    17
    %
    
    $
    622
    
    
    
    17
    %
    
    $
    14
    
    
    
    2
    %Marketing
    
    
    99
    
    
    
    3
    %
    
    
    80
    
    
    
    2
    %
    
    
    19
    
    
    
    24
    %$
    735
    
    
    
    20
    %
    
    $
    702
    
    
    
    19
    %
    
    $
    33
    
    
    
    5
    %
 General and administrative expenses consist primarily of salaries and benefits,
rent expense, billing costs, call center costs, internal network costs, bad
debt expense and property taxes. The increase in general and administrative
expenses of $14 million, or 2%, resulted primarily from increases in costs
associated with our commercial business of $16 million, bad debt expense of $11
million, franchise taxes of $4 million and third party call center costs of $12
million. These increases were partially offset by a decrease in salaries and
benefits of $19 million and property taxes of $14 million. Marketing expenses increased $19 million, or 24%, as a result of an increased
investment in marketing and branding campaigns. Depreciation and Amortization.Depreciation and amortization expense increased
by $10 million, or 1%, from $1.10 billion for the nine months ended September
30, 2003 to $1.11 billion for the nine months ended September 30, 2004. The
increase in depreciation related to an increase in capital expenditures, which
was offset by lower depreciation as the result of the Systems Sales. Impairment of Franchises.We performed an impairment assessment during the
third quarter of 2004 using an independent third-party appraiser. The use of
lower projected growth rates and the resulting revised estimates of future cash
flows in our valuation, primarily as a result of increased competition, led to
the recognition of a $2.4 billion impairment charge for the nine months ended
September 30, 2004. (Gain) Loss on Sale of Assets, Net.Gain on sale of assets of $104 million for
the nine months ended September 30, 2004 primarily represents the pretax gain
realized on the sale of systems to Atlantic Broadband Finance, LLC which closed
in March and April 2004. Loss on sale of assets of $23 million for the nine
months ended September 30, 2003 primarily represents the loss recognized on the
disposition of fixed assets. Option Compensation Expense, Net. Option compensation expense of $34 million
for the nine months ended September 30, 2004 primarily represents the expense
of approximately $9 million related to a stock option exchange program, under
which our employees were offered the right to exchange all stock options
(vested and unvested) issued under the 1999 Charter Communications Option Plan
and 2001 Stock Incentive Plan that had an exercise price over $10 per share for
shares of restricted Charter Class A common stock or, in some instances, cash.
The exchange offer closed in February 2004. Additionally, during the nine
months ended September 30, 2004, we recognized approximately $8 million related
to the options granted under the Charter Long-Term Incentive Program and
approximately $17 million related to options granted following the adoption of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Option compensation expense of $1 million for the
nine months ended September 30, 2003 primarily represents options expensed in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation. Special Charges, Net.Special charges of $100 million for the nine months
ended September 30, 2004 represents approximately $85 million of the aggregate
value of the Charter Class A common stock and warrants to purchase 28




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##### Table of Contents



Charter Class A common stock contemplated to be issued as part of a settlement
of the consolidated federal class actions, state derivative actions and federal
derivative action lawsuits, approximately $9 million of litigation costs
related to the tentative settlement of a South Carolina national class action
suit, all of which settlements are subject to final documentation and court
approval and approximately $9 million of severance and related costs of our
workforce reduction. Special charges for the nine months ended September 30,
2004 were offset by $3 million received from a third party in settlement of a
dispute. Special charges of $18 million for the nine months ended September
30, 2003 represents approximately $23 million of severance and related costs of
our workforce reduction partially offset by a $5 million credit from a
settlement from the Internet service provider Excite@Home related to the
conversion of about 145,000 high-speed data customers to our Charter Pipeline
service in 2001. We expect to continue to record additional special charges in
2004 related to the continued reorganization of our operations. Interest Expense, Net. Net interest expense increased by $31 million, or 8%,
from $375 million for the nine months ended September 30, 2003 to $406 million
for the nine months ended September 30, 2004. The increase in net interest
expense was a result of an increase in our average borrowing rate from 5.73% in
the nine months ended September 30, 2003 to 6.64% in the nine months ended
September 30, 2004, partially offset by a decrease of $624 million in average
debt outstanding from $8.3 billion for the nine months ended September 30, 2003
to $7.6 billion for the nine months ended September 30, 2004. Gain on Derivative Instruments and Hedging Activities, Net.Net gain on
derivative instruments and hedging activities increased $13 million from $35
million for the nine months ended September 30, 2003 to $48 million for the
nine months ended September 30, 2004. The increase is primarily the result of
an increase in gains on interest rate agreements that do not qualify for hedge
accounting under SFAS No. 133, which increased from a gain of $27 million for
the nine months ended September 30, 2003 to a gain of $45 million for the nine
months ended September 30, 2004. This was coupled with a decrease in gains on
interest rate agreements, as a result of hedge ineffectiveness on designated
hedges, which decreased from $8 million for the nine months ended September 30,
2003 to $3 million for the nine months ended September 30, 2004. Loss on Extinguishment of Debt.Loss on extinguishment of debt of $21 million
for the nine months ended September 30, 2004 represents the write-off of
deferred financing fees and third party costs related to the Charter
Communications Operating, LLC (Charter Operating) refinancing in April 2004. Other, Net.Net other expense of $3 million for the nine months ended
September 30, 2003 primarily represents losses on equity investments. Minority Interest.Minority interest represents the 2% accretion of the
preferred membership interests in our indirect subsidiary, CC VIII, LLC, and
since June 6, 2003, the pro rata share of the profits and losses of CC VIII,
LLC. Income Tax Benefit (Expense).Income tax benefit of $41 million and income tax
expense of $3 million was recognized for the nine months ended September 30,
2004 and 2003, respectively. The income tax benefit recognized in the nine months ended September 30, 2004
was directly related to the impairment of franchises as discussed above. We do
not expect to recognize a similar benefit associated with the impairment of
franchises in future periods. However, the actual tax provision calculations
in future periods will be the result of current and future temporary
differences, as well as future operating results. The income tax expense
recognized in the nine months ended September 30, 2003 represents increases in
the deferred tax liabilities and current federal and state income tax expenses
of certain of our indirect corporate subsidiaries. Cumulative Effect of Accounting Change, Net of Tax.Cumulative effect of
accounting change of $840 million (net of minority interest effects of $19
million and tax effects of $16 million) in 2004 represents the impairment
charge recorded as a result of our adoption of Topic D-108, Use of the Residual
Method to Value Acquired Assets Other than Goodwill, which requires the direct
method of separately valuing all intangible assets. Net Loss. Net loss increased by $3.3 billion, from $51 million for the nine
months ended September 30, 2003 to $3.3 billion for the nine months ended
September 30, 2004 as a result of the factors described above. 29




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##### Table of Contents



Liquidity and Capital Resources Introduction This section contains a discussion
of our liquidity and capital resources, including a discussion of our cash
position, sources and uses of cash, access to credit facilities and other
financing sources, historical financing activities, cash needs, capital
expenditures and outstanding debt. Overview Our business requires significant
cash to fund capital expenditures, distributions to our parent companies, debt
service costs and ongoing operations. We have historically funded our
operating activities, capital requirements and debt service costs through cash
flows from operating activities, borrowings under our credit facilities, equity
contributions from our parent companies, borrowings from our parent companies,
issuances of debt securities and cash on hand. The mix of funding sources
changes from period to period, but for the nine months ended September 30,
2004, approximately 67% of our funding requirements were met from cash flows
from operating activities and 33% from proceeds from the sale of systems. This
gives effect to the use of proceeds from the sale of systems, described below,
to repay long-term debt. For the nine months ended September 30, 2004, net cash
flows used in financing activities were $897 million, reflecting a net
repayment of $334 million of debt. Additionally, we increased cash on hand by
$6 million to $91 million. We expect that our mix of sources of funds will
continue to change in the future based on overall needs relative to our cash
flow and on the availability of funds under our credit facilities, our access
to the debt markets and our ability to generate cash flows from operating
activities. In the fourth quarter of 2004, $7.5 million of our debt will mature and an
additional $30 million of our debt will mature in each of 2005 and 2006. In
addition, the Charter Operating credit facilities require the CC V Holdings,
LLC notes to be redeemed within 45 days after the Charter Holdings leverage
ratio discussed below is determined to be below 8.75 to 1.0. Our ability to operate depends upon, among other things, our continued access
to capital, including credit under the Charter Operating credit facilities. We
expect that cash on hand, cash flows from operating activities and the amounts
available under our credit facilities will be adequate to meet our cash needs
in 2004. Our borrowing availability under the credit facilities totaled $957
million as of September 30, 2004, none of which was restricted due to
covenants. See  Certain Trends and Uncertainties  Restrictive Covenants. The Charter Operating credit facilities are subject to certain restrictive
covenants, some of which require us to achieve specified operating results. As
of September 30, 2004, we were and, as of the date of this report, we are in
compliance with the covenants under our credit facilities and our indentures,
and we expect to remain in compliance with those covenants throughout 2004. If
our operating performance results in non-compliance with these covenants, or if
any of certain other events of non-compliance under these credit facilities or
indentures governing our debt occurs, funding under the credit facilities may
not be available and defaults on some or potentially all debt obligations could
occur. Any financial or liquidity problems of our parent companies could cause serious
disruption to our business and have a material adverse effect on our business
and results of operations. Charters ability to make interest payments on its
convertible senior notes, and, in 2005 and 2006, to repay the outstanding
principal of its convertible senior notes will depend on its ability to raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco or its subsidiaries, including CCH II, CCO Holdings and Charter
Operating. The indentures governing the CCH II notes, CCO Holdings notes, and
Charter Operating notes, however, restrict these entities and their
subsidiaries from making distributions to their parent companies (including
Charter and Charter Holdco) for payment of principal on Charters convertible
senior notes, in each case unless there is no default under the applicable
indenture and a specified leverage ratio test is met. In addition, each of CCH
II, CCO Holdings and Charter Operating must independently assess whether such
payments or distributions are advisable. CCH II, CCO Holdings and Charter
Operating currently meet the applicable leverage ratio test under each of their
respective indentures, and therefore are not currently prohibited from making
any such distributions to their respective direct parent. 30




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##### Table of Contents



The indentures governing the Charter Holdings notes permit Charter Holdings to
make distributions to Charter Holdco for payment of interest or principal on
Charters convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings could incur additional debt under a leverage
ratio test of 8.75 to 1.0, there is no default under Charter Holdings
indentures and other specified tests are met. For the quarter ended September
30, 2004, there were no defaults under the Charter Holdings indentures and the
other specified tests were met. However, Charter Holdings continued not to
meet the leverage ratio test of 8.75 to 1.0 at September 30, 2004. As a
result, distributions from Charter Holdings to Charter or Charter Holdco have
been restricted and will continue to be restricted until that test is met. During this restriction period, the indentures governing the Charter Holdings
notes permit Charter Holdings and its subsidiaries to make specified
investments in Charter Holdco or Charter, up to an amount determined by a
formula, as long as there is no default under the indentures. Charter does not expect that cash flows from operating activities and amounts
available under its credit facilities will be sufficient to fund its operations
and permit Charter to satisfy its principal repayment obligations that come due
in 2005 and thereafter. In the event that Charter is not able to demonstrate
that it has access to liquidity in an amount sufficient to fund its business
and to make principal repayment obligations that come due in 2005 and
thereafter, Charter and its subsidiaries ability to receive an unqualified
opinion from an independent registered public accounting firm may be adversely
affected. The failure of Charter Operating to receive an unqualified opinion
would constitute a default under Charter Operatings credit facilities. An
event of default under the covenants governing any of our debt instruments
could result in the acceleration of our payment obligations under that debt
and, under certain circumstances, in cross-defaults under our other debt
obligations, which would have a material adverse effect on our consolidated
financial condition or results of operations. As a result of the foregoing, it is likely that Charter or Charter Holdco will
require additional funding to repay debt maturing in 2005 and 2006. We
understand that Charter is working with its financial advisors to address such
funding requirements. However, there can be no assurance that such funding
will be available to Charter. Although Mr. Allen and his affiliates have
purchased equity from Charter and its subsidiaries in the past, Mr. Allen and
his affiliates are not obligated to purchase equity from, contribute to or loan
funds to Charter or its subsidiaries in the future. In the past, our parent companies have accessed the equity and high-yield debt
markets as a source of capital to fund their subsidiaries operations. We believe that
our parent companies continued access to the debt markets will depend on
market conditions in light of, among other things, their significant levels of debt, their debt ratings, general economic conditions,
and the business condition of the cable, telecommunications and technology
industry. If they
are unable to raise the required capital on reasonable terms, our parent
companies could elect to cause us to distribute or otherwise pay to them (to the
extent available and permitted by the indenture governing our notes) the
necessary funds to pay principal and interest amounts due on Charters, Charter Holdings or CCH IIs
debt, which could negatively impact our liquidity. On March 1, 2004, we closed the sale of certain cable systems in Florida,
Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband
Finance, LLC. We closed on the sale of an additional cable system in New York
to Atlantic Broadband Finance, LLC in April 2004. Subject to post closing
contractual adjustments, we expect the total net proceeds from the sale of all
of these systems to be approximately $733 million, of which $5 million is
currently held in an indemnity escrow account (with the unused portion thereof
to be released by March 1, 2005). The proceeds received to date have been used
to repay a portion of our credit facilities. Long-Term Debt As of September 30, 2004 and December 31, 2003, long-term debt totaled
approximately $7.6 billion and $8.0 billion, respectively. This debt was
comprised of approximately $5.4 billion and $7.2 billion of credit facility
debt, and $2.2 billion and $729 million principal amount of high-yield notes at
September 30, 2004 and December 31, 2003, respectively. As of September 30,
2004 and December 31, 2003, the weighted average interest rate on the credit
facility debt was approximately 6.6% and 5.4%, respectively, and the weighted
average interest rate on the high-yield notes was approximately 8.5% and 9.4%,
respectively, resulting in a blended weighted average interest rate of 7.2% and
5.6%, respectively. Approximately 64% of our debt was effectively fixed
including the effects of our interest rate hedge 31




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##### Table of Contents



agreements as of September 30, 2004 compared to approximately 52% at December
31, 2003. April 2004 Charter Operating Notes.In April 2004, CCO Holdings subsidiaries,
Charter Operating and Charter Communications Operating Capital Corp., jointly
issued $1.1 billion of 8% senior second lien notes due 2012 and $400 million of
8 3/8% senior second lien notes due 2014, for total gross proceeds of $1.5
billion. These notes are structurally senior to the notes of Charter, Charter
Holdings, CCH II and CCO Holdings and rank equally with all other current or
future unsubordinated obligations of Charter Operating. The Charter Operating
notes are structurally subordinated to all obligations of Charter Operatings
subsidiaries, including Charter Operatings credit facilities described below. At any time prior to April 30, 2007, the issuers of the 8% senior second lien
notes may redeem, on a pro rata basis, up to 35% of the total original
principal amount of these notes with proceeds from public equity sales at a
redemption price equal to 108% of the principal amount thereof, plus any
accrued and unpaid interest. Interest on the $1.1 billion 8% senior second
lien notes accrues at 8% per year and is payable semi-annually in arrears on
each April 30 and October 30, commencing on October 30, 2004. At any time prior to April 30, 2007, the issuers of the 8 3/8% senior second
lien notes may redeem, on a pro rata basis, up to 35% of the total original
principal amount of these notes with proceeds from public equity sales at a
redemption price equal to 108.375% of the principal amount thereof, plus any
accrued and unpaid interest. In addition, Charter Operating may redeem all or
any portion of these notes on or after April 30, 2009, at an initial purchase
price equal to 104.188% of the outstanding principal amount redeemed, declining
ratably to 100% for redemptions on or after April 30, 2012, plus any accrued
and unpaid interest. Interest on the $400 million 8 3/8% senior second lien
notes accrues at 8 3/8% per year and is payable semi-annually in arrears on
each April 30 and October 30, commencing on October 30, 2004. In the event of specified change of control events, Charter Operating must
offer to purchase the outstanding Charter Operating senior second lien notes at
a purchase price equal to 101% of the total principal amount of the notes, plus
any accrued and unpaid interest. Until the guarantee and pledge date (as defined in the indenture governing the
Charter Operating notes, generally the fifth business day after the Charter
Holdings leverage ratio is certified to be below 8.75 to 1.0), the Charter
Operating notes are secured by a second-priority lien on substantially all of
Charter Operatings assets that secure the obligations of Charter Operating
under the Charter Operating credit facilities and specified related
obligations. The collateral consists of substantially all of Charter
Operatings direct assets in which security interests may be perfected under
the Uniform Commercial Code by filing a financing statement (including capital
stock and intercompany obligations). On and after the guarantee and pledge date, the collateral for the Charter
Operating notes will consist of all of Charter Operatings and its
subsidiaries assets that secure the obligations of Charter Operating or any
subsidiary of Charter Operating with respect to the Charter Operating credit
facility and the related obligations or certain other indebtedness on such
date. It is currently contemplated that, as of the guarantee and pledge date,
such collateral will consist of the capital stock of Charter Operating held by
CCO Holdings, all of the intercompany obligations owing to CCO Holdings by
Charter Operating or any subsidiary of Charter Operating, and substantially all
of Charter Operatings and the guarantors assets (other than the assets of CCO
Holdings) in which security interests may be perfected under the Uniform
Commercial Code by filing a financing statement (including capital stock and
intercompany obligations). In addition, within a time
frame specified under the Charter Operating credit facilities, Charter Operating will be required to redeem or cause to be
redeemed in full the notes outstanding under the CC V Holdings, LLC indenture.
In addition, when Charter Operating or its subsidiaries exercise any option to
redeem in full the notes outstanding under the Renaissance Media Group, LLC
(Renaissance) or CC V Holdings, LLC indentures, then, provided that the
leverage ratio test remains satisfied, the Renaissance or CC V Holdings, LLC
entities will be required to guarantee the Charter Operating credit facilities
and the related obligations and to secure those guarantees with first-priority
liens, and to guarantee the notes and to secure the Charter Operating senior
second lien notes with second-priority liens, on substantially all of their
assets in which security interests may be perfected under the Uniform 32




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Commercial Code by filing a financing statement (including capital stock and
intercompany obligations). Charter Operating Credit Facilities.In April 2004, the Charter Operating
credit facilities were amended and restated concurrently with the sale of $1.5
billion senior second lien notes described above, among other things, to defer
maturities and increase availability under these facilities and to enable
Charter Operating to acquire the interests of the lenders under the CC VI
Operating Company, LLC (CC VI Operating), CC VIII Operating, LLC (CC VIII
Operating) and the Falcon Cable Communications, LLC (Falcon Cable) credit
facilities. The Charter Operating credit facilities increased the availability
from $5.1 billion to $6.5 billion and provide for two term facilities, one with
a total principal amount of $2.0 billion, of which 12.5% matures in 2007, 30%
matures in 2008, 37.5% matures in 2009 and 20% matures in 2010 (Term A); and
one with a total principal amount of $3.0 billion, which is repayable in 27
equal quarterly installments aggregating in each loan year to approximately $30
million, with the remaining balance due at final maturity in 2011 (Term B).
The amended and restated Charter Operating credit facilities also provide for a
revolving credit facility, in a total amount of $1.5 billion, with a maturity
date in 2010. Amounts under the amended and restated Charter Operating credit
facilities bear interest, at Charter Operatings election, at a base rate or
the Eurodollar rate, as defined, plus a margin for Eurodollar loans of up to
3.00% for the Term A and revolving credit facilities and up to 3.25% for the
Term B credit facility, and for base rate loans, up to 2.00% for the Term A
facility and revolving credit facilities and up to 2.25% for the Term B credit
facility. A quarterly commitment fee of up to 0.75% is payable on the unused
balance of the revolving credit facility. Obligations under the amended commitment amount of $6.5 billion are secured by
a lien on all assets of Charter Operating, to the extent such lien can be
perfected under the Uniform Commercial Code by filing a financing statement,
which assets include capital stock owned by Charter Operating and intercompany
obligations owing to it, including from its subsidiaries, CC VI Operating, CC
VIII Operating and Falcon Cable. Obligations arising under the original commitment amount of $5.1 billion
continue to be guaranteed by CCO Holdings and by Charter Operatings
subsidiaries, other than the non-guarantor subsidiaries (defined below). The
non-guarantor subsidiaries, generally include CCO NR Holdings, LLC and
subsidiaries contributed to CCO NR Holdings, LLC by Charter Holdings in the
organizational restructuring that occurred in June 2003, including CC VI
Operating, CC VIII Operating, Falcon Cable, and their respective subsidiaries.
Obligations arising under the original commitment amount of $5.1 billion
continue to be secured by a pledge of the equity interests owned by the
subsidiary guarantors and intercompany obligations owing to the subsidiary
guarantors, as well as a pledge of CCO Holdings equity interests in Charter
Operating and its subsidiaries, and intercompany obligations owing to CCO
Holdings by Charter Operating and its subsidiaries and intercompany obligations
owing to the subsidiary guarantors. At such time as Charter Holdings leverage ratio is determined to be below 8.75
to 1.0: (i) the guarantors guarantees will be amended to increase the amount
guaranteed to include all of the obligations arising under the amended
commitment amount of $6.5 billion; (ii) most of the non-guarantor subsidiaries
will become additional subsidiary guarantors of the amended commitment amount
of $6.5 billion; and (iii) such guarantees will be secured by a lien on all
assets of the subsidiary guarantors to the extent such lien can be perfected
under the Uniform Commercial Code by filing a financing statement; provided
that the guarantee and pledge of such interests is not otherwise restricted by
certain of Charter Holdings subsidiaries indentures. The Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the Charter Operating
senior second lien notes, the CCO Holdings senior notes, the CCH II senior
notes, the Charter Holdings senior notes and Charters convertible senior
notes, provided that, among other things, no default has occurred and is
continuing under the amended and restated Charter Operating credit facilities.
Conditions to future borrowings include the absence of a default or an event of
default under the amended and restated Charter Operating credit facilities and
the continued accuracy in all material respects of the representations and
warranties, including the absence since December 31, 2003 of any event,
development or circumstance that has had or could reasonably be expected to
have a material adverse affect on our business. The events of default under the Charter Operating credit facilities include
those customary for financings of this type, as well as events of default for,
among other things: (i) the failure to pay or the occurrence of events that
result in the acceleration of other indebtedness owing by certain of CCO
Holdings direct and indirect parent companies in amounts in excess of $200
million in aggregate principal amount, (ii) Paul Allen and/or certain of his
family 33




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members and/or their exclusively owned entities ceasing to have power, directly
or indirectly, to vote at least 35% of the ordinary voting power of Charter
Operating, and (iii) certain of Charter Operatings direct or indirect parent
companies having indebtedness in excess of $500 million aggregate principal
amount which remains undefeased three months prior to the final maturity of
such indebtedness. Charter Operating used the additional borrowings under the credit facilities,
together with proceeds from the sale of the Charter Operating senior second
lien notes to refinance the credit facilities of its subsidiaries, CC VI
Operating, Falcon Cable, and CC VIII Operating, all in concurrent transactions.
In addition, Charter Operating was substituted as the lender in place of the
banks under those subsidiaries credit facilities. As noted above, our access to capital from our credit facilities is contingent
on compliance with a number of restrictive covenants, including covenants tied
to our operating performance. We may not be able to comply with all of these
restrictive covenants. If there is an event of default under our credit
facilities, such as the failure to maintain the applicable required financial
ratios, we would be unable to borrow under these credit facilities, which could
materially adversely impact our ability to operate our business and to make
payments under our debt instruments. In addition, an event of default under
certain of our debt obligations, if not waived, may result in the acceleration
of those debt obligations, which could in turn result in the acceleration of
other debt obligations, and could result in the exercise of remedies by our
creditors and could force us to seek the protection of the bankruptcy laws. Historical Operating, Financing and Investing Activities We held $91 million in cash and cash equivalents as of September 30, 2004
compared to $85 million as of December 31, 2003. Operating Activities.Net
cash provided by operating activities decreased $133 million, or 14%, from $942
million for the nine months ended September 30, 2003 to $809 million for the
nine months ended September 30, 2004. For the nine months ended September 30,
2004, net cash provided by operating activities decreased primarily as a result
of changes in operating assets and liabilities that used $57 million more cash
during the nine months ended September 30, 2004 than the corresponding period
in 2003 and an increase in cash interest expense of $45 million over the
corresponding prior period. The change in operating assets and liabilities is
primarily the result of the benefit in the nine months ended September 30, 2003
from collection of receivables from programmers related to network launches,
while accounts receivable remained essentially flat in the nine months ended
September 30, 2004. Investing Activities.Net cash provided by investing
activities for the nine months ended September 30, 2004 was $94 million and net
cash used in investing activities for the nine months ended September 30, 2003
was $585 million. Investing activities provided $679 million more cash during
the nine months ended September 30, 2004 than the corresponding period in 2003
primarily as a result of proceeds from the sale of certain cable systems to
Atlantic Broadband Finance, LLC. Financing Activities.Net cash used in
financing activities for the nine months ended September 30, 2004 and 2003 was
$897 million and $622 million, respectively. The increase in cash used during
the nine months ended September 30, 2004, as compared to the corresponding
period in 2003, was primarily the result of an increase in net repayments of
long-term debt and distributions. Capital Expenditures We have significant ongoing capital expenditure requirements. Capital
expenditures were $616 million and $481 million for the nine months ended
September 30, 2004 and 2003, respectively. The majority of the capital
expenditures for the nine months ended September 30, 2004 and 2003 related to
customer premise equipment costs. See the table below for more details. Upgrading our cable systems has enabled us to offer digital television,
high-speed data services, VOD, interactive services, additional channels and
tiers, and expanded pay-per-view options to a larger customer base. Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt, equity contributions from our parent
companies and borrowings under credit facilities. In addition, during the nine
months 34




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ended September 30, 2004 and 2003, our liabilities related to capital
expenditures decreased $11 million and $102 million, respectively. During 2004, we expect to spend a total of $850 million to $950 million on
capital expenditures. We expect that the nature of these expenditures will
continue to shift from upgrade/rebuild costs to customer premise equipment and
scalable infrastructure costs. We expect to fund capital expenditures for 2004
primarily from cash flows from operating activities and borrowings under our
credit facilities. We have adopted capital expenditure disclosure guidance,
which was developed by eleven publicly traded cable system operators, including
Charter, with the support of the National Cable & Telecommunications
Association (NCTA). The new disclosure is intended to provide more
consistency in the reporting of operating statistics in capital expenditures
and customers among peer companies in the cable industry. These disclosure
guidelines are not required disclosure under GAAP, nor do they impact our
accounting for capital expenditures under GAAP. The following table presents our major capital expenditures categories in
accordance with NCTA disclosure guidelines for the nine months ended September
30, 2004 and 2003 (dollars in millions): Nine Months EndedSeptember 30,2004
    
    2003Customer premise equipment (a)
    
    $
    344
    
    
    $
    253Scalable infrastructure (b)
    
    
    54
    
    
    
    35Line extensions (c)
    
    
    94
    
    
    
    69Upgrade/Rebuild (d)
    
    
    28
    
    
    
    76Support capital (e)
    
    
    96
    
    
    
    48Total capital expenditures (f)
    
    $
    616
    
    
    $
    481
   (a)
    
    Customer premise equipment includes costs incurred at the customer
residence to secure new customers, revenue units and additional bandwidth
revenues. It also includes customer installation costs in accordance with
SFAS 51 and customer premise equipment (e.g., set-top terminals and cable
modems, etc.).(b)
    
    Scalable infrastructure includes costs, not related to customer premise
equipment or our network, to secure growth of new customers, revenue units
and additional bandwidth revenues or provide service enhancements (e.g.,
headend equipment).(c)
    
    Line extensions include network costs associated with entering new
service areas (e.g., fiber/coaxial cable, amplifiers, electronic
equipment, make-ready and design engineering).(d)
    
    Upgrade/rebuild includes costs to modify or replace existing
fiber/coaxial cable networks, including betterments.(e)
    
    Support capital includes costs associated with the replacement or
enhancement of non-network assets due to technological and physical
obsolescence (e.g., non-network equipment, land, buildings and vehicles).(f)
    
    Represents all capital expenditures made during the three and nine months
ended September 30, 2004 and 2003, respectively. Certain Trends and Uncertainties The following discussion highlights a number of trends and uncertainties, in
addition to those discussed elsewhere in this quarterly report and in the
Critical Accounting Policies and Estimates section of Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations in Amendment No. 1 to our Registration Statement on Form S-4 filed on June 4,
2004, that could materially impact our business, results of operations and
financial condition. Restrictive Covenants.Our credit facilities and the indentures governing our
publicly held notes contain a number of significant covenants that could
adversely impact our business. In particular, our credit facilities and
indentures restrict our ability to: 35




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
    
    pay dividends or make other distributions;
    
    make certain investments or acquisitions;
    
    enter into related party transactions;
    
    dispose of assets or merge;
    
    incur additional debt;
    
    issue equity;
    
    repurchase or redeem equity interests and debt;
    
    grant liens; and
    
    pledge assets. Furthermore, our credit facilities require us to, among other things, maintain
specified financial ratios, meet specified financial tests and provide audited
financial statements with an unqualified opinion from an independent registered
public accounting firm. Our ability to comply with these provisions may be
affected by events beyond our control. The breach of any of these covenants
will result in a default under the applicable debt agreement or instrument and
could trigger acceleration of the related debt under the applicable agreement,
and in certain cases under other agreements governing our indebtedness. Any
default under the credit facilities or indentures applicable to us could
adversely affect our growth, our financial condition and our results of
operations and the ability to make payments on our publicly held notes and
those of our subsidiaries, and our credit facilities. For more information,
see the section above entitled  Liquidity and Capital Resources. Parent Company Liquidity Concerns.Our parent companies have a significant
amount of debt and may incur additional debt in the future. At September 30,
2004, Charter had approximately $744 million aggregate principal amount of
convertible senior notes outstanding, which mature in 2005 and 2006, and
Charter Holdings had approximately $8.5 billion aggregate principal amount of
senior notes and senior discount notes, some of which mature in 2007 and the
remainder of which mature in 2009 through 2012. At September 30, 2004, CCH II
had outstanding approximately $1.6 billion of senior notes that mature in 2010.
Charter, Charter Holdings and CCH II will need to raise additional capital or
receive distributions or payments from us in order to satisfy their debt
obligations. The indentures governing the CCH II notes, CCO Holdings notes, and Charter
Operating notes restrict those notes issuers from making distributions to their
parent companies (including Charter and Charter Holdco) for payment of
principal on parent company notes, in each case unless there is no default
under those indentures and a specified leverage ratio test can be met. In
addition, each of CCH II, CCO Holdings and Charter Operating must independently
assess whether such payments or distributions are advisable. CCH II, CCO
Holdings and Charter Operating currently meet the applicable leverage ratio
test under each of their respective indentures, and therefore are not currently
prohibited from making any such distributions to their respective direct
parent. The indentures governing the Charter Holdings notes permit Charter Holdings to
make distributions to Charter Holdco for payment of interest or principal on
Charters convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings could incur additional debt under a leverage
ratio test of 8.75 to 1.0, there is no default under Charter Holdings
indentures and other specified tests are met. For the quarter ended September
30, 2004, there were no defaults under the Charter Holdings indentures and
other specified tests were met. However, Charter Holdings continued not to
meet the leverage ratio test at September 30, 2004. As a result, distributions
from Charter Holdings to Charter Holdco or Charter again have been restricted
and will continue to be restricted until that test is met. Charter currently has sufficient assets to pay interest due on its outstanding
convertible senior notes during 2004. However, Charters ability to make
interest payments, or principal payments at maturity in 2005 and 2006, on its
outstanding convertible senior notes is contingent upon it obtaining additional
debt and/or equity financing or receiving distributions or other payments from
its subsidiaries. Because Charter is our manager, any financial or liquidity
problems of Charter could cause serious disruption to our business and have a
material adverse effect on our business and results of operations. Any such
event could adversely impact our own credit rating, and our relations with
customers and suppliers, which could in turn further impair our ability to
obtain financing and operate our business. Further, to the extent that any
such event results in a change of control of Charter (whether through a 36




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bankruptcy, receivership or other reorganization of Charter and/or Charter
Holdco, or otherwise), it could result in an event of default under our credit
facilities and would require a change of control repurchase offer under our
outstanding notes. Charter does not expect that cash flows from operating activities and amounts
available under its credit facilities will be sufficient to fund its operations
and permit Charter to satisfy its principal repayment obligations that come due
in 2005 and thereafter. In the event that Charter is not able to demonstrate
that it has adequate access to liquidity in an amount sufficient to fund its
business and to make principal repayment obligations that come due in 2005 and
thereafter, Charter and its subsidiaries ability to receive an unqualified
opinion from an independent registered public accounting firm may be adversely
affected. The failure of Charter Operating to receive an unqualified opinion
would constitute a default under Charter Operatings credit facilities. An
event of default under the covenants governing any of the Companys debt
instruments could result in the acceleration of its payment obligations under
that debt and, under certain circumstances, in cross-defaults under its other
debt obligations, which would have a material adverse effect on the Companys
consolidated financial condition or results of operations. See  Long-Term
Indebtedness  Change of Control Payments. Acceleration of Our Indebtedness.In the event of a default under our credit
facilities or notes, our creditors could elect to declare all amounts borrowed,
together with accrued and unpaid interest and other fees, to be due and
payable. In such event, our credit facilities and indentures would not permit
CCO Holdings subsidiaries to distribute funds to CCO Holdings to pay interest
or principal on its notes. If the amounts outstanding under such credit
facilities or notes are accelerated, all of the debt and liabilities would be
payable from the assets of CCO Holdings subsidiaries, prior to any
distribution of CCO Holdings subsidiaries assets to pay the interest and
principal amounts on CCO Holdings notes. In addition, the lenders under our
credit facilities could foreclose on their collateral, which includes equity
interests in CCO Holdings subsidiaries, and they could exercise other rights
of secured creditors. In any such case, we might not be able to repay or make
any payments on CCO Holdings notes. Additionally, an acceleration or payment
default under our credit facilities would cause a cross-default in the
indentures governing the Charter Holdings notes, CCH IIs notes, our notes,
the Charter Operating notes and Charters convertible senior notes. Any
default under any of our credit facilities or notes might adversely affect the
holders of our notes and our growth, financial condition and results of
operations and could force us to examine all options, including seeking the
protection of the bankruptcy laws. CCO Holdings Notes are Structurally
Subordinated to all Liabilities of CCO Holdings Subsidiaries.The borrowers
and guarantors under the Charter Operating credit facilities and senior second
lien notes are indirect subsidiaries of CCO Holdings. A number of CCO
Holdings subsidiaries are also obligors under other debt instruments,
including Charter Operating, which is a co-issuer of senior second lien notes. As of September 30, 2004, our total debt was
approximately $7.6 billion, of which $7.1 billion would have been structurally
senior to CCO Holdings notes. In a liquidation, the lenders under our credit
facilities and the holders of the other debt instruments and all other
creditors of CCO Holdings subsidiaries would have the right to be paid before
holders of CCO Holdings notes from any of its subsidiaries assets. If Charter caused a subsidiary to make a distribution to enable CCO Holdings to
make payments in respect of its notes, and such transfer were deemed a
fraudulent transfer or an unlawful distribution, the holders of CCO Holdings
notes could be required to return the payment to (or for the benefit of) the
creditors of CCO Holdings subsidiaries. In the event of the bankruptcy,
liquidation or dissolution of a subsidiary, following payment by such
subsidiary of its liabilities, such subsidiary may not have sufficient assets
remaining to make any payments to us as an equity holder or otherwise and may
be restricted by bankruptcy and insolvency laws from making any such payments.
The foregoing contractual and legal restrictions could limit our ability to
make payments of principal and/or interest to the holders of CCO Holdings
notes. Securities Litigation and Government Investigations.A number of
putative federal class action lawsuits have been filed against Charter and
certain of its former and present officers and directors alleging violations of
securities laws, which have been consolidated for pretrial purposes. In
addition, a number of other lawsuits have been filed against Charter in other
jurisdictions. A shareholders derivative suit was filed in the U.S. District
Court for the Eastern District of Missouri against Charter and certain of its
directors and officers. Also, three shareholders derivative suits were filed
in Missouri state court against Charter, its then current directors and its
former independent auditor, which 37




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actions have been consolidated. The federal shareholders derivative suit and
the consolidated derivative suit each allege that the defendants breached their
fiduciary duties. In addition, Charter has recently entered into Memoranda of
Understanding setting forth proposed terms of settlement for the above
described class actions and derivative suits. Settlement of those actions
under the terms of the memoranda is subject to a number of conditions, and
there can therefore be no assurance that the actions will be settled on those
terms or at all. See Part II, Item 1. Legal Proceedings. In August 2002, Charter became aware of a grand jury investigation being
conducted by the U.S. Attorneys Office for the Eastern District of Missouri
into certain of our accounting and reporting practices focusing on how it
reported customer numbers, and its reporting of amounts received from digital
set-top terminal suppliers for advertising. The U.S. Attorneys Office has
publicly stated that Charter is not a target of the investigation. Charter has
also been advised by the U.S. Attorneys Office that no member of its board of
directors, including its Chief Executive Officer, is a target of the
investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated customer account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. Charter has
advised us that it is fully cooperating with the investigation. On November 4, 2002, Charter received an informal, non-public inquiry from the
staff of the SEC. The SEC issued a formal order of investigation dated January
23, 2003, and subsequently served document and testimony subpoenas on Charter
and a number of its former employees. The investigation and subpoenas
generally concerned Charters prior reports with respect to its determination
of the number of customers and various of its accounting policies and practices
including its capitalization of certain expenses and dealings with certain
vendors, including programmers and digital set-top terminal suppliers. On July
27, 2004, the SEC and Charter reached a final agreement to settle the
investigation. In the Settlement Agreement and Cease and Desist Order, Charter
agreed to entry of an administrative order prohibiting any future violations of
United States securities laws and requiring certain other remedial internal
practices and public disclosures. Charter neither admitted nor denied any
wrongdoing, and the SEC assessed no fine against Charter. Moreover, due to the inherent uncertainties of litigation and investigations,
and due to the remaining conditions to the finalization of our anticipated
settlements, Charter cannot predict with certainty the ultimate outcome of
these proceedings. An unfavorable outcome in the lawsuits or the government
investigation described above could result in substantial potential liabilities
and have a material adverse effect on our consolidated financial condition and
results of operations or our liquidity. Further, these proceedings, and
Charters actions in response to these proceedings, could result in substantial
additional defense costs and the diversion of managements attention, and could
adversely affect our ability to execute our business and financial strategies. Competition.The industry in which we operate is highly competitive, and has
been more so in recent years. In some instances, we compete against companies
with fewer regulatory burdens, easier access to financing, greater personnel
resources, greater brand name recognition and long-established relationships
with regulatory authorities and customers. Increasing consolidation in the
cable industry and the repeal of certain ownership rules may provide additional
benefits to certain of our competitors, either through access to financing,
resources or efficiencies of scale. Our principal competitor for video services throughout our territory is direct
broadcast satellite television services, also known as DBS. Competition from
DBS, including intensive marketing efforts, aggressive pricing, and the ability
of DBS to provide certain services that we are in the process of developing,
has had an adverse impact on our ability to retain customers. DBS has grown
rapidly over the last several years and continues to do so. The cable
industry, including Charter, has lost a significant number of subscribers to
DBS competition, and we face serious challenges in this area on a going forward
basis. Local telephone companies and electric utilities can offer video and other
services in competition with Charter, and they increasingly may do so in the
future. Certain telephone companies have begun more extensive deployment of
fiber in their networks that will enable them to begin providing video
services, as well as telephony and Internet access services, to residential and
business customers. The subscription television industry also faces
competition from free broadcast television and from other communications and
entertainment media. With respect to our Internet 38




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access services, we face competition, including intensive marketing efforts and
aggressive pricing, from telephone companies and other providers of dial-up
and digital subscriber line technology, also known as DSL. Further loss of
customers to DBS or other alternative video and data services and marketing
efforts to retain customers and combat that loss could have a material negative
impact on the value of our business and its performance. Mergers, joint ventures and alliances among franchised, wireless or private
cable operators, satellite television providers, local exchange carriers and
others, and the repeal of certain ownership rules may provide additional
benefits to some of our competitors, either through access to financing,
resources or efficiencies of scale, or the ability to provide multiple services
in direct competition with us. Long-Term Indebtedness  Change of Control Payments.We and our parent
companies may not have the ability to raise the funds necessary to fulfill the
obligations under our and our parent companies notes and our credit facilities
following a change of control. Under the indentures governing our parent
companies notes, upon the occurrence of specified change of control events,
including certain specified dispositions of stock by Mr. Allen, each such
issuer is required to offer to repurchase all of its outstanding notes.
However, our parent companies may not have sufficient funds at the time of the
change of control event to make the required repurchase of the applicable
notes, and all of the note issuers are limited in their ability to make
distributions to their respective parent companies to fund any required
repurchase. In addition, a change of control under our credit facilities and
indentures governing our notes would require the repayment of borrowings under
those credit facilities and indentures. These credit facilities and the notes
would have to be repaid by CCO Holdings subsidiaries before their assets could
be available to CCO Holdings or its parent companies to repurchase CCO
Holdings and its parents notes. Any failure to make or complete a change of
control offer would place the applicable issuer or borrower in default under
its notes or credit facilities, which could in turn result in a default under
its and its parent companies indentures and other instruments of indebtedness.
See  Certain Trends and Uncertainties  Parent Company Liquidity
Concerns. Variable Interest Rates.At September 30, 2004, excluding the
effects of hedging, approximately 71% of our debt bears interest at variable
rates that are linked to short-term interest rates. In addition, a significant
portion of our existing debt, assumed debt or debt we might arrange in the
future will bear interest at variable rates. If interest rates rise, our costs
relative to those obligations will also rise. As of September 30, 2004 and
December 31, 2003, the weighted average interest rate on the credit facility
debt was approximately 6.6% and 5.4%, respectively, while the weighted average
interest rate on the high-yield notes was approximately 8.5% and 9.4%,
respectively, resulting in a blended weighted average interest rate of 7.2% and
5.6%, respectively. Approximately 64% of our debt was effectively fixed
including the effects of our interest rate hedge agreements as of September 30,
2004 compared to approximately 52% at December 31, 2003. Streamlining of
Operations.In the past, we experienced rapid growth from acquisitions of a
number of smaller cable operators and the rapid rebuild and rollout of advanced
services. Our future success will depend in part on our ability to standardize
and streamline our operations. The failure to implement a consistent corporate
culture and management, operating or financial systems or procedures necessary
to standardize and streamline our operations and effectively operate our
enterprise could have a material adverse effect on our business, results of
operations and financial condition. In addition, Charters ability to properly
manage our operations will be impacted by Charters ability to attract, retain
and incentivize experienced, qualified, professional management. Services.We expect that a substantial portion of our near-term growth will be
achieved through revenues from high-speed data services, digital video, bundled
service packages, and to a lesser extent, various commercial services that take
advantage of cables broadband capacity. The technology involved in our
product and service offerings generally requires that we have permission to use
intellectual property and that such property not infringe on rights claimed by
others. We may not be able to offer these advanced services successfully to
our customers or provide adequate customer service and these advanced services
may not generate adequate revenues. Also, if the vendors we use for these
services are not financially viable over time, we may experience disruption of
service and incur costs to find alternative vendors. In addition, if it is
determined that the product or service being utilized infringes on the rights
of others, we may be sued or be precluded from using the technology. Increasing Programming Costs.Programming has been, and is expected to continue
to be, our largest operating expense item. In recent years, the cable industry
has experienced a rapid escalation in the cost of programming, 39




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particularly sports programming. This escalation may continue, and we may not
be able to pass programming cost increases on to our customers. The inability
to fully pass these programming cost increases on to our customers would have
an adverse impact on our cash flow and operating margins. As measured by
programming costs, and excluding premium services (substantially all of which
were renegotiated and renewed in 2003), as of September 30, 2004, approximately
33% of our current programming contracts have expired or are scheduled to
expire by the end of 2004, and approximately another 12% are scheduled to
expire by the end of 2005. Notes Price Volatility.The market price of our publicly traded notes has been
and is likely to continue to be highly volatile. We expect that the price of
our securities may fluctuate in response to various factors, including the
factors described throughout this section and various other factors, which may
be beyond our control. These factors beyond our control could include:
financial forecasts by securities analysts; new conditions or trends in the
cable or telecommunications industry; general economic and market conditions
and specifically, conditions related to the cable or telecommunications
industry; any further downgrade of our debt ratings; announcement of the
development of improved or competitive technologies; the use of new products or
promotions by us or our competitors; changes in accounting rules; and new
regulatory legislation adopted in the United States. In addition, the securities market in general, and the market for cable
television securities in particular, have experienced significant price
fluctuations. Volatility in the market price for companies may often be
unrelated or disproportionate to the operating performance of those companies.
These broad market and industry factors may seriously harm the market price of
our notes, regardless of our operating performance. In the past, securities
litigation has often commenced following periods of volatility in the market
price of a companys securities, and several purported class action lawsuits
were filed against Charter in 2001 and 2002, following a decline in its stock
price. Economic Slowdown; Global Conflict.It is difficult to assess the impact
that the general economic slowdown and global conflict will have on future
operations. However, the economic slowdown has resulted and could continue to
result in reduced spending by customers and advertisers, which could reduce our
revenues, and also could affect our ability to collect accounts receivable and
maintain customers. Reductions in operating revenues would likely negatively
affect our ability to make expected capital expenditures and could also result
in our inability to meet our obligations under our financing agreements. These
developments could also have a negative impact on our financing and variable
interest rate agreements through disruptions in the market or negative market
conditions. Regulation and Legislation.Cable system operations are extensively
regulated at the federal, state, and local level, including rate regulation of
basic service and equipment and municipal approval of franchise agreements and
their terms, such as franchise requirements to upgrade cable plant and meet
specified customer service standards. Additional legislation and regulation is
always possible. For example, there has been considerable legislative interest
recently in requiring cable operators to offer historically bundled programming
services on an á la carte basis. Cable operators also face significant regulation of their channel carriage.
They currently can be required to devote substantial capacity to the carriage
of programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. This carriage burden
could increase in the future, particularly if the FCC were to require cable
systems to carry both the analog and digital versions of local broadcast
signals or multiple channels added by digital broadcasters. The FCC is
currently conducting a proceeding in which it is considering these channel
usage possibilities. In addition, the carriage of new high definition
broadcast and satellite programming services over the next few years may
consume significant amounts of system capacity without contributing to
proportionate increases in system revenue. There is also uncertainty whether
local franchising authorities, state regulators, the FCC, or the U.S. Congress
will impose obligations on cable operators to provide unaffiliated Internet
service providers with regulated access to cable plant. If they were to do so,
and the obligations were found to be lawful, it could complicate our operations
in general, and our Internet operations in particular, from a technical and
marketing standpoint. These open access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. The United States Court of Appeals for the Ninth
Circuit recently vacated in part an FCC 40




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ruling defining cable modem service as an information service and remanded
for further proceedings. The Ninth Circuit held that cable modem service is
not cable service but is part telecommunications service and part
information service. The decision has been appealed to the United States
Supreme Court. However, if it is not reversed, the decision may lead to our
having to contribute to the federal governments universal service fund, to
comply with open access requirements, and to subject our high-speed data
operations generally to other common carrier regulations. As we offer other
advanced services over our cable system, we are likely to face additional calls
for regulation of our capacity and operation. These regulations, if adopted,
could adversely affect our operations. CONTINGENCIES Securities Class Actions and Derivative Suits Against Charter.Fourteen
putative federal class action lawsuits (the Federal Class Actions) were filed
against Charter, our manager and indirect parent, and certain of its former and
present officers and directors in various jurisdictions allegedly on behalf of
all purchasers of Charters securities during the period from either November 8
or November 9, 1999 through July 17 or July 18, 2002. Unspecified damages were
sought by the plaintiffs. In general, the lawsuits alleged that Charter
utilized misleading accounting practices and failed to disclose these
accounting practices and/or issued false and misleading financial statements
and press releases concerning Charters operations and prospects. The Federal
Class Actions were specifically and individually identified in public filings
made by Charter prior to the date of this quarterly report. In October 2002, Charter filed a motion with the Judicial Panel on
M
ultidistrict Litigation (the Panel) to transfer the Federal Class Actions
to the Eastern District of Missouri. On March 12, 2003, the Panel transferred
the six Federal Class Actions not filed in the Eastern District of Missouri to
that district for coordinated or consolidated pretrial proceedings with the
eight Federal Class Actions already pending there. The Panels transfer order
assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a
prior court order, StoneRidge Investment Partners LLC became lead plaintiff
upon entry of the Panels transfer order. StoneRidge subsequently filed a
Consolidated Amended Complaint. The Court subsequently consolidated the
Federal Class Actions into a single action (the Consolidated Federal Class
Action for pretrial purposes. On June 19, 2003, following a status and
scheduling conference with the parties, the Court issued a Case Management
Order setting forth a schedule for the pretrial phase of the Consolidated
Federal Class Action. Motions to dismiss the Consolidated Amended Complaint
were filed. On February 10, 2004, in response to a joint motion made by
StoneRidge and Defendants Charter, Vogel and Allen, the Court entered an order
providing, among other things, that: (1) the parties who filed such motion,
engage in a mediation within ninety (90) days; and (2) all proceedings in the
Consolidated Federal Class Actions were stayed until May 10, 2004. On May 11,
2004, the Court extended the stay in the Consolidated Federal Class Action for
an additional sixty (60) days. On July 12, 2004, the parties submitted a joint
motion to again extend the stay, this time until September 10, 2004. The Court
granted that extension on July 20, 2004. On August 5, 2004, Stoneridge,
Charter and the individual defendants who were the subject of the suit entered
into a Memorandum of Understanding (described more fully below) setting forth
agreements in principle to settle the Consolidated Federal Class Action. On September 12, 2002, a
shareholders derivative suit (the State Derivative
Action was filed in the Circuit Court of the City of St. Louis, State of
Missouri (the Missouri State Court), against Charter and its then current
directors, as well as its former auditors. A substantively identical
derivative action was later filed and consolidated into the State Derivative
Action. The plaintiffs allege that the individual defendants breached their
fiduciary duties by failing to establish and maintain adequate internal
controls and procedures. Unspecified damages, allegedly on Charters behalf,
are sought by the plaintiffs. On March 12, 2004, an action substantively identical to the State Derivative
Action was filed in the Missouri State Court, against Charter and certain of
its current and former directors, as well as its former auditors. The
plaintiffs in that case alleged that the individual defendants breached their
fiduciary duties by failing to establish and maintain adequate internal
controls and procedures. Unspecified damages, allegedly on Charters behalf,
were sought by plaintiffs. On July 14, 2004, the Court consolidated this case
with the State Derivative Action. Separately, on
February 12, 2003, a shareholders derivative suit (the Federal
Derivative Action, was filed against Charter and its then current directors
in the United States District Court for the Eastern District of Missouri. The
plaintiff in that suit alleged that the individual defendants breached their
fiduciary duties and grossly mismanaged 41




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Charter by failing to establish and maintain adequate internal controls and
procedures. Unspecified damages, allegedly on Charters behalf, were sought by
the plaintiffs. On August 5, 2004, Charter entered into Memoranda of Understanding setting
forth agreements in principle regarding settlement of the Consolidated Federal
Class Action, the State Derivative Action(s) and the Federal Derivative Action
(the Actions). In exchange for a release of all claims by plaintiffs against
Charter and its former and present officers and directors named in the Actions,
Charter will pay to the plaintiffs a combination of cash and equity
collectively valued at $144 million, which will include the fees and expenses
of plaintiffs counsel. Of this amount, $64 million will be paid in cash (by
Charters insurance carriers) and the balance will be paid in shares of Charter
Class A common stock having an aggregate value of $40 million and ten-year
warrants to purchase shares of Charter Class A common stock having an aggregate
warrant value of $40 million. The warrants would have an exercise price equal
to 150% of the fair market value (as defined) of Charter Class A common stock
as of the date of the entry of the order of final judgment approving the
settlement. In addition, Charter expects to issue additional shares of its
Class A common stock to its insurance carrier having an aggregate value of $5
million. As part of the settlements, Charter will also commit to a variety of
corporate governance changes, internal practices and public disclosures, some
of which have already been undertaken and none of which are inconsistent with
measures Charter is taking in connection with the recent conclusion of the SEC
investigation described below. The settlement of each of the lawsuits is
conditioned upon, among other things, the parties approval and execution of
definitive settlement agreements with respect to the matters described above,
judicial approval of the settlements by the Court following notice to the
class, and dismissal of the consolidated derivative actions now pending in
Missouri State Court, which are related to the Federal Derivative Action. In addition to the Federal Class Actions, the State Derivative Action, the new
Missouri State Court derivative action and the Federal Derivative Action, six
putative class action lawsuits were filed against Charter and certain of its
then current directors and officers in the Court of Chancery of the State of
Delaware (the Delaware Class Actions). The lawsuits were filed after the
filing of a Schedule 13D amendment by Mr. Allen indicating that he was
exploring a number of possible alternatives with respect to restructuring or
expanding his ownership interest in Charter. Charter believes that the
plaintiffs speculated that Mr. Allen might have been contemplating an unfair
bid for shares of Charter or some other sort of going private transaction on
unfair terms and generally alleged that the defendants breached their fiduciary
duties by participating in or acquiescing to such a transaction. The lawsuits,
which are substantively identical, were brought on behalf of Charters
securities holders as of July 29, 2002, and sought unspecified damages and
possible injunctive relief. However, Charter has informed us that no such
transaction by Mr. Allen has been presented. On April 30, 2004, orders of
dismissal without prejudice were entered in each of the Delaware Class Actions. Government Investigations. In August 2002, Charter
became aware of a grand jury investigation being conducted by the
U.S. Attorneys Office for the Eastern District of Missouri into certain of its
accounting and reporting practices, focusing on how Charter reported customer
numbers, and its reporting of amounts received from digital set-top terminal
suppliers for advertising. The U.S. Attorneys Office has publicly stated that
Charter is not a target of the investigation. Charter has also been advised by
the U.S. Attorneys office that no member of its board of directors, including
its Chief Executive Officer, is a target of the investigation. On July 24,
2003, a federal grand jury charged four former officers of Charter with
conspiracy and mail and wire fraud, alleging improper accounting and reporting
practices focusing on revenue from digital set-top terminal suppliers and
inflated customer account numbers. On July 25, 2003, one of the former
officers who was indicted entered a guilty plea. Charter has advised us that
it is fully cooperating with the investigation. On November 4, 2002, Charter received an informal, non-public inquiry from the
staff of the SEC. The SEC issued a formal order of investigation dated January
23, 2003, and subsequently served document and testimony subpoenas on Charter
and a number of its former employees. The investigation and subpoenas
generally concerned Charters prior reports with respect to its determination
of the number of customers, and various of its accounting policies and
practices including its capitalization of certain expenses and dealings with
certain vendors, including programmers and digital set-top terminal suppliers.
On July 27, 2004, the SEC and Charter reached a final agreement to settle the
investigation. In the Settlement Agreement and Cease and Desist Order, Charter
agreed to entry of an administrative order prohibiting any future violations of
United States securities laws and requiring certain other remedial internal
practices and public disclosures. Charter neither admitted nor denied any
wrongdoing, and the SEC assessed no fine 42




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against Charter. Indemnification.Charter is generally required to indemnify each of the named
individual defendants in connection with the matters described above pursuant
to the terms of its bylaws and (where applicable) such individual defendants
employment agreements. In accordance with these documents, in connection with
the pending grand jury investigation, the now settled SEC investigation and the
above described lawsuits, some of Charters current and former directors and
current and former officers have been advanced certain costs and expenses
incurred in connection with their defense. Other Litigation.In October 2001, two customers, Nikki Nicholls and Geraldine
M. Barber, filed a class action suit against Charter Holdco in South Carolina
Court of Common Pleas (the South Carolina
Class Action), purportedly on
behalf of a class of Charter Holdcos customers, alleging that Charter Holdco
improperly charged them a wire maintenance fee without request or permission.
They also claimed that Charter Holdco improperly required them to rent analog
and/or digital set-top terminals even though their television sets
were cable
ready. A substantively identical case was filed in the Superior Court of
Athens  Clarke County, Georgia by Emma S. Tobar on March 26, 2002 (the
Georgia Class Action), alleging a nationwide class for these claims. Charter
Holdco removed the South Carolina Class Action to the United States District
Court for the District of South Carolina in November 2001, and moved to dismiss
the suit in December 2001. The federal judge remanded the case to the South
Carolina Court of Common Pleas in August 2002 without ruling on the motion to
dismiss. The plaintiffs subsequently moved for a default judgment, arguing
that upon return to state court, Charter Holdco should have, but did not file a
new motion to dismiss. The state court judge granted the plaintiffs motion
over Charter Holdcos objection in September 2002. Charter Holdco immediately
appealed that decision to the South Carolina Court of Appeals and the South
Carolina Supreme Court, but those courts ruled that until a final judgment was
entered against Charter Holdco, they lacked jurisdiction to hear the appeal. In January 2003, the Court of Common Pleas granted the plaintiffs motion for
class certification. In October and November 2003, Charter Holdco filed
motions (a) asking that court to set aside the default judgment, and (b)
seeking dismissal of plaintiffs suit for failure to state a claim. In January
2004, the Court of Common Pleas granted in part and denied in part Charter
Holdcos motion to dismiss for failure to state a claim. It also took under
advisement Charter Holdcos motion to set aside the default judgment. In April
2004, the parties to both the Georgia and South Carolina Class Actions
participated in a mediation. The mediator made a proposal to the parties to
settle the lawsuits. In May 2004, the parties accepted the mediators proposal
and reached a tentative settlement, subject to final documentation and court
approval. As a result of the tentative settlement, we recorded a special
charge of $9 million in our consolidated statement of operations in the first
quarter of 2004. On July 8, 2004, the Superior Court of Athens  Clarke
County, Georgia granted a motion to amend the Tobar complaint to add Nicholls,
Barber and April Jones as plaintiffs in the Georgia Class Action and to add any
potential class members in South Carolina. The court also granted preliminary
approval of the proposed settlement on that date. A hearing to consider final
approval of the settlement is scheduled to occur on November 10, 2004. On
August 2, 2004, the parties submitted a joint request to the South Carolina
Court of Common Pleas to stay the South Carolina Class Action pending final
approval of the settlement and on August 17, 2004, that court granted the
parties request. Outcome.In addition to the matters set forth above, Charter is also party to
other lawsuits and claims that arose in the ordinary course of conducting its
business. In the opinion of management, after taking into account recorded
liabilities, the outcome of these other lawsuits and claims are not expected to
have a material adverse effect on our consolidated financial condition, results
of operations or our liquidity. 
 Item 4. Controls and Procedures. As of the end of the period covered by this report, management, including our
Chief Executive Officer and Interim Co-Chief Financial Officers, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with respect to the information generated for use in this quarterly
report. The evaluation was based in part upon reports and affidavits provided
by a number of executives. Based upon, and as of the date of that evaluation,
our Chief Executive Officer and Interim Co-Chief Financial Officers concluded
that the disclosure controls and procedures were effective to provide
reasonable assurances that information required to be disclosed in 43




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the reports we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Commissions rules and forms. There was no change in our internal control over financial reporting during the
quarter ended September 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance of
achieving the desired control objectives and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based upon the above evaluation, our
management believes that its controls provide such reasonable assurances. 44




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PART II. OTHER INFORMATION. 
 Item 1. Legal Proceedings. In addition to those matters disclosed under the heading Contingencies of
Part I, Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations, we are involved from time to time in routine legal
matters and other claims incidental to our business. We believe that the
resolution of such routine matters and other incidental claims, taking into
account established reserves and insurance, will not have a material adverse
impact on our consolidated financial position or results of operations. 
 Item 6. Exhibits. The index to the exhibits begins on page 47 of this quarterly report. 45




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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 their behalf by the undersigned, thereunto
duly authorized. CCO HOLDINGS, LLC
RegistrantBy:
    
    CHARTER COMMUNICATIONS, INC., Sole MangerDated: November 12, 2004
    
    By:
    
    /s/ Derek ChangName:
    
    Derek ChangTitle:
    
    Executive Vice President
of Finance and Strategy and
Interim Co-Chief Financial Officer
(Co-Principal Financial Officer)By:
    
    /s/ Paul E. MartinName:
    
    Paul E. MartinTitle:
    
    Interim Co-Chief Financial Officer,
Senior Vice President and
Corporate Controller
(Co-Principal Financial Officer and
Principal Accounting Officer)CCO HOLDINGS CAPITAL CORP.
RegistrantDated: November 12, 2004
    
    By:
    
    /s/ Derek ChangName:
    
    Derek ChangTitle:
    
    Executive Vice President
of Finance and Strategy and
Interim Co-Chief Financial Officer
(Co-Principal Financial Officer)By:
    
    /s/ Paul E. MartinName:
    
    Paul E. MartinTitle:
    
    Interim Co-Chief Financial Officer,
Senior Vice President and
Corporate Controller
(Co-Principal Financial Officer and
Principal Accounting Officer)
 46




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EXHIBIT INDEX Exhibit Number
    
    Description of Document10.1
    
    Separation Agreement and Release for Margaret A.
Bellville dated as of September 16, 2004 (Incorporated
by reference to Exhibit 10.1 to Charter Communications,
Inc.s quarterly report on Form 10-Q filed on November
4, 2004).31.1
    
    Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange
Act of 1934.31.2
    
    Certificate of Interim Co-Chief Financial Officer
pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the
Securities Exchange Act of 1934.31.3
    
    Certificate of Interim Co-Chief Financial Officer
pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the
Securities Exchange Act of 1934.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Executive Officer).32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Interim Co-Chief Financial Officer).32.3
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Interim Co-Chief Financial Officer).
 47