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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
   FORM 10-Q
  (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004or[   ]
    
    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 [X] NO [  ] Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest 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 or 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) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format.




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CCO Holdings, LLC
CCO Holdings Capital Corp.
Quarterly Report on Form 10-Q for the Period ended June 30, 2004 Table of Contents PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements - CCO Holdings, LLC and SubsidiariesCondensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 6. Exhibits and Reports on Form 8-K
    
    
    42SIGNATURES
    
    
    43EXHIBIT INDEX
    
    
    44Certificate of Chief Executive OfficerCertificate of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  This quarterly report on Form 10-Q is for the three and six months ended June
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 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;
    
    our and our parent companies ability to pay or refinance debt as
it becomes due;
    
    the availability of funds to meet interest payment obligations
under our and our parent companies debt and to fund our operations and
necessary capital expenditures, either through cash flows from
operating activities, further borrowings or other sources;
    
    any adverse consequences arising out of our and our parent
companys restatement of our 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 comply with all covenants in our indentures and
credit facilities, any violation of which would result in a violation
of the applicable facility or indenture and could trigger a default of
other obligations under cross-default provisions;
    
    our ability to obtain programming at reasonable prices or to pass cost increases on to our customers;
    
    general business conditions, economic uncertainty or slowdown; and
    
    the effects of governmental regulation, including but not limited
to local franchise taxing authorities, on our business. All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
We are under no duty or obligation to update any of the forward-looking
statements after the date of this quarterly report. 3




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PART I. FINANCIAL INFORMATION. 
 ITEM 1. FINANCIAL STATEMENTS.
 CCO HOLDINGS, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (DOLLARS IN MILLIONS)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    88
    
    
    $
    85Accounts receivable, less allowance for doubtful accounts of
$20 and $17, respectively
    
    
    176
    
    
    
    178Receivables from related party
    
    
    
    
    
    
    60Prepaid expenses and other current assets
    
    
    20
    
    
    
    21Total current assets
    
    
    284
    
    
    
    344INVESTMENT IN CABLE PROPERTIES:Property, plant and equipment, net of accumulated
depreciation of $4,428 and $3,834, respectively
    
    
    6,348
    
    
    
    6,808Franchises, net of accumulated amortization
of $3,299 and $3,445, respectively
    
    
    13,195
    
    
    
    13,680Total investment in cable properties, net
    
    
    19,543
    
    
    
    20,488OTHER NONCURRENT ASSETS
    
    
    231
    
    
    
    162Total assets
    
    $
    20,058
    
    
    $
    20,994LIABILITIES AND MEMBERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    853
    
    
    $
    996Payables to related party
    
    
    14
    
    
    
    Total current liabilities
    
    
    867
    
    
    
    996LONG-TERM DEBT
    
    
    7,609
    
    
    
    7,956LOANS PAYABLE  RELATED PARTY
    
    
    39
    
    
    
    37DEFERRED MANAGEMENT FEES  RELATED PARTY
    
    
    14
    
    
    
    14OTHER LONG-TERM LIABILITIES
    
    
    569
    
    
    
    687MINORITY INTEREST
    
    
    727
    
    
    
    719MEMBERS EQUITY:Members equity
    
    
    10,261
    
    
    
    10,642Accumulated other comprehensive loss
    
    
    (28
    )
    
    
    (57
    )Total members equity
    
    
    10,233
    
    
    
    10,585Total liabilities and members equity
    
    $
    22,058
    
    
    $
    20,994
 4




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CCO HOLDINGS, LLC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (DOLLARS IN MILLIONS)
Unaudited
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003REVENUES
    
    $
    1,239
    
    
    $
    1,217
    
    
    $
    2,453
    
    
    $
    2,395COSTS AND EXPENSES:Operating (excluding depreciation and amortization)
    
    
    515
    
    
    
    488
    
    
    
    1,027
    
    
    
    973Selling, general and administrative
    
    
    244
    
    
    
    232
    
    
    
    483
    
    
    
    467Depreciation and amortization
    
    
    364
    
    
    
    373
    
    
    
    734
    
    
    
    743(Gain) loss on sale of assets, net
    
    
    2
    
    
    
    4
    
    
    
    (104
    )
    
    
    13Option compensation expense, net
    
    
    12
    
    
    
    
    
    
    
    26
    
    
    
    Special charges, net
    
    
    87
    
    
    
    8
    
    
    
    97
    
    
    
    101,224
    
    
    
    1,105
    
    
    
    2,263
    
    
    
    2,206Income from operations
    
    
    15
    
    
    
    112
    
    
    
    190
    
    
    
    189OTHER INCOME AND EXPENSE:Interest expense, net
    
    
    (137
    )
    
    
    (124
    )
    
    
    (258
    )
    
    
    (254
    )Gain (loss) on derivative instruments and hedging activities, net
    
    
    63
    
    
    
    (10
    )
    
    
    56
    
    
    
    4Loss on extinguishment of debt
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    Other, net
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )(94
    )
    
    
    (135
    )
    
    
    (223
    )
    
    
    (251
    )Loss before minority interest and income taxes
    
    
    (79
    )
    
    
    (23
    )
    
    
    (33
    )
    
    
    (62
    )MINORITY INTEREST
    
    
    (6
    )
    
    
    (4
    )
    
    
    (9
    )
    
    
    (7
    )Loss before income taxes
    
    
    (85
    )
    
    
    (27
    )
    
    
    (42
    )
    
    
    (69
    )INCOME TAX EXPENSE
    
    
    (3
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    (2
    )Net loss
    
    $
    (88
    )
    
    $
    (28
    )
    
    $
    (46
    )
    
    $
    (71
    )
 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
 Six Months EndedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (46
    )
    
    $
    (71
    )Adjustments to reconcile net loss to net cash flows from operating activities:Minority interest
    
    
    9
    
    
    
    7Depreciation and amortization
    
    
    734
    
    
    
    743Option compensation expense, net
    
    
    23
    
    
    
    Special charges, net
    
    
    85
    
    
    
    Noncash interest expense
    
    
    6
    
    
    
    19Gain on derivative instruments and hedging activities, net
    
    
    (56
    )
    
    
    (4
    )(Gain) loss on sale of assets, net
    
    
    (104
    )
    
    
    13Loss on extinguishment of debt
    
    
    18
    
    
    
    Deferred income taxes
    
    
    4
    
    
    
    2Other, net
    
    
    (5
    )
    
    
    (1
    )Changes in operating assets and liabilities, net of effects from dispositions:Accounts receivable
    
    
    (1
    )
    
    
    41Prepaid expenses and other assets
    
    
    (4
    )
    
    
    15Accounts payable, accrued expenses and other
    
    
    (133
    )
    
    
    (153
    )Receivables from and payables to related party, including deferred management fees
    
    
    (52
    )
    
    
    (27
    )Net cash flows from operating activities
    
    
    478
    
    
    
    584CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    

    
    (380
    )
    
    
    (254
    )Change in accrued expenses related to capital expenditures
    
    
    (38
    )
    
    
    (103
    )Proceeds from sale of assets
    
    
    727
    
    
    
    Other, net
    
    
    (2
    )
    
    
    (1
    )Net cash flows from investing activities
    
    
    307
    
    
    
    (358
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings of long-term debt
    
    
    2,812
    
    
    
    347Repayments of long-term debt
    
    
    (3,159
    )
    
    
    (341
    )Repayments to related parties
    
    
    
    
    
    
    (96
    )Payments for debt issuance costs
    
    
    (94
    )
    
    
    (14
    )Capital contributions
    
    
    
    
    
    
    10Distributions
    
    
    (341
    )
    
    
    (245
    )Net cash flows from financing activities
    
    
    (782
    )
    
    
    (339
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    3
    
    
    
    (113
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    85
    
    
    
    310CASH AND CASH EQUIVALENTS, end of period
    
    $
    88
    
    
    $
    197CASH PAID FOR INTEREST
    
    $
    294
    
    
    $
    235
 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, except where indicated)
 1. Organization and Basis of Presentation CCO Holdings, LLC (CCO Holdings) is
a holding company whose primary assets at June 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 six months ended June 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 included in the Amendment No. 1 to
the Companys 2003 financial statements included in 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 $88 million
and $46 million for the three and six months ended June 30, 2004, respectively,
and $28 million and $71 million for the three and six months ended June 30,
2003, respectively. The 7




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) Companys net cash flows from operating activities were $478 million and $584
million for the six months ended June 30, 2004 and 2003, respectively. The
Company has historically required significant cash to fund capital expenditures
and debt service costs. Historically, the Company has funded these
requirements through cash flows from operating activities, borrowings under its
credit facilities, equity contributions from its parent companies, borrowings
from parent companies, issuances of debt securities and cash on hand. The mix
of funding sources changes from period to period, but for the six months ended
June 30, 2004, approximately 63% of the Companys funding requirements were
from cash flows from operating activities and 37% from borrowings of long-term
debt. This gives effect to the use of proceeds from the sale of systems,
described below, to repay long-term debt. For the six months ended June 30,
2004, the Company had net cash flows used in financing activities of $785
million, reflecting a net repayment of $347 million of debt. Additionally, the
Company increased cash on hand by $3 million to $88 million. The Companys
long-term financing as of June 30, 2004 consists of $5.4 billion of credit
facility debt which was refinanced in April 2004 and $2.2 billion of high-yield
notes. For the remainder of 2004, $15 million of the Companys debt matures,
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
borrowing availability under the credit facilities totaled $977 million as of
June 30, 2004, none of which was restricted due to covenants. 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. However, these 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 actual operating
performance results in non-compliance with these covenants, or if other events
of non-compliance under these credit facilities or indentures governing
subsidiary debt occur, funding under the credit facilities may not be available
and defaults on some or potentially all debt obligations could occur.
Additionally, no assurances can be given that the Company will not experience
liquidity problems because of adverse market conditions, increased competition
or other unfavorable events. CCO Holdings parent companies have a significant amount of debt. The
indentures governing the CCH II notes, CCO Holdings notes, and Charter
Operating notes restrict those subsidiaries from making distributions to their
parent companies (including, as applicable, Charter, Charter Holdings and CCH
II) for payment of principal on parent company notes, in each case unless there
is no default under those indentures and a specified leverage ratio test can be
met. Each such subsidiary currently meets the applicable leverage ratio test,
and therefore is not currently prohibited from making any such distributions to
its direct parent. The indentures governing the Charter Holdings notes permit
Charter Holdings to make distributions to Charter Holdco for payment of
interest or principal on Charters convertible senior notes, only if, after
giving effect to the distribution, Charter Holdings can incur additional debt
under the leverage ratio test of 8.75 to 1.0, there is no default under Charter
Holdings indentures and other specified tests are met. However, Charter
Holdings continued not to meet the leverage ratio test at June 30, 2004. As a
result, distributions from Charter Holdings to Charter Holdco or Charter have
been restricted and will continue to be restricted until that test is met. Any
financial or liquidity problems of CCO Holdings parent companies would likely
cause serious disruption to the Companys business and have a material adverse
effect on its business and results of operations. 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 $10 million is currently held in an indemnity 8




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 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
represented geographic clusters of the Companys cable systems by which the
Company manages its operating assets, which management believes represents the
highest and best use of those assets. Fair value is determined based on
estimated discounted future cash flows using assumptions that are consistent
with internal forecasts. As of June 30, 2004 and December 31, 2003, indefinite-lived and finite-lived
intangible assets are presented in the following table: June 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
    
    $
    16,438
    
    
    $
    3,287
    
    
    $
    13,151
    
    
    $
    17,018
    
    
    $
    3,412
    
    
    $
    13,606Goodwill
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    52
    
    
    
    
    
    
    
    52$
    16,490
    
    
    $
    3,287
    
    
    $
    13,203
    
    
    $
    17,070
    
    
    $
    3,412
    
    
    $
    13,658Finite-lived
intangible assets:Franchises with
finite lives
    
    $
    56
    
    
    $
    12
    
    
    $
    44
    
    
    $
    107
    
    
    $
    33
    
    
    $
    74
 For the three and six months ended June 30, 2004, the net carrying amount of
indefinite-lived intangible assets was reduced by $1 million and $484 million,
respectively, 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
ability in 2003 to renew these franchise assets. Franchise amortization
expense for the three and six months ended June 30, 2004 was $1 million and $2
million, respectively, and franchise amortization expense for the three and six
months ended June 30, 2003 was $2 million and $4 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. Actual amortization expense
to be reported in future periods could differ from these estimates as a result
of new intangible asset acquisitions or divestitures, changes in useful lives
and other relevant factors. 9




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 4. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following as of June 30,
2004 and December 31, 2003: June 30,
    
    December 31,2004
    
    2003Accounts payable-trade
    
    $
    78
    
    
    $
    144Accrued capital expenditures
    
    
    55
    
    
    
    93Accrued expenses:Interest
    
    
    100
    
    
    
    97Programming costs
    
    
    298
    
    
    
    319Franchise-related fees
    
    
    51
    
    
    
    70State sales tax
    
    
    55
    
    
    
    61Other
    
    
    216
    
    
    
    212$
    853
    
    
    $
    996
 5. Long-Term Debt Long-term debt consists of the following as of June 30, 2004 and December 31,
2003: June 30, 2004
    
    December 31, 2003Accreted
    
    Face
    
    AccretedFace Value
    
    Value
    
    Value
    
    ValueLong-Term DebtCCO Holdings:83⁄4% 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
    
    
    5,380
    
    
    
    5,380
    
    
    
    4,459
    
    
    
    4,459CC VI Operating
    
    
    
    
    
    
    
    
    
    
    868
    
    
    
    868Falcon Cable
    
    
    
    
    
    
    
    
    
    
    856
    
    
    
    856CC VIII Operating
    
    
    
    
    
    
    
    
    
    
    1,044
    
    
    
    1,044$
    7,607
    
    
    $
    7,609
    
    
    $
    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
credit facilities, together with proceeds from the sale of the Charter
Operating senior second lien notes to refinance the credit facilities of its
subsidiaries, CC VI Operating Company, LLC (CC VI Operating), Falcon Cable
Communications, LLC (Falcon Cable), and CC VIII Operating, LLC (CC VIII
Operating), all in 10




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) one concurrent transaction. The effect of the transaction was to substitute
Charter Operating 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
the three months ended June 30, 2004 and 2003 was $57 million and $26 million,
respectively, and $17 million and $62 million for the six months ended June 30,
2004 and 2003, respectively. 7. Accounting for Derivative Instruments and Hedging Activities The Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs.
The Companys policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, the Company has
agreed to exchange, at specified intervals through 2007, the difference between
fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. Interest rate collar agreements are used to limit
the Companys exposure to and benefits from interest rate fluctuations on
variable rate debt to within a certain range of rates. The Company does not hold or issue derivative instruments for trading purposes.
The Company does, however, have certain interest rate derivative instruments
that have been designated as cash flow hedging instruments. Such instruments
are those that effectively convert variable interest payments on certain debt
instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows
derivative gains and losses to offset related results on hedged items in the
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 June 30, 2004 and 2003, net gain (loss)
on derivative instruments and hedging activities includes gains of $3 million
and losses of $1 million, respectively, and for the six months ended June 30,
2004 and 2003, net gain (loss) on derivative instruments and hedging activities
includes gains of $2 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
six months ended June 30, 2004, a gain of $27 million and $29 million,
respectively, and for the three and six months ended June 30, 2003, a gain of
$2 million and $9 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 June 30, 2004 and 2003, net gain (loss) on derivative instruments
and hedging activities includes gains of $60 million and losses of $9 million,
respectively, and for the six months ended June 30, 2004 and 2003 net gain
(loss) on derivative instruments 11




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) and hedging activities includes gains of $54 million and losses of $4 million,
respectively, for interest rate derivative instruments not designated as
hedges. As of June 30, 2004 and December 31, 2003, the Company had outstanding $2.8
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 six months ended June 30,
2004 and 2003: Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Video
    
    $
    846
    
    
    $
    875
    
    
    $
    1,695
    
    
    $
    1,741High-speed data
    
    
    181
    
    
    
    136
    
    
    
    349
    
    
    
    258Advertising sales
    
    
    73
    
    
    
    67
    
    
    
    132
    
    
    
    124Commercial
    
    
    58
    
    
    
    50
    
    
    
    114
    
    
    
    97Other
    
    
    81
    
    
    
    89
    
    
    
    163
    
    
    
    175$
    1,239
    
    
    $
    1,217
    
    
    $
    2,453
    
    
    $
    2,395
 9. Operating Expenses Operating expenses consist of the following for the three and six months ended
June 30, 2004 and 2003: Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Programming
    
    $
    329
    
    
    $
    313
    
    
    $
    663
    
    
    $
    627Advertising sales
    
    
    25
    
    
    
    23
    
    
    
    48
    
    
    
    44Service
    
    
    161
    
    
    
    152
    
    
    
    316
    
    
    
    302$
    515
    
    
    $
    488
    
    
    $
    1,027
    
    
    $
    973
 12




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##### Table of Contents



CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 10. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of the following for the
three and six months ended June 30, 2004 and 2003: Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003General and administrative
    
    $
    208
    
    
    $
    203
    
    
    $
    416
    
    
    $
    418Marketing
    
    
    36
    
    
    
    29
    
    
    
    67
    
    
    
    49$
    244
    
    
    $
    232
    
    
    $
    483
    
    
    $
    467
 Components of selling expense are included in general and administrative and
marketing expense. 11. Special Charges In the fourth quarter of 2002, the Company recorded a special charge of $31
million associated with the Companys workforce reduction program and the
consolidation of its operations from three divisions and ten regions into five
operating divisions, elimination of redundant practices and streamlining its
management structure. During the year ended December 31, 2003, additional
severance related costs of $26 million were incurred and recorded as a special
charge. During the three and six months ended June 30, 2004, an additional 50
and 150 employees, respectively, were identified for termination, and severance
costs of $2 million and $3 million, respectively, were recorded in special
charges. Payments are made over a period of up to two years with approximately
$3 million and $11 million paid during the three and six months ended June 30,
2004, respectively, and $43 million paid during the year ended December 31,
2003. As of June 30, 2004 and December 31, 2003, a liability of approximately
$6 million and $14 million, respectively, is recorded on the accompanying
condensed consolidated balance sheets related to the reorganization activities
discussed above. For the six months ended June 30, 2004, special charges also
includes approximately $85 million, which represents the allocation to the
Company of expense for 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 the terms set forth in memoranda of understanding regarding
settlement of the consolidated Federal Class Action and Federal Derivative
Action and approximately $9 million of litigation costs related to the
tentative settlement of the South Carolina national class action suit, all of
which settlements are subject to final documentation and court approval (see
note 13). During the three and six months ended June 30, 2003, the Company recorded
severance costs of $8 million and $15 million, respectively, in special
charges. For the six months ended June 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 Pipeline service in 2001. 12. Income Taxes CCO Holdings is a single member limited liability company not subject to income
tax. CCO Holdings holds all operations through indirect subsidiaries. The
majority of these indirect subsidiaries are limited liability companies that
are not subject to income tax. However, certain of CCO Holdings indirect
subsidiaries are corporations that are subject to income tax. As of June 30, 2004 and December 31, 2003, the Company had net deferred income
tax liabilities of approximately $267 million. The net deferred income tax
liabilities relate to certain of CCO Holdings indirect subsidiaries, which 13




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) file separate income tax returns. During the three and six months ended June
30, 2004, the Company recorded $3 million and $4 million of income tax expense,
respectively, and during the three and six months ended June 30, 2003, the
Company recorded $1 million and $2 million of income tax expense, respectively.
The income tax expense is recognized through increases in current state and
federal income tax expense as well as increases to the deferred tax liabilities
of certain of CCO Holdings 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 Fourteen putative federal class action lawsuits (the ''Federal Class Actions)
have been filed against Charter and certain of its former and present officers
and directors in various jurisdictions allegedly on behalf of all purchasers of
Charters securities during the period from either November 8 or November 9,
1999 through July 17 or July 18, 2002. Unspecified damages are sought by the
plaintiffs. In general, the lawsuits allege that Charter utilized misleading
accounting practices and failed to disclose these accounting practices and/or
issued false and misleading financial statements and press releases concerning
Charters operations and prospects. The Federal Class Actions were
specifically and individually identified in public filings made by Charter
prior to the date of this quarterly report. In October 2002, Charter filed a motion with the Judicial Panel on
Multidistrict Litigation (the ''Panel) to transfer the Federal Class Actions
to the Eastern District of Missouri. On March 12, 2003, the Panel transferred
the six Federal Class Actions not filed in the Eastern District of Missouri to
that district for coordinated or consolidated pretrial proceedings with the
eight Federal Class Actions already pending there. The Panels transfer order
assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a
prior court order, StoneRidge Investment Partners LLC became lead plaintiff
upon entry of the Panels transfer order. StoneRidge subsequently filed a
Consolidated Amended Complaint. The Court subsequently consolidated the
Federal Class Actions into a single consolidated action (the ''Consolidated
Federal Class Action) for pretrial purposes. On June 19, 2003, following a
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 September 12, 2002, a shareholders derivative suit (the ''State Derivative
Action) was filed in the Circuit Court of the City of St. Louis, State of
Missouri (the Missouri State Court) against Charter and its then current
directors, as well as its former auditors. A substantively identical
derivative action was later filed and consolidated into the State Derivative
Action. The plaintiffs allege that the individual defendants breached their
fiduciary duties by failing to establish and maintain adequate internal
controls and procedures. Unspecified damages, allegedly on Charters behalf,
are sought by the plaintiffs. On March 12, 2004, an action substantively identical to the State Derivative
Action was filed in the Missouri State Court, against Charter and certain of
its current and former directors, as well as its former auditors. The
plaintiffs allege that the individual defendants breached their fiduciary
duties by failing to establish and maintain adequate internal controls and
procedures. Unspecified damages, allegedly on Charters behalf, are sought by
plaintiffs. On July 14, 2004, the Court consolidated this case with the State
Derivative Action. 14




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) Separately, on February 12, 2003, a shareholders derivative suit (the Federal
Derivative Action), was filed against Charter and its then current directors
in the United States District Court for the Eastern District of Missouri. The
plaintiff alleges that the individual defendants breached their fiduciary
duties and grossly mismanaged Charter by failing to establish and maintain
adequate internal controls and procedures. Unspecified damages, allegedly on
Charters behalf, are sought by the plaintiffs. On August 5, 2004, Charter entered into Memoranda of Understanding setting
forth agreements in principle regarding settlement of the consolidated Federal
Class Action 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 a result, the Company
recorded an $85 million special charge on its consolidated statement of
operations for the three and six months ended June 30, 2004 related to the
allocation of expense for the aggregate value of Charter Class A common stock
and warrants. 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 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 the Company 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. 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. 15




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##### Table of Contents



CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 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 its current and former directors and Charters
current and former officers have been advanced certain costs and expenses
incurred in connection with their defense. Charter has liability insurance coverage that it believes is available for the
matters described above, where applicable, subject to the terms, conditions and
limitations of the respective policies. There is no assurance that current
coverage will be sufficient for all claims described above or any future claims
that may arise. In October 2001, two customers, Nikki Nicholls and Geraldine M. Barber, filed a
class action suit against Charter Holdco in South Carolina Court of Common
Pleas (''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 have ruled that until a final judgment is entered
against Charter Holdco, they lack jurisdiction to hear the appeal. In January 2003, the Court of Common Pleas granted the plaintiffs motion for
class certification. In October and November 2003, Charter Holdco filed
motions (a) asking that court to set aside the default judgment, and (b)
seeking dismissal of plaintiffs suit for failure to state a claim. In January
2004, the Court of Common Pleas granted in part and denied in part Charter
Holdcos motion to dismiss for failure to state a claim. It also took under
advisement Charter Holdcos motion to set aside the default judgment. In April
2004, the parties 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, the Company recorded a
special charge of $9 million in its consolidated statement of operations in the
first quarter of 2004 (see note 12). 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 16




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 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. Charter is awaiting a ruling on that request. Charter is unable to predict the outcome of the lawsuits and the government
investigation described above. An unfavorable outcome in any of these lawsuits
or the government investigation could have a material adverse effect on the
Companys financial condition, results of operations or its liquidity. 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 the Company. SFAS No. 123 requires pro forma disclosure of the impact on earnings as if the
compensation expense for these plans had been determined using the fair value
method. The following table presents the Companys net loss as reported and
the pro forma amounts that would have been reported using the fair value method
under SFAS No. 123 for the periods presented: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (88
    )
    
    $
    (28
    )
    
    $
    (46
    )
    
    $
    (71
    )Add back stock-based compensation expense related
to stock options included in reported net loss
    
    
    12
    
    
    
    
    
    
    
    26
    
    
    
    Less employee stock-based compensation expense
determined under fair value based method for all
employee stock option awards
    
    
    (10
    )
    
    
    (5
    )
    
    
    (31
    )
    
    
    (7
    )Effects of unvested options in stock option exchange
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    Pro forma
    
    $
    (86
    )
    
    $
    (33
    )
    
    $
    (3
    )
    
    $
    (78
    )
 In January 2004, Charter began an option exchange program in which the
employees of the Company were offered the right to exchange all stock options
(vested and unvested) under the 1999 Charter Communications Option Plan and
2001 Stock Incentive Plan that had an exercise price over $10 per share for
shares of restricted Charter Class A common stock or, in some instances, cash.
Based on a sliding exchange ratio, which varied depending on the 17




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 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 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 18




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) share of CC VIIIs profits or losses (as computed for capital account purposes)
after June 6, 2003). The limited liability company agreement of CC VIII does
not provide for a mandatory redemption of the CC VIII interest. An issue has arisen as to whether the documentation for the Bresnan transaction
was correct and complete with regard to the ultimate ownership of the CC VIII
interest following consummation of the Comcast put right. Specifically, under
the terms of the Bresnan transaction documents that were entered into in June
1999, the Comcast sellers originally would have received, after adjustments,
24,273,943 Charter Holdco membership units, but due to an FCC regulatory issue
raised by the Comcast sellers shortly before closing, the Bresnan transaction
was modified to provide that the Comcast sellers instead would receive the
preferred equity interests in CC VIII represented by the CC VIII interest. As
part of the last-minute changes to the Bresnan transaction documents, a draft
amended version of the Charter Holdco limited liability company agreement was
prepared, and contract provisions were drafted for that agreement that would
have required an automatic exchange of the CC VIII interest for 24,273,943
Charter Holdco membership units if the Comcast sellers exercised the Comcast
put right and sold the CC VIII interest to Mr. Allen or his affiliates.
However, the provisions that would have required this automatic exchange did
not appear in the final version of the Charter Holdco limited liability company
agreement that was delivered and executed at the closing of the Bresnan
transaction. The law firm that prepared the documents for the Bresnan
transaction brought this matter to the attention of Charter and representatives
of Mr. Allen in 2002. Thereafter, the board of directors of Charter formed a Special Committee
(currently comprised of Messrs. 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. 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 19




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) agreement provides, among other things, that TechTV must offer the Company
certain terms and conditions that are no less favorable in the affiliation
agreement than are given to any other distributor that serves the same number
of or fewer TechTV viewing customers. Additionally, pursuant to the
affiliation agreement, the Company was entitled to incentive payments for
channel launches through December 31, 2003. In March 2004, Charter Holdco entered into agreements with Vulcan Programming
and TechTV, which provide for (i) Charter Holdco and TechTV to amend the
affiliation agreement which, among other things, revises the description of the
TechTV network content, provides for Charter Holdco to waive certain claims
against TechTV relating to alleged breaches of the affiliation agreement and
provides for TechTV to make payment of outstanding launch receivables due to
Charter Holdco under the affiliation agreement, (ii) Vulcan Programming to pay
approximately $10 million and purchase over a 24-month period, at fair market
rates, $2 million of advertising time across various cable networks on the
Companys cable systems in consideration of the agreements, obligations,
releases and waivers under the agreements and in settlement of the
aforementioned claims and (iii) TechTV to be a provider of content relating to
technology and video gaming for the Companys interactive television platforms
through December 31, 2006 (exclusive for the first year). The Company
recognized approximately $4 million of the Vulcan Programming payment as an
offset to programming expense during the six months ended June 30, 2004 with
the remaining $6 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 the Company
deploys from a maximum of 15 headends through year-end 2004. The license
granted for each unit deployed under the agreement is valid for five years. In
addition, the Company will pay certain other fees including a per-headend
license fee and maintenance fees. Total license and maintenance fees during
the term of the agreement are expected to be approximately $3 million. The
agreement provides that the Company is entitled to receive contract terms,
considered on the whole, and license fees, considered apart from other contract
terms, no less favorable than those accorded to any other Digeo customer. In
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 significantly 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 the Company in certain circumstances. The Company believes that Vulcan Ventures, an entity controlled by Mr. Allen,
owns an approximate 60% equity interest in Digeo, Inc. Messrs. Allen and Vogel
are directors of Digeo. Mr. Savoy, who resigned from Charters board of
directors in April 2004, was a director and served on the compensation
committee of Digeo until September 2003. Mr. Vogel owns options to purchase
10,000 shares of Digeo common stock. 20




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CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated) 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
to carry programming content from Oxygen to the Companys customers. 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 six months ended June 30, 2004 and 2003, the Company paid Oxygen
approximately $7 million and $4 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 $0.7 million related to
these launch incentives as a reduction of programming expense for each of the
six months ended June 30, 2004 and 2003. 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 six
months ended June 30, 2004 and 2003, the Company recorded approximately $7
million and $4 million, respectively, as a reduction of programming expense.
The carrying value of the Companys investment in Oxygen was approximately $26
million and $19 million as of June 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 carriage
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 lieu 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 of
which is the fair market value per share of common stock on the conversion
date. Mr. William Savoy, a director of Charter, Charter Holdco, and Charter Holdings
until his resignation in April 2004, served on the board of directors of Oxygen
until September 2003. As of June 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. 21




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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 June 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). 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 June 30,
2004 and 2003: Approximate as ofJune 30,
    
    June 30,2004 (a)
    
    2003 (a)Cable Video Services:Analog Video:Residential (non-bulk) analog video customers (b)
    
    
    5,892,600
    
    
    
    6,234,500Multi-dwelling (bulk) and commercial unit customers (c)
    
    
    240,600
    
    
    
    252,400Analog video customers (b)(c)
    
    
    6,133,200
    
    
    
    6,486,900Digital Video:Digital video customers (d)
    
    
    2,650,200
    
    
    
    2,603,900Digital percentage of analog video customers (b)(c)(d)(e)
    
    
    43
    %
    
    
    40
    %Digital set-top terminals deployed
    
    
    3,751,900
    
    
    
    3,680,000Non-Video Cable Services:Residential high-speed data customers (f)
    
    
    1,711,400
    
    
    
    1,349,000Dial-up customers
    
    
    7,800
    
    
    
    11,700Telephony customers (g)
    
    
    31,200
    
    
    
    23,700
 Pro forma for the effect of the sale of systems to Atlantic Broadband Finance,
LLC, which closed on March 1 and April 30, 2004, and to WaveDivision Holdings,
LLC, which closed on October 1, 2003, as if all of these sales had occurred as
of January 1, 2003, analog video customers, digital video customers and
residential high-speed data customers would have been 6,228,000, 2,511,800 and
1,304,100, respectively, as of June 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
June 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 June 30, 2004 and 2003, customers include approximately
58,700 and 71,400 persons whose accounts were over 60 days past due in
payment, approximately 6,300 and 8,700 persons whose accounts were over
90 22




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##### Table of Contents



days past due in payment, and approximately 2,000 and 1,900 of which were
over 120 days past due in payment, respectively.(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 June 30, 2004 and 2003 are approximately 11,400 and 13,300
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 168,400 and 71,900 of these customers at June 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 because of our high level of debt, depreciation
expenses that we incur resulting from the capital investments we have made and
continue to make in our cable properties, and amortization and impairment of
our franchise intangibles. We expect that these expenses (other than
amortization and impairment of franchises) will remain significant, and we
therefore expect to continue to report net losses for the foreseeable future. For the six months ended June 30, 2004 and 2003, our income from operations was
$190 million and $189 million, respectively. Our operating margins remained
constant at 8% for the six months ended June 30, 2003 and 2004 primarily as a
result of a gain on the sale of certain cable systems to Atlantic Broadband
Finance, LLC recorded in the first quarter of 2004 offset by the increase in
option compensation expense and special charges that were recorded in the
second quarter of 2004. Since our inception, and currently, our ability to conduct operations has been
and continues to be dependent on our access to credit under our credit
facilities. The occurrence of an event of default under our credit facilities
could result in borrowings from these credit facilities being unavailable to us
and could, in the event of a payment default or acceleration, also trigger
events of default under our outstanding public notes and would have a material
adverse effect on us. Approximately $15 million of our financing matures
during the remainder of 2004, which we expect to fund through borrowings under
our credit facilities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES For a discussion of our critical accounting policies and the means by which we
develop estimates therefor, see 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. 23




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##### Table of Contents



RESULTS OF OPERATIONS Six Months Ended June 30, 2004 Compared to Six Months Ended June 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): Six Months Ended June 30,2004
    
    2003Revenues
    
    $
    2,453
    
    
    
    100
    %
    
    $
    2,395
    
    
    
    100
    %Costs and expenses:Operating (excluding depreciation and amortization)
    
    
    1,027
    
    
    
    42
    %
    
    
    973
    
    
    
    41
    %Selling, general and administrative
    
    
    483
    
    
    
    19
    %
    
    
    467
    
    
    
    19
    %Depreciation and amortization
    
    
    734
    
    
    
    30
    %
    
    
    743
    
    
    
    31
    %(Gain) loss on sale of assets, net
    
    
    (104
    )
    
    
    (4
    )%
    
    
    13
    
    
    
    1
    %Option compensation expense, net
    
    
    26
    
    
    
    1
    %
    
    
    
    
    
    
    Special charges, net
    
    
    97
    
    
    
    4
    %
    
    
    10
    
    
    
    2,263
    
    
    
    92
    %
    
    
    2,206
    
    
    
    92
    %Income from operations
    
    
    190
    
    
    
    8
    %
    
    
    189
    
    
    
    8
    %Interest expense, net
    
    
    (258
    )
    
    
    
    
    
    
    (254
    )Gain on derivative instruments and hedging activities, net
    
    
    56
    
    
    
    
    
    
    
    4Loss on extinguishment of debt
    
    
    (21
    )
    
    
    
    
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    (1
    )(223
    )
    
    
    
    
    
    
    (251
    )Loss before minority interest and income taxes
    
    
    (33
    )
    
    
    
    
    
    
    (62
    )Minority interest
    
    
    (9
    )
    
    
    
    
    
    
    (7
    )Loss before income taxes
    
    
    (42
    )
    
    
    
    
    
    
    (69
    )Income tax expense
    
    
    (4
    )
    
    
    
    
    
    
    (2
    )Net loss
    
    $
    (46
    )
    
    
    
    
    
    $
    (71
    )
 Revenues.Revenues increased by $58 million, or 2%, from $2.4 billion for the
six months ended June 30, 2003 to $2.5 billion for the six months ended June
30, 2004. This increase is principally the result of an increase of 362,400
and 46,300 high-speed data and digital video customers, respectively, as well
as price increases for video and high-speed data services, and is offset
partially by a decrease of 353,700 analog video customers. Included in the
reduction in analog video customers and reducing the increase in digital video
and high-speed data customers are 258,900 analog video customers, 92,100
digital video customers and 44,900 high-speed data customers related to the
Systems Sales. The systems sold pursuant to the Systems Sales reduced the
increase in revenues by $126 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
recorders provided to some of our existing residential customer base and
commercial customers. 24




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##### Table of Contents



Revenues by service offering were as follows (dollars in millions): Six Months Ended June 30,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % of
    
    
    
    
    
    %Revenues
    
    Revenues
    
    Revenues
    
    Revenues
    
    Change
    
    ChangeVideo
    
    $
    1,695
    
    
    
    69
    %
    
    $
    1,741
    
    
    
    73
    %
    
    $
    (46
    )
    
    
    (3
    )%High-speed data
    
    
    349
    
    
    
    14
    %
    
    
    258
    
    
    
    11
    %
    
    
    91
    
    
    
    35
    %Advertising sales
    
    
    132
    
    
    
    5
    %
    
    
    124
    
    
    
    5
    %
    
    
    8
    
    
    
    6
    %Commercial
    
    
    114
    
    
    
    5
    %
    
    
    97
    
    
    
    4
    %
    
    
    17
    
    
    
    18
    %Other
    
    
    163
    
    
    
    7
    %
    
    
    175
    
    
    
    7
    %
    
    
    (12
    )
    
    
    (7
    )%$
    2,453
    
    
    
    100
    %
    
    $
    2,395
    
    
    
    100
    %
    
    $
    58
    
    
    
    2
    %
 Video revenues consist primarily of revenues from analog and digital video
services provided to our non-commercial customers. Video revenues decreased by
$46 million, or 3%, from $1.74 billion for the six months ended June 30, 2003
to $1.70 billion for the six months ended June 30, 2004. Approximately $49
million of the decrease was the result of the Systems Sales, while the
remaining increase of approximately $3 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 $91 million, or 35%, from $258 million for the six months ended June
30, 2003 to $349 million for the six months ended June 30, 2004. Approximately
87% of the increase related to the increase in the average number of customers
receiving high-speed data services, whereas approximately 13% related to the
increase in average price of the service. The increase was primarily the
result of the addition of high-speed data customers within our existing service
areas. We were also able to offer this service to more of our customers, as
the estimated percentage of homes passed that could receive high-speed data
service increased from 82% as of June 30, 2003 to 87% as of June 30, 2004 as a
result of our system upgrades. The increase in high-speed data revenues was
reduced by approximately $5 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 $8 million, or 6%, from $124 million for the six months ended June
30, 2003 to $132 million for the six months ended June 30, 2004, primarily as a
result of an increase in national advertising campaigns, offset partially by a
decrease in advertising revenue from vendors. For the six months ended June 30,
2004 and 2003, we received $6 million and $7 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 $17 million, or 18%, from $97 million for the six months ended June
30, 2003 to $114 million for the six months ended June 30, 2004, primarily as a
result of an increase in commercial high-speed data revenues. The increase was
reduced by approximately $6 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 $12 million, or 7%, from $175 million for
the six months ended June 30, 2003 to $163 million for the six months ended
June 30, 2004. Approximately $5 million of the decrease was the result of the
Systems Sales, while the remaining decrease was primarily the result of a
decrease in installation revenue. Operating Expenses.Operating expenses increased $54 million, or 6%, from $973
million for the six months ended June 30, 2003 to $1.0 billion for the six
months ended June 30, 2004. The increase in operating expenses was reduced by
$78 million as a result of the System Sales. Programming costs included in the
accompanying condensed consolidated statements of operations were $663 million
and $627 million, representing 29% and 28% of total costs and expenses for the
six months ended June 30, 2004 and 2003, respectively. Key expense components
as a percentage of revenues were as follows (dollars in millions): 25




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % of
    
    
    
    
    
    %Expenses
    
    Revenues
    
    Expenses
    
    Revenues
    
    Change
    
    ChangeProgramming
    
    $
    663
    
    
    
    27
    %
    
    $
    627
    
    
    
    26
    %
    
    $
    36
    
    
    
    6
    %Advertising sales
    
    
    48
    
    
    
    2
    %
    
    
    44
    
    
    
    2
    %
    
    
    4
    
    
    
    9

    %Service
    
    
    316
    
    
    
    13
    %
    
    
    302
    
    
    
    13
    %
    
    
    14
    
    
    
    5
    %$
    1,027
    
    
    
    42
    %
    
    $
    973
    
    
    
    41
    %
    
    $
    54
    
    
    
    6
    %
 Programming costs consist primarily of costs paid to programmers for the
provision of basic, premium and digital channels and pay-per-view programming.
The increase in programming costs of $36 million, or 6%, for the six months
ended June 30, 2004 over the six months ended June 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 $17 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 $28 million
and $31 million for the six months ended June 30, 2004 and 2003, respectively.
Programming costs for the six months ended June 30, 2004 also include a $4
million reduction related to the settlement of a dispute with TechTV, Inc. See
note 16 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 video product margins to the extent we are unable to
pass on cost increases to our customers. We expect to partially offset any
resulting margin compression from our traditional video services with revenue
from advanced video services, increased incremental high-speed data revenues,
advertising revenues and commercial 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 $4 million, or 9%, primarily
due to increased salary and benefit 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 $14 million, or 5%, resulted primarily from
additional activity associated with ongoing infrastructure maintenance. Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased by $16 million, or 3%, from $467 million for
the six months ended June 30, 2003 to $483 million for the six months ended
June 30, 2004. The increase in selling, general and administrative expenses
was reduced by $26 million as a result of the System Sales. Key components of
expense as a percentage of revenues were as follows (dollars in millions): Six Months Ended June 30,2004
    
    2003
    
    2004 over 2003% of
    
    
    
    
    
    % ofExpenses
    
    Revenues
    
    Expenses
    
    Revenues
    
    Change
    
    % ChangeGeneral and
administrative
    
    $
    416
    
    
    
    17
    %
    
    $
    418
    
    
    
    17
    %
    
    $
    (2
    )
    
    
    Marketing
    
    
    67
    
    
    
    2
    %
    
    
    49
    
    
    
    2
    %
    
    
    18
    
    
    
    37
    %$
    483
    
    
    
    19
    %
    
    $
    467
    
    
    
    19
    %
    
    $
    16
    
    
    
    3
    %
 26




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##### Table of Contents



General and administrative expenses consist primarily of salaries and benefits,
rent expense, billing costs, call center costs, internal network costs, bad
debt expense and property taxes. The decrease in general and administrative
expenses of $2 million resulted primarily from decreases in salaries and
benefits of $11 million and property taxes of $14 million. These decreases
were partially offset by an increase in bad debt expense of $10 million, call
center costs of $9 million and state franchise taxes of $4 million. Marketing expenses increased $18 million, or 37%, as a result of an increased
investment in marketing and branding campaigns. Depreciation and Amortization.Depreciation and amortization expense decreased
by $9 million, or 1%, from $743 million for the six months ended June 30, 2003
to $734 million for the six months ended June 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. (Gain) Loss on Sale of Assets, Net.Gain on sale of assets of $104 million for
the six months ended June 30, 2004 primarily represents the pretax gain
realized on the sale of systems to Atlantic Broadband Finance, LLC which closed
on March 1 and April 30, 2004. Loss on sale of assets of $13 million for the
three months ended June 30, 2003 primarily represents the loss recognized on
the sale of fixed assets. Option Compensation Expense, Net. Option compensation expense of $26 million
for the six months ended June 30, 2004 primarily represents the expense of
approximately $8 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 six
months ended June 30, 2004, we recognized approximately $6 million related to
the options granted under the Charter Long-Term Incentive Program and
approximately $12 million related to options granted following the adoption of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Special Charges, Net.Special charges of $97 million for the six months ended
June 30, 2004 represents the allocation of approximately $85 million of expense
for 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 the
terms set forth in memoranda of understanding regarding settlement of the
consolidated Federal Class Action and Federal Derivative Action and
approximately $9 million of litigation costs related to the tentative
settlement of the South Carolina national class action suit, all of which
settlements are subject to final documentation and court approval and
approximately $3 million of severance and related costs of our workforce
reduction. Special charges of $10 million for the six months ended June 30,
2003 represents approximately $15 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 $4 million, or 2%,
from $254 million for the six months ended June 30, 2003 to $258 million for
the six months ended June 30, 2004. The increase in net interest expense was a
result of an increase in our average borrowing rate from 5.7% in the six months
ended June 30, 2003 to 6.4% in the six months ended June 30, 2004, partially
offset by a decrease of $0.6 billion in average debt outstanding from $8.2
billion for the six months ended June 30, 2003 compared to $7.6 billion for the
six months ended June 30, 2004. Gain on Derivative Instruments and Hedging Activities, Net.Net gain on
derivative instruments and hedging activities increased $52 million from $4
million for the six months ended June 30, 2003 to $56 million for the six
months ended June 30, 2004. The increase is primarily a result of an increase
in gains on interest rate agreements, which do not qualify for hedge accounting
under SFAS No. 133, which increased from a loss of $4 million for the six
months ended June 30, 2003 to a gain of $54 million for the six months ended
June 30, 2004. This was coupled with a decrease in gains on interest rate
agreements, as a result of hedge ineffectiveness, on designated hedges, which 27




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##### Table of Contents



decreased from $8 million for the six months ended June 30, 2003 to $2 million
for the six months ended June 30, 2004. Loss on extinguishment of debt.Loss on extinguishment of debt of $21
million for the six months ended June 30, 2004 represents the write-off of
deferred financing fees and third party costs related to the Charter Operating
refinancing in April 2004. Other, Net.Net other expense of $1 million for the six months ended June 30,
2003 primarily represents losses on equity investments. Minority Interest.Minority interest expense represents the 10% dividend on
preferred membership units in CCO Holdings indirect subsidiary, Charter
Helicon, LLC and the 2% accretion of the preferred membership interests in CC
VIII, LLC and, since June 6, 2003, the pro rata share of the profits and losses
of CC VIII, LLC allocated to Mr. Allen. Income Tax Expense.Income tax expense of $4 million and $2 million was
recognized for the six months ended June 30, 2004 and 2003, respectively, which
represents increases in the deferred tax liabilities and current federal and
state income tax expenses of certain of CCO Holdings indirect corporate
subsidiaries. Net Loss. Net loss decreased by $25 million, from $71 million for the six
months ended June 30, 2003 to $46 million for the six months ended June 30,
2004 as a result of the factors described above. Liquidity and Capital Resources Introduction This section contains a discussion
of our liquidity and capital resources, including a discussion of our cash
position, sources and uses of cash, access to credit facilities and other
financing sources, historical financing activities, cash needs, capital
expenditures and outstanding debt. Overview Our business requires significant
cash to fund capital expenditures, debt service costs and ongoing operations.
We have historically funded our operating activities, capital requirements and
debt service costs through cash flows from operating activities, borrowings
under our credit facilities, equity contributions from our parent companies,
borrowings from our parent companies, issuances of debt securities and cash on
hand. The mix of funding sources changes from period to period, but for the
six months ended June 30, 2004, approximately 63% of our funding requirements
were from cash flows from operating activities and 37% was from borrowings of
long-term debt. This gives effect to the use of proceeds from the sale of
systems, described below, to repay long-term debt. For the six months ended
June 30, 2004, net cash flows used in financing activities were $782 million,
reflecting a net repayment of $347 million of debt. Additionally, we increased
cash on hand by $3 million to $88 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. On March 1, 2004, we closed the sale of certain cable systems in Florida,
Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband
Finance, LLC. We closed on the sale of an additional cable system in New York
to Atlantic Broadband Finance, LLC in April 2004. Subject to post closing
contractual adjustments, we expect the total net proceeds from the sale of all
of these systems to be approximately $733 million, of which $10 million is
currently held in an indemnity escrow account (with the unused portion thereof
to be released by March 1, 2005). The proceeds received to date have been used
to repay a portion of our credit facilities. As of June 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.
Further, as of June 30, 2004, we had borrowing availability under the Charter
Communications Operating, LLC 28




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##### Table of Contents



(Charter Operating) credit facilities of $977 million, none of which was
restricted due to covenants. If our actual operating performance results in
non-compliance with these covenants, or if other events of non-compliance
occur, funding under the credit facilities may not be available and defaults on
some or potentially all debt obligations could occur. However, we expect that
our cash on hand, cash flows from operating activities, and the amounts
available under our credit facilities should be sufficient to satisfy our
liquidity needs for the foreseeable future. As of June 30, 2004, we held $88
million in cash and cash equivalents. Continued access to our credit
facilities is subject to our remaining in compliance with the applicable
covenants of these credit facilities, including covenants tied to our operating
performance. If there is an event of default under our credit facilities, such
as the failure to maintain the applicable required financial ratios, we would
be unable to borrow under these credit facilities, which could materially
adversely impact our ability to operate our business and to make payments under
our debt instruments. Although Mr. Allen and his affiliates have purchased equity from Charter
and its subsidiaries in the past, Mr. Allen and his affiliates are not
obligated to purchase equity from, contribute to or loan funds to Charter or to
its subsidiaries in the future. Our parent companies have a significant amount of debt. The indentures
governing the CCH II notes, CCO Holdings notes, and Charter Operating notes
restrict those subsidiaries from making distributions to their parent companies
(including, as applicable, Charter, Charter Holdings and CCH II) for payment of
principal on parent company notes, in each case unless there is no default
under those indentures and a specified leverage ratio test can be met. Each
such subsidiary currently meets the applicable leverage ratio test, and
therefore is not currently prohibited from making any such distributions to its
direct parent. The indentures governing the Charter Holdings notes permit
Charter Holdings to make distributions to Charter Holdco for payment of
interest or principal on Charters convertible senior notes, only if, after
giving effect to the distribution, Charter Holdings can incur additional debt
under the leverage ratio test of 8.75 to 1.0, there is no default under Charter
Holdings indentures and other specified tests are met. However, Charter
Holdings continued not to meet the leverage ratio test at June 30, 2004. As a
result, distributions from Charter Holdings to Charter have been restricted and
will continue to be restricted until that test is met. Any financial or
liquidity problems of our parent companies would likely cause serious
disruption to the Companys business and have a material adverse effect on its
business and results of operations. In the past, our parent companies have accessed the equity and high-yield bond
markets as a source of capital for their subsidiaries growth. We believe that
our parent companies continued access to the debt markets will depend on
market conditions in light of, among other things, general economic conditions,
the business condition of the cable, telecommunications and technology
industry, their significant levels of debt, and their debt ratings. If they are
unable to raise the required capital on reasonable terms, our parent companies
may elect to cause us to distribute or otherwise pay to them (to the extent
available and permitted by the indenture governing our notes) the necessary
funds to service or repay Charters, Charter Holdings or CCH IIs debt,
thereby impacting our liquidity. Long-Term Debt As of June 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 debt under our credit facilities
and $2.2 billion and $729 million of high-yield debt at June 30, 2004 and
December 31, 2003, respectively. As of June 30, 2004 and December 31, 2003,
the weighted average interest rate on the bank debt, including the effects of
hedging, was approximately 6.5% and 5.4%, respectively, while the weighted
average interest rate on the high-yield debt was approximately 8.5% and 9.4%,
respectively, resulting in a blended weighted average interest rate of 7.1% and
5.6%, respectively. Approximately 67% of our debt was effectively fixed
including the effects of our interest rate hedge agreements as of June 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 credit facilities described below. 29




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##### Table of Contents



At any time prior to April 30, 2007, the issuers of the 8% senior second lien
notes may redeem, on a pro rata basis, up to 35% of the total original
principal amount of these notes with proceeds from public equity sales at a
redemption price equal to 108.000% of the principal amount thereof, plus any
accrued and unpaid interest. Interest on the $1.1 billion 8% senior second
lien notes accrues at 8% per year and is payable semi-annually in arrears on
each April 30 and October 30, commencing on October 30, 2004. At any time prior to April 30, 2007, the issuers of the 8 3/8% senior second
lien notes may redeem, on a pro rata basis, up to 35% of the total original
principal amount of these notes with proceeds from public equity sales at a
redemption price equal to 108.375% of the principal amount thereof, plus any
accrued and unpaid interest. In addition, Charter Operating may redeem all or
any portion of these notes on or after April 30, 2009, at an initial purchase
price equal to 104.188% of the outstanding principal amount redeemed declining
ratably to 100% for redemptions on or after April 30, 2012, plus any accrued
and unpaid interest. Interest on the $400 million 8 3/8% senior second lien
notes accrues at 8 3/8% per year and is payable semi-annually in arrears on
each April 30 and October 30, commencing on October 30, 2004. In the event of specified change of control events, Charter Operating must
offer to purchase the outstanding Charter Operating senior second lien notes at
a purchase price equal to 101% of the total principal amount of the notes, plus
any accrued and unpaid interest. Until the guarantee and pledge date (as defined in the indenture governing the
Charter Operating notes, generally the fifth business day after the Charter
Holdings leverage ratio is certified to be below 8.75 to 1.0), the Charter
Operating notes are secured by a second-priority lien on significantly 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 significantly 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 significantly 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 significantly all of their
assets in which security interests may be perfected under the Uniform
Commercial Code by filing a financing statement (including capital stock and
intercompany obligations). 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 increase the availability
from $5.1 billion to $6.5 billion and provide for two term facilities, one with
a total principal amount of $2.0 billion, of which 12.5% matures in 2007, 30%
matures in 2008, 30




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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 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

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 Charter Operating credit facilities. Conditions to future
borrowings include the absence of a default or an event of default under the
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 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 one concurrent
transaction. Borrowing availability under the credit facilities as of June 30,
2004 was approximately $977 million, none of which was restricted due to
covenants. In the 31




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refinancing 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 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 $88 million in cash and cash equivalents as of June 30, 2004 compared
to $85 million as of December 31, 2003. Operating Activities.Net cash
provided by operating activities decreased 18%, from $584 million for the six
months ended June 30, 2003 to $478 million for the six months ended June 30,
2004. For the six months ended June 30, 2004, net cash provided by operating
activities decreased primarily as a result of changes in operating assets and
liabilities that used $66 million more cash during the six months ended June
30, 2004 than the corresponding period in 2003 coupled with an increase in cash
interest expense of $17 million over the corresponding prior period. Investing
Activities.Net cash provided by investing activities for the six months ended
June 30, 2004 was $307 million and net cash used in investing activities for
the six months ended June 30, 2003 was $358 million. Investing activities
provided $665 million more cash during the six months ended June 30, 2004 than
the corresponding period in 2003 primarily as a result of proceeds from the
sale of certain cable systems in Florida, Pennsylvania, Maryland, Delaware, New
York and West Virginia to Atlantic Broadband Finance, LLC. Financing
Activities.Net cash used in financing activities for the six months ended June
30, 2004 and 2003 was $782 million and $339 million, respectively. The
increase in cash used during the six months ended June 30, 2004 as compared to
the corresponding period in 2003 was primarily the result of an increase in net
repayments of long-term debt. Capital Expenditures We have significant ongoing capital expenditure requirements. Capital
expenditures were $380 million and $254 million for the six months ended June
30, 2004 and 2003, respectively. The majority of the capital expenditures for
the six months ended June 30, 2004 and 2003 related to our customer premise
equipment. See table below for more details. Upgrading our cable systems has
enabled us to offer digital television, high-speed data services, VOD,
interactive services, additional channels and tiers, and expanded pay-per-view
options to a larger customer base. Our capital expenditures are funded
primarily from cash flows from operating activities, the issuance of debt and
borrowings under credit facilities. In addition, during the six months ended
June 30, 2004 and 2003, our liabilities related to capital expenditures
decreased $38 million and $103 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 32




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capital expenditures and customers among peer companies in the cable industry.
These disclosure guidelines are not required disclosure under GAAP, nor do they
impact our accounting for capital expenditures under GAAP. The following table presents our major capital expenditures categories in
accordance with NCTA disclosure guidelines for the three and six months ended
June 30, 2004 and 2003 (dollars in millions): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Customer premise equipment (a)
    
    $
    105
    
    
    $
    70
    
    
    $
    217
    
    
    $
    134Scalable infrastructure (b)
    
    
    14
    
    
    
    12
    
    
    
    33
    
    
    
    20Line extensions (c)
    
    
    35
    
    
    
    17
    
    
    
    60
    
    
    
    24Upgrade/Rebuild (d)
    
    
    6
    
    
    
    25
    
    
    
    18
    
    
    
    40Support capital (e)
    
    
    33
    
    
    
    29
    
    
    
    52
    
    
    
    36Total capital expenditures (f)
    
    $
    193
    
    
    $
    153
    
    
    $
    380
    
    
    $
    254
  (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 six months
ended June 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
the 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:  
    
    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. 33




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Furthermore, our credit facilities require us to maintain specified financial
ratios and meet financial tests. 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 June 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 June 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, as applicable, Charter,
Charter Holdings and CCH II) for payment of principal on parent company notes,
in each case unless there is no default under those indentures and a specified
leverage ratio test can be met. Each such issuer currently meets the
applicable leverage ratio test, and therefore is not currently prohibited from
making any such distributions to its direct parent. The indentures governing
the Charter Holdings notes permit Charter Holdings to make distributions to
Charter Holdco for payment of interest or principal on Charters convertible
senior notes, only if, after giving effect to the distribution, Charter
Holdings can incur additional debt under the leverage ratio test of 8.75 to
1.0, there is no default under Charter Holdings indentures and other specified
tests are met. However, in the event that Charter Holdings could not incur any
additional debt under the 8.75 to 1.0 leverage ratio test, the indentures
governing the Charter Holdings notes permit us to make specified investments in
Charter Holdco or Charter, up to its formulaic capacity, as long as there is no
default under the indentures. For the quarter ended June 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 June 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, and because we are indirectly wholly owned by
Charter Holdings, their financial or liquidity problems could cause serious
disruption to our business and could have a material adverse effect on our
business and results of operations. Any such event would likely adversely
impact our own credit rating, and our relations with customers and suppliers,
which could in turn further impair our ability to obtain financing and operate
our business. Further, to the extent that any such event results in a change
of control of Charter, Charter Holdings or CCH II (whether through a
bankruptcy, receivership or other reorganization, or otherwise), it could
result in an event of default under our credit facilities and our outstanding
notes and would require a change of control repurchase offer under our
outstanding notes. Acceleration of Our Indebtedness.In the event of a default
under our credit facilities or notes, our creditors could elect to declare all
amounts borrowed, together with accrued and unpaid interest and other fees, to
be due and payable. In such event, our credit facilities and indentures will
not permit 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 34




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our notes. Any default under any of our credit facilities or notes might
adversely affect the holders of our notes and our growth, financial condition
and results of operations and could force us to examine all options, including
seeking the protection of the bankruptcy laws. 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
and/or senior discount notes. As of June 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
CCO Holdings from any of its subsidiaries assets. If CCO Holdings caused a subsidiary to make a distribution to enable it to make
payments in respect of its notes, and such transfer were deemed a fraudulent
transfer or an unlawful distribution, the holders of 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 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, and
several class action lawsuits were filed in Delaware state court against

Charter and certain of its directors and officers. Finally, three shareholders
derivative suits were filed in Missouri state court against Charter, its then
current directors and its former independent auditor. These actions have been
consolidated. The federal shareholders derivative suit, the Delaware class
actions and the consolidated derivative suit each allege that the defendants
breached their fiduciary duties. In August 2002, Charter became aware of a grand jury investigation being
conducted by the U.S. Attorneys Office for the Eastern District of Missouri
into certain of its accounting and reporting practices focusing on how it
reported customer numbers, and its reporting of amounts received from digital
set-top terminal suppliers for advertising. The U.S. Attorneys Office has
publicly stated that Charter is not 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. In addition, Charter has recently entered into Memoranda of Understanding
setting forth proposed terms of 35




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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. However, 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 significant 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 significant
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. 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. Local telephone
companies and electric utilities can compete in this area, and they
increasingly may do so in the future. The subscription television industry
also faces competition from free broadcast television and from other
communications and entertainment media. With respect to our Internet access
services, we face competition, including intensive marketing efforts and
aggressive pricing, from telephone companies and other providers of dial-up
and digital subscriber line technology, also known as DSL. Further loss of
customers to DBS or other alternative video and data services could have a
material negative impact on our business. Mergers, joint ventures and alliances among franchised, wireless or private
cable operators, satellite television providers, local exchange carriers and
others, and the repeal of certain ownership rules may provide additional
benefits to some of our competitors, either through access to financing,
resources or efficiencies of scale, or the ability to provide multiple services
in direct competition with us. Variable Interest Rates.At June 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 June 30, 2004
and December 31, 2003, the weighted average interest rate on the bank debt was
approximately 6.5% and 5.4%, respectively, while the weighted average interest
rate on the high-yield debt was approximately 8.5% and 9.4%, respectively,
resulting in a blended weighted average interest rate of 7.1% and 5.6%,
respectively. Approximately 67% of our debt was effectively fixed including
the effects of our interest rate hedge agreements as of June 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 significant 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 36




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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, 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 (significantly all of which were
renegotiated and renewed in 2003), as of June 30, 2004, approximately 36% of
our current programming contracts have expired or are scheduled to expire by
the end of 2004, and approximately another 12% 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. If
we experience reduced operating revenues, it could negatively affect our
ability to make expected capital expenditures and could also result in our
inability to meet our obligations under our financing agreements. These
developments could also have a negative impact on our financing and variable
interest rate agreements through disruptions in the market or negative market
conditions. Long-Term Indebtedness -- Change of Control Payments. We and our parent
companies may not have the ability to raise the funds necessary to fulfill the
obligations under our and our parent companies' notes and our credit facilities
following a change of control. Under the indentures governing 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 the indentures governing our
notes would require the repayment of borrowings under those credit facilities
and indentures. These credit facilities and notes would have to be repaid by CCO
Holdings' subsidiaries before 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. 37




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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 à la carte basis. Cable operators also face significant regulation of their channel carriage.
They currently can be required to devote significant capacity to the carriage
of programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. This carriage burden
could increase in the future, particularly if the FCC were to require cable
systems to carry both the analog and digital versions of local broadcast
signals or multiple channels added by digital broadcasters. The FCC is
currently conducting a proceeding in which it is considering this channel usage
possibility, although it previously issued a tentative decision against such
dual carriage. In addition, the carriage of new high definition broadcast and
satellite programming services over the next few years may consume significant
amounts of system capacity without contributing to proportionate increases in
system revenue. There is also uncertainty whether local franchising
authorities, state regulators, the FCC, or the U.S. Congress will impose
obligations on cable operators to provide unaffiliated Internet service
providers with regulated access to cable plant. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These open access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. The United States Court of Appeals for the Ninth
Circuit recently vacated in part an FCC ruling defining cable modem service as
an information service and remanded for further proceedings. The Ninth
Circuit held that cable modem service is not cable service but is part
telecommunications service and part information service. The decision will
likely be appealed, but it may possibly lead to cable operators having to
contribute to the federal governments universal service fund, to open access
requirements, and to other common carrier regulations. As we offer other
advanced services over our cable system, we are likely to face additional calls
for regulation of our capacity and operation. These regulations, if adopted,
could adversely affect our operations. CONTINGENCIES Securities Class Actions and Derivative Suits Against Charter.Fourteen
putative federal class action lawsuits (the Federal Class Actions) have been
filed against Charter and certain of its former and present officers and
directors in various jurisdictions allegedly on behalf of all purchasers of
Charters securities during the period from either November 8 or November 9,
1999 through July 17 or July 18, 2002. Unspecified damages are sought by the
plaintiffs. In general, the lawsuits allege that Charter utilized misleading
accounting practices and failed to disclose these accounting practices and/or
issued false and misleading financial statements and press releases concerning
Charters operations and prospects. The Federal Class Actions were
specifically and individually identified in public filings made by Charter
prior to the date of this quarterly report. In October 2002, Charter filed a motion with the Judicial Panel on
Multidistrict Litigation (the ''Panel) to transfer the Federal Class Actions
to the Eastern District of Missouri. On March 12, 2003, the Panel transferred
the six Federal Class Actions not filed in the Eastern District of Missouri to
that district for coordinated or consolidated pretrial proceedings with the
eight Federal Class Actions already pending there. The Panels transfer order
assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a
prior court order, StoneRidge Investment Partners LLC became lead plaintiff
upon entry of the Panels transfer order. StoneRidge subsequently filed a
Consolidated Amended Complaint. The Court subsequently consolidated the
Federal Class Actions into a single consolidated action (the ''Consolidated
Federal Class Action) for pretrial purposes. On June 19, 2003, following a
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 38




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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 September 12, 2002, a shareholders derivative suit (the ''State Derivative
Action) was filed in the Circuit Court of the City of St. Louis, State of
Missouri (the Missouri State Court), against Charter and its then current
directors, as well as its former auditors. A substantively identical
derivative action was later filed and consolidated into the State Derivative
Action. The plaintiffs allege that the individual defendants breached their
fiduciary duties by failing to establish and maintain adequate internal
controls and procedures. Unspecified damages, allegedly on Charters behalf,
are sought by the plaintiffs. On March 12, 2004, an action substantively identical to the State Derivative
Action was filed in the Missouri State Court, against Charter and certain of
its current and former directors, as well as its former auditors. The
plaintiffs allege that the individual defendants breached their fiduciary
duties by failing to establish and maintain adequate internal controls and
procedures. Unspecified damages, allegedly on Charters behalf, are 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 alleges that the individual defendants breached their fiduciary
duties and grossly mismanaged Charter by failing to establish and maintain
adequate internal controls and procedures. Unspecified damages, allegedly on
Charters behalf, are sought by the plaintiffs. On August 5, 2004, Charter entered into Memoranda of Understanding setting
forth agreements in principle regarding settlement of the consolidated Federal
Class Action 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. 39




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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 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 its current and former directors and
Charters current and former officers have been advanced certain costs and
expenses incurred in connection with their defense. Insurance. Charter has liability insurance coverage that it believes is
available for the matters described above, where applicable, subject to the
terms, conditions and limitations of the respective policies. There is no
assurance that current coverage will be sufficient for all claims described
above or any future claims that may arise. Other Litigation.In October 2001, two customers, Nikki Nicholls and Geraldine
M. Barber, filed a class action suit against Charter Holdco in South Carolina
Court of Common Pleas (''South Carolina Class Action), purportedly on behalf
of a class of Charter Holdcos customers, alleging that Charter Holdco
improperly charged them a wire maintenance fee without request or permission.
They also claimed that Charter Holdco improperly required them to rent analog
and/or digital set-top terminals even though their television sets were ''cable
ready. 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 have ruled that until a final judgment
is entered against Charter Holdco, they lack jurisdiction to hear the appeal. In January 2003, the Court of Common Pleas granted the plaintiffs motion for
class certification. In October and November 2003, Charter Holdco filed
motions (a) asking that court to set aside the default judgment, and (b)
seeking dismissal of plaintiffs suit for failure to state a claim. In January
2004, the Court of Common Pleas granted in part and denied in part Charter
Holdcos motion to dismiss for failure to state a claim. It also took under
advisement Charter Holdcos motion to set aside the default judgment. In April
2004, the parties to both the Georgia and South 40




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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. Charter is awaiting a
ruling on that request. Outcome.Charter is unable to predict the outcome of the lawsuits and the
government investigation described above. An unfavorable outcome in any of
these lawsuits or the government investigation could have a material adverse
effect on our consolidated financial condition, results of operations or our
liquidity. 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 Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with respect to the information generated for use in this quarterly
report. The evaluation was based in part upon reports and affidavits provided
by a number of executives. Based upon, and as of the date of that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commissions
rules and forms. There was no change in our internal control over financial reporting during the
quarter ended June 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. 41




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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 and Reports on Form 8-K. (a) EXHIBITS The index to the exhibits begins on page 44 of this quarterly report. (b) REPORTS ON FORM 8-K None. 42




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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
Registrant
By: CHARTER COMMUNICATIONS, INC., Sole ManagerDated: August 13, 2004
    
    
    
    By:
    
    /s/ MICHAEL P. HUSEBYName:
    
    Michael P. HusebyTitle:
    
    Executive Vice President andChief Financial Officer(Principal Financial Officer)By:
    
    /s/ Paul E. MartinName:
    
    Paul E. MartinTitle:
    
    Senior Vice President andCorporate Controller(Principal Accounting Officer)CCO HOLDINGS CAPITAL CORP.
RegistrantDated: August 13, 2004
    
    
    
    By:
    
    /s/ MICHAEL P. HUSEBYName:
    
    Michael P. HusebyTitle:
    
    Executive Vice President andChief Financial Officer(Principal Financial Officer)By:
    
    /s/ Paul E. MartinName:
    
    Paul E. MartinTitle:
    
    Senior Vice President andCorporate Controller(Principal Accounting Officer)
 43




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EXHIBIT INDEX ExhibitNumber
    
    Description of Document10.1
    
    
    Amended and Restated Credit Agreement among Charter Communications
Operating, LLC, CCO Holdings, LLC and certain lenders and agents
named therein dated April 27, 2004 (Incorporated by reference to
Exhibit 10.25 to Amendment No. 2 to the registration statement on
Form S-4 of CCH II, LLC filed on May 5, 2004 (File No.
333-111423)).10.2
    
    
    Indenture relating to the 8% senior second lien notes due 2012 and
8 3/8% senior second lien notes due 2014, dated as of April 27,
2004, by and among Charter Communications Operating, LLC, Charter
Communications Operating Capital Corp. and Wells Fargo Bank, N.A.
as trustee (Incorporated by reference to Exhibit 10.32 to
Amendment No. 2 to the registration statement on Form S-4 of CCH
II, LLC filed on May 5, 2004 (File No. 333-111423)).10.3
    
    
    Purchase Agreement, dated April 20, 2004 by and among Charter
Communications Operating, LLC and Charter Communications Operating
Capital Corp. and the purchasers named therein (Incorporated by
reference to Exhibit 10.33 to Amendment No. 2 to the registration
statement on Form S-4 of CCH II, LLC filed on May 5, 2004 (File
No. 333-111423)).31.1
    
    
    Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934.31.2
    
    
    Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934.32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer).32.2
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer).
 44