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EX-10.2 - EXHIBIT 10.2 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_2.htm
EX-10.4 - EXHIBIT 10.4 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_4.htm
EX-10.1 - EXHIBIT 10.1 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_1.htm
EX-10.3 - EXHIBIT 10.3 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_3.htm
EX-10.5 - EXHIBIT 10.5 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_5.htm
EX-32.1 - EXHIBIT 32.1 - CHARTER COMMUNICATIONS, INC. /MO/exhibit32_1.htm
EX-10.6 - EXHIBIT 10.6 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_6.htm
EX-31.1 - EXHIBIT 31.1 - CHARTER COMMUNICATIONS, INC. /MO/exhibit31_1.htm
EX-31.2 - EXHIBIT 31.2 - CHARTER COMMUNICATIONS, INC. /MO/exhibit31_2.htm
EX-12.1 - EXHIBIT 12.1 - CHARTER COMMUNICATIONS, INC. /MO/exhibit12_1.htm
EX-10.7 - EXHIBIT 10.7 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_7.htm
EX-10.8 - EXHIBIT 10.8 - CHARTER COMMUNICATIONS, INC. /MO/exhibit10_8.htm
EX-32.2 - EXHIBIT 32.2 - CHARTER COMMUNICATIONS, INC. /MO/exhibit32_2.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

FORM 10-Q


                  (Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009

or

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number:    000-27927


Charter Communications, Inc.
(Exact name of registrant as specified in its charter)
(Debtor-In-Possession as of March 27, 2009)

  Delaware
 
43-1857213
 (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
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [  ]  NO [  ]

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo þ

Number of shares of Class A common stock outstanding as of September 30, 2009: 383,325,924
Number of shares of Class B common stock outstanding as of September 30, 2009: 50,000
 

 


 
 

 

Charter Communications, Inc.
Quarterly Report on Form 10-Q for the Period ended September 30, 2009

Table of Contents

PART I. FINANCIAL INFORMATION
Page
   
Item 1. Financial Statements - Charter Communications, Inc. and Subsidiaries
 
Condensed Consolidated Balance Sheets as of September 30, 2009
 
and December 31, 2008
4
Condensed Consolidated Statements of Operations for the three and nine
 
months ended September 30, 2009 and 2008
5
Condensed Consolidated Statements of Cash Flows for the
 
nine months ended September 30, 2009 and 2008
6
Notes to Condensed Consolidated Financial Statements
7
   
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
25
   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
39
   
Item 4.   Controls and Procedures
39
   
PART II. OTHER INFORMATION
40
   
Item 1. Legal Proceedings
40
   
Item 1A.  Risk Factors
41
   
Item 6. Exhibits
46
   
SIGNATURES
S-1
   
EXHIBIT INDEX
E-1

This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2009.  The Securities and Exchange Commission ("SEC") allows us to "incorporate by reference" information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents.  Information incorporated by reference is considered to be part of this quarterly report.  In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this quarterly report.  In this quarterly report, "we," "us" and "our" refer to Charter Communications, Inc., Charter Communications Holding Company, LLC and their subsidiaries.


 
 

 


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:

This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the "Results of Operations" and "Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this quarterly report.  Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations.  Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under "Risk Factors" under Part II, Item 1A and the factors described under “Risk Factors” under Part I, Item 1A of our most recent Form 10-K filed with the SEC.  Many of the forward-looking statements contained in this quarterly report may be identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "will," "may," "intend," "estimated," "aim," "on track," "target," "opportunity," and "potential," among others.  Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in this quarterly report and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

·  
the completion of the Company’s restructuring including the outcome and impact on our business of the proceedings under Chapter 11 of the Bankruptcy Code;
·  
the ability of the Company to satisfy closing conditions under the agreements-in-principle with certain of our bondholders and pre-arranged joint plan of reorganization (as amended, “the Plan”) and related documents;
·  
the availability and access, in general, of funds to meet our debt obligations and to fund our operations and necessary capital expenditures, either through cash on hand, cash flows from operating activities, further borrowings or other sources and, in particular, our ability to fund debt obligations (by dividend, investment or otherwise) to the applicable obligor of such debt;
·  
our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions;
·  
our ability to repay debt prior to or when it becomes due and/or successfully access the capital or credit markets to refinance that debt through new issuances, exchange offers or otherwise, especially given recent volatility and disruption in the capital and credit markets;
·  
the impact of competition from other distributors, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers, and digital subscriber line (“DSL”) providers;
·  
difficulties in growing and operating our telephone services, while adequately meeting  customer expectations for the reliability of voice services;
·  
our ability to adequately meet demand for installations and customer service;
·  
our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed Internet, telephone and other services, and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition and the weak economic conditions in the United States;
·  
our ability to obtain programming at reasonable prices or to adequately raise prices to offset the effects of higher programming costs;
·  
general business conditions, economic uncertainty or downturn, including the recent volatility and disruption in the capital and credit markets and the significant downturn in the housing sector and overall economy; and
·  
the effects of governmental regulation on our business.
 
All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement.  We are under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.


 
3

 

PART I. FINANCIAL INFORMATION.

Item 1.
Financial Statements.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
 

 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 1,075     $ 960  
Accounts receivable, less allowance for doubtful accounts of $22 and $18, respectively
    211       222  
Prepaid expenses and other current assets
    73       36  
Total current assets
    1,359       1,218  
                 
INVESTMENT IN CABLE PROPERTIES:
               
    Property, plant and equipment, net of accumulated depreciation
    4,822       4,987  
Franchises, net
    4,520       7,384  
Total investment in cable properties, net
    9,342       12,371  
                 
OTHER NONCURRENT ASSETS
    204       293  
                 
Total assets
  $ 10,905     $ 13,882  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
LIABILITIES NOT SUBJECT TO COMPROMISE:
               
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 1,458     $ 1,310  
Current portion of long-term debt
    11,740       155  
Total current liabilities
    13,198       1,465  
                 
LONG-TERM DEBT
    --       21,511  
NOTE PAYABLE – RELATED PARTY
    --       75  
DEFERRED MANAGEMENT FEES – RELATED PARTY
    --       14  
OTHER LONG-TERM LIABILITIES
    162       1,082  
                 
LIABILITIES SUBJECT TO COMPROMISE (INCLUDING AMOUNTS DUE TO
               
   RELATED PARTY OF $102 AND $0, RESPECTIVELY)
    10,675       --  
                 
TEMPORARY EQUITY
    234       241  
                 
SHAREHOLDERS’ DEFICIT:
               
Class A Common stock; $.001 par value; 10.5 billion shares authorized;
               
383,325,924 and 411,737,894 shares issued and outstanding, respectively
    --       --  
Class B Common stock; $.001 par value; 4.5 billion
               
shares authorized; 50,000 shares issued and outstanding
    --       --  
Preferred stock; $.001 par value; 250 million shares
               
authorized; no non-redeemable shares issued and outstanding
    --       --  
Additional paid-in capital
    5,399       5,394  
Accumulated deficit
    (16,949 )     (15,597 )
Accumulated other comprehensive loss
    (284 )     (303 )
Total Charter shareholders’ deficit
    (11,834 )     (10,506 )
                 
Noncontrolling interest
    (1,530 )     --  
Total shareholders’ deficit
    (13,364 )     (10,506 )
                 
Total liabilities and shareholders’ deficit
  $ 10,905     $ 13,882  

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

 
 
4

 

(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
 

 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
REVENUES
  $ 1,693     $ 1,636     $ 5,045     $ 4,823  
                                 
COSTS AND EXPENSES:
                               
Operating (excluding depreciation and amortization)
    736       710       2,164       2,089  
Selling, general and administrative
    357       371       1,044       1,059  
Depreciation and amortization
    327       332       977       981  
Impairment of franchises
    2,854       --       2,854       --  
Other operating (income) expenses, net
    10       15       (38 )     51  
                                 
      4,284       1,428       7,001       4,180  
                                 
Income (loss) from operations
    (2,591 )     208       (1,956 )     643  
                                 
OTHER INCOME (EXPENSES):
                               
Interest expense, net (excluding unrecorded interest
     expense of $206 and $421 for the three and nine
     months ended September 30, 2009, respectively)
    (206 )     (478 )     (885 )     (1,419 )
Change in value of derivatives
    --       10       (4 )     (1 )
Reorganization items, net
    (198 )     --       (523 )     --  
Other income (expense), net
    --       (4 )     1       1  
                                 
      (404 )     (472 )     (1,411 )     (1,419 )
                                 
Loss before income taxes
    (2,995 )     (264 )     (3,367 )     (776 )
                                 
INCOME TAX BENEFIT (EXPENSE)
    565       (57 )     444       (174 )
                                 
Consolidated net loss
    (2,430 )     (321 )     (2,923 )     (950 )
                                 
Less: Net (income) loss – noncontrolling interest
    1,395       (1 )     1,571       (5 )
                                 
Net Loss – Charter shareholders
  $ (1,035 )   $ (322 )   $ (1,352 )   $ (955 )
                                 
LOSS PER COMMON SHARE, BASIC AND
     DILUTED:
                               
Net Loss – Charter shareholders
  $ (2.73 )   $ (0.86 )   $ (3.57 )   $ (2.57 )
                                 
Weighted average common shares outstanding, basic and diluted
    379,066,320       374,145,243       378,718,134       371,968,952  


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

 
 
5

 

(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
Unaudited
 

 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss – Charter shareholders
  $ (1,352 )   $ (955 )
Adjustments to reconcile net loss to net cash flows from operating activities:
               
Depreciation and amortization
    977       981  
Impairment of franchises
    2,854       --  
Noncash interest expense
    35       45  
Change in value of derivatives
    4       1  
Noncash reorganization items, net
    155       --  
Deferred income taxes
    (451 )     169  
Noncontrolling interest
    (1,571 )     5  
Other, net
    28       31  
Changes in operating assets and liabilities, net of effects from dispositions:
               
Accounts receivable
    11       (21 )
Prepaid expenses and other assets
    (37 )     (9 )
Accounts payable, accrued expenses and other
    355       163  
                 
Net cash flows from operating activities
    1,008       410  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (819 )     (938 )
Change in accrued expenses related to capital expenditures
    (18 )     (41 )
Other, net
    (4 )     (1 )
                 
Net cash flows from investing activities
    (841 )     (980 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings of long-term debt
    --       2,355  
Repayments of long-term debt
    (52 )     (1,238 )
Payments for debt issuance costs
    --       (42 )
Other, net
    --       (11 )
                 
Net cash flows from financing activities
    (52 )     1,064  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    115       494  
CASH AND CASH EQUIVALENTS, beginning of period
    960       75  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 1,075     $ 569  
                 
CASH PAID FOR INTEREST
  $ 685     $ 1,241  

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

 
 
6

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



Organization, Basis of Presentation and Bankruptcy Proceedings

Organization

Charter Communications, Inc. (“Charter") is a holding company whose principal assets at September 30, 2009 are the 53% controlling common equity interest in Charter Communications Holding Company, LLC (“Charter Holdco”) and “mirror” notes which are payable by Charter Holdco to Charter and have the same principal amount and terms as those of Charter’s convertible senior notes.  Charter Holdco is the sole owner of CCHC, LLC (“CCHC”), which is the sole owner of Charter Communications Holdings, LLC (“Charter Holdings”).  The consolidated financial statements include the accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of their subsidiaries where the underlying operations reside, which are collectively referred to herein as the “Company.”  All significant intercompany accounts and transactions among consolidated entities have been eliminated.

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

Basis of Presentation

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, certain information and footnote disclosures typically included in Charter’s Annual Report on Form 10-K have been condensed or omitted for this quarterly report.  The accompanying condensed consolidated financial statements are unaudited and are subject to review by regulatory authorities.  However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.  Interim results are not necessarily indicative of results for a full year.
 
The condensed consolidated financial statements have also been prepared in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852-10, Reorganizations – Overall (“ASC 852-10”), and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business.  Continuation of the Company as a going concern is contingent upon, among other things, the Company’s ability (i) to go effective with the plan of reorganization under the U.S. Bankruptcy Code; (ii) to generate sufficient cash flow from operations; and (iii) to obtain financing sources to meet the Company’s future obligations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  Upon confirmation, and subsequent effectiveness, of the Company’s plan of reorganization, the Company anticipates that these matters will no longer raise substantial doubt about the Company’s ability to continue as a going concern.  The condensed consolidated financial statements reflect adjustments to record amounts in accordance with ASC 852-10.  However, they do not reflect all adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties.  Additionally, a plan of reorganization could materially change amounts reported in the condensed consolidated financial statements, which do not give effect to all adjustments of the carrying value of assets and liabilities that are necessary as a consequence of reorganization under Chapter 11.  Upon the effectiveness of the Company’s pre-arranged joint plan of reorganization (as amended, the “Plan”), the Company will apply fresh start accounting in accordance with ASC 852-10 which requires assets and liabilities to be reflected at fair value.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Areas

 
7

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



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.

Certain prior year amounts have been reclassified to conform with the 2009 presentation, including the reflection of non-vested restricted stock as temporary equity.

All subsequent events have been evaluated for disclosure in the financial statements through November 6, 2009.

Bankruptcy Proceedings

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

The filing was made to allow the Company to implement a restructuring pursuant to the Plan aimed at improving the Company’s capital structure.  The Plan essentially provides for a balance sheet restructuring that will leave intact the Company’s operations.

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

On October 15, 2009, the Bankruptcy Court provided a preliminary ruling indicating that the Plan would be confirmed in the next several weeks.  The Bankruptcy Court also indicated that it would rule in favor of the reinstatement of certain of the Company’s debt.  The Company expects to cause the Plan to go effective soon after the Bankruptcy Court enters the confirmation order.

The Plan is expected to be funded with cash on hand, cash from operations, an exchange of debt of CCH II, LLC (“CCH II”) for other debt at CCH II (the “Notes Exchange”), and estimated proceeds of approximately $1.6 billion of an equity rights offering (the “Rights Offering”).  In addition to separate restructuring agreements entered into with certain holders of certain of the Company’s subsidiaries’ notes (the “Noteholders”) pursuant to which Charter expects to implement the Plan (as amended, the “Restructuring Agreements”), the Noteholders have entered into commitment letters with Charter (the “Commitment Letters”) pursuant to which they have agreed to exchange and/or purchase, as applicable, certain securities of Charter.  The holders of the CCH II notes have made their elections in the Notes Exchange.  As a result of the Notes Exchange, CCH II will exchange approximately $1.5 billion of old CCH II notes for new CCH II notes on the effective date of the Plan should the Bankruptcy Court ultimately approve the Plan and the Plan becomes effective.  The Rights Offering has also been concluded resulting in holders of CCH I, LLC (“CCH I”) notes electing to purchase approximately $1.6 billion of Charter’s new Class A Common Stock and certain of the Noteholders electing to exercise an overallotment option to purchase an additional approximately $40 million of Charter’s new Class A Common Stock.  The Rights Offering will close on the effective date of the Plan should the Bankruptcy Court ultimately approve the Plan and the Plan becomes effective. The Plan would result in the reduction of the Company’s debt by approximately $8 billion.

 
8

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)




The Restructuring Agreements contemplate that upon the effective date of the Plan (i) the notes and credit facilities of Charter’s subsidiaries, Charter Communications Operating, LLC (“Charter Operating”) and CCO Holdings, LLC (“CCO Holdings”) will remain outstanding, (ii) holders of notes issued by CCH II will receive new CCH II notes and/or cash, (iii) holders of notes issued by CCH I will receive shares of Charter’s new Class A Common Stock, (iv) holders of notes issued by CCH I Holdings, LLC (“CIH”) will receive warrants to purchase shares of Charter’s new Class A Common Stock, (v) holders of notes of Charter Holdings will receive warrants to purchase shares of Charter’s new Class A Common Stock, (vi) holders of convertible notes issued by Charter will receive cash and preferred stock to be issued by Charter,  (vii) holders of existing common stock will not receive any amounts on account of their common stock, which will be cancelled, and (viii) trade creditors will continue to be paid in full.  In addition, as part of the Plan, the holders of CCH I notes will be deemed to have received and transferred to Mr. Paul G. Allen, Charter’s chairman and primary shareholder, $85 million of new CCH II notes.  

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

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

Interest Payments

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

 
9

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



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

Charter Operating Revolving Credit Facility

The Company has utilized $1.4 billion of the $1.5 billion revolving credit facility under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as amended and restated as of March 6, 2007 (the “Credit Agreement”).  Upon filing bankruptcy, Charter Operating no longer has access to the revolving feature of its revolving credit facility.  Reinstatement of the Credit Agreement will result in the revolving credit facility remaining in place with its original terms except its revolving feature.

2.           Liabilities Subject to Compromise and Reorganization Items, Net

Liabilities Subject to Compromise

Under the Bankruptcy Code, certain claims against the Company in existence prior to the filling of the petitions for relief under the federal bankruptcy laws are stayed while the Company continues business operations as a DIP.  These estimated claims are reflected in condensed consolidated balance sheets as liabilities subject to compromise at the expected allowed claim amount as of September 30, 2009 and are summarized in the table below.  Such claims remain subject to future adjustments.  Adjustments may result from actions of the Bankruptcy Court, negotiations, rejection or acceptance of executory contracts, determination as to the value of any collateral securing claims, proofs of claim or other events.

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

Accrued Expenses
     
  Accrued interest
  $ 632  
  Other
    85  
Total Accrued Expenses Subject To Compromise
    717  
         
Related Party Payables
       
  Note Payable
    77  
  Deferred Management Fees
    25  
Total Related Party Payables Subject To Compromise
    102  
         
Debt
       
Charter Communications, Inc.:
       
5.875% convertible senior notes due November 16, 2009
    3  
6.50% convertible senior notes due October 1, 2027
    479  

 
10

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)




 
Charter Communications Holdings, LLC:
     
  10.000% senior notes due April 1, 2009
    53  
  10.750% senior notes due October 1, 2009
    4  
  9.625% senior notes due November 15, 2009
    25  
  10.250% senior notes due January 15, 2010
    1  
  11.750% senior discount notes due January 15, 2010
    1  
  11.125% senior notes due January 15, 2011
    47  
  13.500% senior discount notes due January 15, 2011
    60  
  9.920% senior discount notes due April 1, 2011
    51  
  10.000% senior notes due May 15, 2011
    69  
  11.750% senior discount notes due May 15, 2011
    54  
  12.125% senior discount notes due January 15, 2012
    75  
CCH I Holdings, LLC:
       
  11.125% senior notes due January 15, 2014
    151  
  13.500% senior discount notes due January 15, 2014
    581  
  9.920% senior discount notes due April 1, 2014
    471  
  10.000% senior notes due May 15, 2014
    299  
  11.750% senior discount notes due May 15, 2014
    815  
  12.125% senior discount notes due January 15, 2015
    217  
CCH I, LLC:
       
  11.000% senior notes due October 1, 2015
    3,959  
CCH II, LLC:
       
  10.250% senior notes due September 15, 2010
    1,857  
  10.250% senior notes due October 1, 2013
    584  
Total Debt Subject to Compromise
    9,856  
         
Total Liabilities Subject To Compromise
  $ 10,675  

While operating during the Chapter 11 proceedings, the Company ceased recording interest on its debt subject to compromise as of March 27, 2009, except on CCH II debt.  The Company will continue to accrue interest on CCH II’s debt as it intends to pay the interest under the Plan.  This amount is recorded in accrued interest subject to compromise.  The amount of contractual interest expense not recorded for the three and nine months ended September 30, 2009 was approximately $206 million and $421 million, respectively.

Reorganization Items, Net

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


 
11

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



Reorganization items, net consisted of the following items:

   
Three Months Ended September 30, 2009
   
Nine Months Ended September 30, 2009
 
                 
Penalty interest, net
  $ 136     $ 257  
Loss on debt at allowed claim amount
    --       97  
Professional fees
    58       145  
Paul Allen management fee settlement – related party
    --       11  
Other
    4       13  
                 
Total Reorganization Items, Net
  $ 198     $ 523  

Reorganization items, net consist of adjustments to record liabilities at the allowed claim amounts, including the write off of deferred financing fees, and other expenses directly related to the Company’s bankruptcy proceedings.  Penalty interest primarily represents the 2% per annum penalty interest on the CCH II, CCO Holdings and Charter Operating debt and credit facilities, and the incremental amounts owed on the CCO Holdings and Charter Operating credit facilities as a result of the requirement to pay the prime rate plus the 1% per annum applicable margin instead of the election to pay the Eurodollar rate. Upon filing bankruptcy, Charter Operating and CCO Holdings are not able to elect the Eurodollar rate on credit facilities but must pay interest at the prime rate plus the 1% per annum applicable margin plus 2% per annum penalty interest.

3.           Franchises, Goodwill and Other Intangible Assets

Franchise rights represent the value attributed to agreements or authorizations with local and state authorities that allow access to homes in cable service areas.  Management estimates the fair value of franchise rights at the date of acquisition and determines if the franchise has a finite life or an indefinite-life as defined by ASC 350-10, Intangibles – Goodwill and Other - Overall.  Franchises that qualify for indefinite-life treatment are tested for impairment annually, or more frequently as warranted by events or changes in circumstances.  Franchises are aggregated into essentially inseparable units of accounting to conduct the valuations.  The units of accounting generally represent clustering of the Company’s cable systems into groups by which such systems are managed.  Management believes such grouping represents the highest and best use of those assets.

As a result of the continued economic pressure on the Company’s customers from the recent economic downturn along with increased competition, the Company determined that its projected future growth would be lower than previously anticipated in its annual impairment testing in December 2008.  Accordingly, the Company determined that sufficient indicators existed to require it to perform an interim franchise impairment analysis as of September 30, 2009.  As of the date of the filing of this Quarterly Report on Form 10-Q, the Company determined that an impairment of franchises is probable and can be reasonably estimated. Accordingly, for the quarter ended September 30, 2009, the Company recorded a preliminary non-cash franchise impairment charge of $2.9 billion which represents the Company’s best estimate of the impairment of its franchise assets. The Company currently expects to finalize its franchise impairment analysis during the quarter ended December 31, 2009, which could result in an impairment charge that differs from the estimate.  In addition, upon the effectiveness of the Company’s Plan, the Company will apply fresh start accounting in accordance with ASC 852-10 and as such will adjust its franchise, goodwill, and other intangible assets to reflect fair value and will also establish any previously unrecorded intangible assets at their fair values.  The Company expects these fresh start adjustments will result in material increases to total tangible and intangible assets, primarily as a result of adjustments to property, plant and equipment, goodwill and customer relationships.

Consistent with prior impairment tests, the Company determined the estimated fair value of each unit of accounting utilizing an income approach model based on the present value of the estimated discrete future cash flows of each unit assuming a discount rate. This approach makes use of unobservable factors such as projected revenues, expenses,

 
12

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



capital expenditures, and a discount rate applied to the estimated cash flows. The determination of the discount rate was based on a weighted average cost of capital approach, which uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows attributable to the franchises.

The Company estimated discounted future cash flows using reasonable and appropriate assumptions including among others, penetration rates for basic and digital video, high-speed Internet, and telephone; revenue growth rates; and expected operating margins and capital expenditures.  The assumptions are derived based on the Company’s and its peers’ historical operating performance adjusted for current and expected competitive and economic factors surrounding the cable industry.  The estimates and assumptions made in the Company’s valuations are inherently subject to significant uncertainties, many of which are beyond its control, and there is no assurance that these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense growth rates, the amount and timing of capital expenditures and the discount rate utilized.  The assumptions used are consistent with internal forecasts, some of which differ from the assumptions used for the annual impairment testing in December 2008 as a result of the economic and competitive environment discussed previously.  The change in assumptions reflects the lower than anticipated growth in revenues experienced during the first three quarters of 2009 and the expected reduction of future cash flows as compared to those used in the December 2008 valuations.

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

   
September 30, 2009
   
December 31, 2008
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
   
Gross
Carrying
Amount
   
Accumulated Amortization
   
Net
Carrying
Amount
 
Indefinite-lived intangible assets:
                                   
Franchises with indefinite lives
  $ 4,514     $ --     $ 4,514     $ 7,377     $ --     $ 7,377  
Goodwill
    68       --       68       68       --       68  
                                                 
    $ 4,582     $ --     $ 4,582     $ 7,445     $ --     $ 7,445  
Finite-lived intangible assets:
                                               
Franchises with finite lives
  $ 16     $ 10     $ 6     $ 16     $ 9     $ 7  
Other intangible assets
    83       46       37       71       41       30  
                                                 
    $ 99     $ 56     $ 43     $ 87     $ 50     $ 37  

During the nine months ended September 30, 2009, the net carrying amount of indefinite-lived franchises was reduced by $2.9 billion related to impairment of franchises and $9 million related to cable asset sales completed in 2009.

Franchise amortization expense represents the amortization relating to franchises that did not qualify for indefinite-life treatment including costs associated with franchise renewals.  Franchise amortization expense for each of the three months ended September 30, 2009 and 2008 was approximately $0.4 million and for each of the nine months ended September 30, 2009 and 2008 was approximately $1 million.  Other intangible assets amortization expense for the three months ended September 30, 2009 and 2008 was approximately $2 million and $1 million, respectively, and for the nine months ended September 30, 2009 and 2008 was approximately $5 million and $3 million, respectively.  The Company expects that amortization expense on franchise assets and other intangible assets will be approximately $7 million annually for each of the next five years.  Actual amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, the application of fresh start accounting and other relevant factors.

 
13

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)




4.           Accounts Payable and Accrued Expenses

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

   
September 30,
2009
   
December 31,
2008
 
             
Accounts payable – trade
  $ 95     $ 99  
Accrued capital expenditures
    38       56  
Accrued expenses:
               
Terminated interest rate swap liability
    495       --  
Interest
    154       408  
Programming costs
    281       305  
Compensation
    114       124  
Franchise-related fees
    49       60  
Other
    232       258  
                 
    $ 1,458     $ 1,310  

5.           Debt Not Subject to Compromise

Debt not subject to compromise consists of the following as of September 30, 2009 and December 31, 2008:

   
September 30, 2009
   
December 31, 2008
 
   
Principal Amount
   
Accreted Value
   
Principal Amount
   
Accreted Value
 
Charter Communications, Inc.:
                       
  5.875% convertible senior notes due November 16, 2009
  $ --     $ --     $ 3     $ 3  
  6.50% convertible senior notes due October 1, 2027
    --       --       479       373  
Charter Communications Holdings, LLC:
                               
  10.000% senior notes due April 1, 2009
    --       --       53       53  
  10.750% senior notes due October 1, 2009
    --       --       4       4  
  9.625% senior notes due November 15, 2009
    --       --       25       25  
  10.250% senior notes due January 15, 2010
    --       --       1       1  
  11.750% senior discount notes due January 15, 2010
    --       --       1       1  
  11.125% senior notes due January 15, 2011
    --       --       47       47  
  13.500% senior discount notes due January 15, 2011
    --       --       60       60  
  9.920% senior discount notes due April 1, 2011
    --       --       51       51  
  10.000% senior notes due May 15, 2011
    --       --       69       69  
  11.750% senior discount notes due May 15, 2011
    --       --       54       54  
  12.125% senior discount notes due January 15, 2012
    --       --       75       75  
CCH I Holdings, LLC:
                               
  11.125% senior notes due January 15, 2014
    --       --       151       151  
  13.500% senior discount notes due January 15, 2014
    --       --       581       581  
  9.920% senior discount notes due April 1, 2014
    --       --       471       471  
  10.000% senior notes due May 15, 2014
    --       --       299       299  
  11.750% senior discount notes due May 15, 2014
    --       --       815       815  
  12.125% senior discount notes due January 15, 2015
    --       --       217       217  

 
14

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)




CCH I, LLC:
                       
  11.000% senior notes due October 1, 2015
    --       --       3,987       4,072  
CCH II, LLC:
                               
  10.250% senior notes due September 15, 2010
    --       --       1,860       1,857  
  10.250% senior notes due October 1, 2013
    --       --       614       598  
CCO Holdings, LLC:
                               
  8 ¾% senior notes due November 15, 2013
    800       797       800       796  
  Credit facility
    350       350       350       350  
Charter Communications Operating, LLC:
                               
  8.000% senior second-lien notes due April 30, 2012
    1,100       1,100       1,100       1,100  
  8 3/8% senior second-lien notes due April 30, 2014
    770       770       770       770  
  10.875% senior second-lien notes due September 15, 2014
    546       529       546       527  
  Credit facilities
    8,194       8,194       8,246       8,246  
Total Debt Not Subject to Compromise
  $ 11,760     $ 11,740     $ 21,729     $ 21,666  

The accreted values presented above generally represent the principal amount of the notes less the original issue discount at the time of sale, plus the accretion to the balance sheet date.  See Note 2 for debt subject to compromise.

Filing for bankruptcy is an event of default under the Company’s credit facilities and the indentures governing its debt. Therefore, in accordance with ASC 470-10-45, Debt – Overall – Other Presentation Matters, debt not subject to compromise has been classified as current as of September 30, 2009.  The Company does not intend to repay the current portion of long-term debt with current assets but intends to reinstate this debt through the Plan.  Accordingly, upon the effective date of the Plan, $11.7 billion of the debt classified as current will be reclassified as long-term.  See Note 1.

Although CCH II’s debt is classified as subject to compromise as of September 30, 2009, under the Plan, existing holders of senior notes of CCH II and CCH II Capital Corp. (“CCH II Notes”) were entitled to elect to exchange their CCH II Notes for new 13.5% Senior Notes of CCH II and CCH II Capital Corp. (the “New CCH II Notes”).  CCH II Notes that are not exchanged will be paid in cash in an amount equal to the outstanding principal amount of such CCH II Notes plus accrued but unpaid interest to the bankruptcy petition date plus post-petition interest, but excluding any call premiums or prepayment penalties and for the avoidance of doubt, any unmatured interest.  

6.           Temporary Equity

Temporary equity includes Mr. Allen’s 5.6% membership interests in CC VIII, an indirect subsidiary of Charter Holdco of $179 million and $203 million as of September 30, 2009 and December 31, 2008, respectively, and $55 million and $38 million, respectively, of nonvested shares of restricted stock and performance shares issued to employees.  Mr. Allen’s CC VIII interest is classified as temporary equity as a result of Mr. Allen’s ability to put his interest to the Company upon a change in control.  Noncontrolling interest in the accompanying condensed consolidated statements of operations includes losses of approximately $31 million and $24 million for the three and nine months ended September 30, 2009, respectively, and income of approximately $1 million and $5 million for the three and nine months ended September 30, 2008, respectively, which represents the 2% accretion of the preferred membership interests plus approximately 5.6% of CC VIII’s income (loss).

7.           Noncontrolling Interest

Charter is a holding company whose primary assets are a controlling equity interest in Charter Holdco, the indirect owner of the Company’s cable systems, and $482 million of mirror notes payable by Charter Holdco to Charter, and which have the same principal amount and terms as those of Charter’s 5.875% and 6.50% convertible senior notes.  Noncontrolling interest on the Company’s condensed consolidated balance sheets represents the cumulative allocation since January 1, 2009 of Mr. Allen’s portion of Charter Holdco’s net loss, or 47% of total net loss of Charter Holdco.

 
15

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



 
On January 1, 2009, Charter adopted ASC 810-10, Consolidation – Overall (“ASC 810-10”), which requires losses to be allocated to noncontrolling interest even when such amounts are deficits. As such, losses are now allocated between Charter and the noncontrolling interest.  Net loss and loss per common share would have been $2.5 billion and $6.49 and $2.9 billion and $7.78, respectively, for the three and nine months ended September 30, 2009 if ASC 810-10 had not been adopted.

Changes to controlling and noncontrolling interest consist of the following for the periods presented:

   
Controlling
   
Noncontrolling
       
   
Interest
   
Interest
   
Total
 
                   
Balance, December 31, 2008
  $ (10,506 )   $ --     $ (10,506 )
  Net loss
    (1,352 )     (1,571 )     (2,923 )
  Loss included in temporary equity (see Note 6)
    --       24       24  
  Changes in the fair value of interest rate agreements
    (5 )     (4 )     (9 )
  Stock compensation expense
    5       --       5  
  Amortization of accumulated other comprehensive loss related to interest rate agreements
    24       21       45  
                         
Balance, September 30, 2009
  $ (11,834 )   $ (1,530 )   $ (13,364 )

8.
Comprehensive Loss

The Company reports changes in the fair value of interest rate agreements designated as hedging the variability of cash flows associated with floating-rate debt obligations, that meet the effectiveness criteria as outlined in ASC 815-30, Derivatives and Hedging – Cash Flow Hedges (“ASC 815-30”), in accumulated other comprehensive loss after giving effect to the noncontrolling interest share of gains and losses.  Comprehensive loss – Charter shareholders was $1.0 billion and $341 million for the three months ended September 30, 2009 and 2008, respectively, and $1.3 billion and $956 million for the nine months ended September 30, 2009 and 2008, respectively.

9.           Accounting for Derivative Instruments and Hedging Activities

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

Upon filing for Chapter 11 bankruptcy, the counterparties to the interest rate swap agreements terminated the underlying contracts and, upon emergence from bankruptcy, will receive payment for the market value of the interest rate swap agreements as measured on the date the counterparties terminated.  At September 30, 2009, the terminated interest rate swap liabilities of $495 million are reflected at settlement amounts and were recorded in current liabilities in the condensed consolidated balance sheets.  The terminated interest rate swap liabilities were classified as not subject to compromise in the condensed consolidated balance sheets at September30, 2009 as they are fully secured by the Company’s assets.  The amount remaining in accumulated other comprehensive loss related to these interest rate swap agreements will be amortized over the original life of the interest rate agreements until emergence from Chapter 11 bankruptcy.  
 
The Company’s hedging policy does not permit it to hold or issue derivative instruments for speculative trading purposes.  The Company did, however, have certain interest rate derivative instruments that were designated as cash
 
16

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



flow hedging instruments.  Such instruments effectively converted variable interest payments on certain debt instruments into fixed payments.  For qualifying hedges, ASC 815-30 allows derivative gains and losses to offset related results on hedged items in the consolidated statements of operations.  The Company formally documented, designated and assessed the effectiveness of transactions that received hedge accounting.  

Changes in the fair value of interest rate agreements that were designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, and that met the effectiveness criteria specified by ASC 815-30 were reported in accumulated other comprehensive loss.  The amounts were subsequently reclassified as an increase or decrease to interest expense in the same periods in which the related interest on the floating-rate debt obligations affected earnings (losses).

Certain interest rate derivative instruments were not designated as hedges as they did not meet the effectiveness criteria specified by ASC 815-30.  However, management believes such instruments were closely correlated with the respective debt, thus managing associated risk.  Interest rate derivative instruments not designated as hedges were marked to fair value, with the impact recorded as a change in value of derivatives in the Company’s consolidated statements of operations.  

As of December 31, 2008, the Company had outstanding $4.3 billion in notional amounts of interest rate swap agreements outstanding.  The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to credit loss.  The amounts exchanged were determined by reference to the notional amount and the other terms of the contracts.

Certain provisions of the Company’s 5.875% and 6.50% convertible senior notes issued in November 2004 and October 2007, respectively, were considered embedded derivatives for accounting purposes and were required to be accounted for separately from the convertible senior notes.  In accordance with ASC 815-15, Derivatives and Hedging – Embedded Derivatives, these derivatives are marked to market with gains or losses recorded in change in value of derivatives on the Company’s consolidated statements of operations.  At September 30, 2009 and December 31, 2008, the fair value of the embedded derivatives was de minimus.

The effect of derivative instruments on the Company’s consolidated statement of operations is presented in the table below.
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Change in value of derivatives:
                       
Loss on interest rate derivatives not
     designated as hedges
  $ --     $ (7 )   $ (4 )   $ (1 )
Gain on embedded derivatives
    --       17       --       --  
    $ --     $ (10 )   $ (4 )   $ (1 )
                                 
Accumulated other comprehensive loss:
                               
Loss on interest rate derivatives
     designated as hedges (effective portion)
  $ --     $ (19 )   $ (9 )   $ (1 )
    $ --     $ (19 )   $ (9 )   $ (1 )
                                 
Amount of loss reclassified from
     accumulated other comprehensive loss
     into interest expense or reorganization
     items, net
  $ 23     $ (23 )   $ 12     $ (55 )


 
17

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



10.           Fair Value

Financial Assets and Liabilities

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

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

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

A summary of the carrying value and fair value of the Company’s debt not subject to compromise at September 30, 2009 and December 31, 2008 is as follows:
 
    September 30, 2009    
September 30, 2009
 
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
                     
 
 
Charter convertible notes
  $ --     $ --     $ 376     $ 12  
Charter Holdings debt
    --       --       440       159  
CIH debt
    --       --       2,534       127  
CCH I debt
    --       --       4,072       658  
CCH II debt
    --       --       2,455       1,051  
CCO Holdings debt
    797       817       796       505  
Charter Operating debt
    2,399       2,497       2,397       1,923  
Credit facilities
    8,544       8,089       8,596       6,187  

The Company adopted ASC 820-10, Fair Value Measurements and Disclosures – Overall (“ASC 820-10”), on its financial assets and liabilities effective January 1, 2008, and has an established process for determining fair value.  Fair value is based upon quoted market prices, where available.  If such valuation methods are not available, fair value is based on internally or externally developed models using market-based or independently-sourced market parameters, where available.  Fair value may be subsequently adjusted to ensure that those assets and liabilities are recorded at fair value.  The Company’s methodology may produce a fair value that may not be indicative of net realizable value or reflective of future fair values, but the Company believes its methods are appropriate and consistent with other market peers.  The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value estimate as of the Company’s reporting date.

ASC 820-10 establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:

·  
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
·  
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
·  
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 
18

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



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

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

   
Fair Value as of December 31, 2008
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Other long-term liabilities:
                       
Interest rate derivatives designated as hedges
  $ --     $ 303     $ --     $ 303  
Interest rate derivatives not designated as hedges
    --       108       --       108  
                                 
    $ --     $ 411     $ --     $ 411  

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

Nonfinancial Assets and Liabilities

As permitted by ASC 820-10, the Company adopted ASC 820-10 effective January 1, 2009 on its nonfinancial assets and liabilities including fair value measurements of franchises, property, plant, and equipment, and other intangible assets.  These assets are not measured at fair value on a recurring basis; however they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist.  During the three months ended September 30, 2009, the Company recorded an impairment on its franchise assets of $2.9 billion.  The impairment charge was calculated by comparing the book value of franchise assets to their fair values as of September 30, 2009 which are determined utilizing an income approach that makes use of significant unobservable inputs. Such fair value is classified as level 3 in the fair value hierarchy.  See Note 3 for additional information. 

11.           Other Operating (Income) Expenses, Net

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

   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Loss on sale of assets, net
  $ 3     $ 3     $ 6     $ 7  
Special charges, net
    7       12       (44 )     44  
                                 
    $ 10     $ 15     $ (38 )   $ 51  

Loss on sale of assets, net

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


 
19

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



Special charges, net

Special charges, net for the three and nine months ended September 30, 2009 primarily includes net income or expense from actual or potential litigation settlements.  Special charges, net for the three and nine months ended September 30, 2008 primarily represent severance charges and settlement costs associated with certain litigation, offset by favorable insurance settlements.

12.           Income Taxes

All operations are held through Charter Holdco and its direct and indirect subsidiaries.  Charter Holdco and the majority of its subsidiaries are generally limited liability companies that are not subject to income tax.  However, certain of these limited liability companies are subject to state income tax.  In addition, the subsidiaries that are corporations are subject to federal and state income tax.  All of the remaining taxable income, gains, losses, deductions and credits of Charter Holdco are passed through to its members: Charter and CII.  Charter is responsible for its share of taxable income or loss of Charter Holdco allocated to Charter in accordance with the Charter Holdco limited liability company agreement (the “LLC Agreement”) and partnership tax rules and regulations.  Charter also records financial statement deferred tax assets and liabilities related to its investment in Charter Holdco.

For the three and nine months ended September 30, 2009, the Company recorded $565 million and $444 million of income tax benefit, respectively, and for the three and nine months ended September 30, 2008, the Company recorded $57 million and $174 million of income tax expense, respectively.Income tax benefits were realized through reductions in the deferred tax liabilities related to Charter’s investment in Charter Holdco, as well as the deferred tax liabilities of certain of Charter’s indirect corporate subsidiaries.  Income tax benefit for the three and nine months ended September 30, 2009 included $625 million of deferred tax benefit related to the impairment of franchises.  Income tax expense was recognized through increases in deferred tax liabilities related to Charter’s investment in Charter Holdco, and certain of Charter’s subsidiaries, in addition to current federal and state income tax expense.  

As of September 30, 2009 and December 31, 2008, the Company had net deferred income tax liabilities of approximately $107 million and $558 million, respectively, recorded in other long-term liabilities in the condensed consolidated balance sheets.  Included in these deferred tax liabilities is approximately $104 million and $179 million of deferred tax liabilities at September 30, 2009 and December 31, 2008, respectively, relating to certain indirect subsidiaries of Charter Holdco that file separate income tax returns. The remainder of the Company’s deferred tax liability arose from Charter’s investment in Charter Holdco, and was largely attributable to the characterization of franchises for financial reporting purposes as indefinite-lived.

As of September 30, 2009, the Company had deferred tax assets of $6.1 billion, which included $2.6 billion of financial losses in excess of tax losses allocated to Charter from Charter Holdco.  The deferred tax assets also included $3.5 billion of tax net operating loss carryforwards (generally expiring in years 2009 through 2028) of Charter and its indirect subsidiaries.  Valuation allowances of $5.9 billion exist with respect to these deferred tax assets.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  Because of the uncertainties in projecting future taxable income of Charter Holdco, valuation allowances have been established except for deferred benefits available to offset certain deferred tax liabilities that will reverse over time.

The amount of any benefit from the Company’s tax net operating losses is dependent on: (1) Charter and its subsidiaries’ ability to generate future taxable income and (2) the unexpired amount of net operating loss carryforwards available to offset amounts payable on such taxable income.  Any future “ownership changes” of Charter’s common stock, such as that which will occur upon emergence from Chapter 11 bankruptcy, would place limitations, on an annual basis, on the use of such net operating losses to offset any future taxable income the Company may generate and will be reduced by the amount of any cancellation of debt income resulting from the Plan that is allocable to Charter.  Such limitations, in conjunction with the net operating loss expiration provisions, are

 
20

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



expected to materially limit the Company’s ability to use a substantial portion of its net operating losses to offset future taxable income.

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

13.           Related Party Transactions

The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved.  Unless otherwise disclosed, management believes each of the transactions described below was on terms no less favorable to the Company than could have been obtained from independent third parties.

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

9 OM, Inc. (formerly known as Digeo, Inc.)

Mr. Allen, through his 100% ownership of Vulcan Ventures Incorporated (“Vulcan Ventures”), owned a majority interest in 9 OM, Inc. (formerly known as Digeo, Inc.) on a fully-converted fully-diluted basis.  However, in October 2009, substantially all of 9 OM, Inc.'s assets were sold to ARRIS Group, Inc., an unrelated third party. Ms. Jo Lynn Allen is a director of Charter and a director and Vice President of Vulcan Ventures.  Mr. Lance Conn is a director of Charter and was Executive Vice President of Vulcan Ventures until his resignation in May 2009.  Charter Operating owns a small minority percentage of 9 OM, Inc.'s stock but does not expect to receive any proceeds from the sale of assets to the ARRIS Group, Inc.

In May 2008, Charter Operating entered into an agreement with 9 OM, LLC (formerly known as Digeo Interactive, LLC), a subsidiary of 9 OM, Inc., for the minimum purchase of high-definition DVR units for approximately $21 million.  This minimum purchase commitment is subject to reduction as a result of certain specified events such as the failure to deliver units timely and catastrophic failure.  The software for these units is being supplied under a software license agreement with 9 OM, LLC; the cost of which is expected to be approximately $2 million for the initial licenses and on-going maintenance fees of approximately $0.3 million annually, subject to reduction to coincide with any reduction in the minimum purchase commitment.  For the three and nine months ended September 30, 2009, Charter purchased approximately $4 million and $15 million of DVR units from 9 OM, LLC under these agreements, respectively.

14.           Contingencies

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

On March 27, 2009, JPMorgan Chase Bank, N.A., for itself and as Administrative Agent under the Credit Agreement, filed an adversary proceeding (the “JPMorgan Adversary Proceeding”) in Bankruptcy Court against Charter Operating

 
21

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



and CCO Holdings seeking a declaration that there have been events of default under the Credit Agreement.  Such a judgment may prevent Charter Operating and CCO Holdings from reinstating the terms and provisions of the Credit Agreement through the bankruptcy proceeding.  On April 10, 2009, Charter Operating and CCO Holdings filed a motion to dismiss (the “Motion to Dismiss”) the JPMorgan Adversary Proceeding and argued that dismissal was proper because the JPMorgan Adversary Proceeding (i) is a core proceeding that is properly heard by the Bankruptcy Court; and (ii) fails to state a claim for default under the Credit Agreement.  On May 5, 2009, the Bankruptcy Court ruled that the JPMorgan Adversary Proceeding is a core proceeding.  The JPMorgan Adversary Proceeding is being decided by the Bankruptcy Court as a part of the hearing that began on July 20, 2009 and concluded on October 1, 2009  to consider the confirmation of the Plan.  On October 15, 2009, the Bankruptcy Court held a hearing at which the judge read into the record his preliminary ruling in favor of Charter in the JPMorgan Adversary Proceeding and indicated that a final order would be entered in the next several weeks.

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

15.           Stock Compensation Plans

The Company has stock compensation plans (the “Equity Plans”) which provide for the grant of non-qualified stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock and/or shares of restricted stock (shares of restricted stock not to exceed 20.0 million shares of Charter Class A common stock), as each term is defined in the Equity Plans.  Employees, officers, consultants and directors of the Company and its subsidiaries and affiliates are eligible to receive grants under the Equity Plans.  Options granted generally vest over four years from the grant date, with 25% generally vesting on the first anniversary of the grant date and ratably thereafter.  Generally, options expire 10 years from the grant date.  Restricted stock vests annually over a one to three-year period beginning from the date of grant.  The 2001 Stock Incentive Plan allows for the issuance of up to a total of 90.0 million shares of Charter Class A common stock (or units convertible into Charter Class A common stock).  In March 2008, the Company adopted an incentive program to allow for performance cash.  Under the incentive program, subject to meeting performance criteria, performance units under the 2001 Stock Incentive Plan and performance cash are deposited into a performance bank of which one-third of the balance is paid out each year.  During the three and nine months ended September 30, 2009, no equity awards were granted. During the three and nine months ended September 30, 2009, Charter granted $0.2 million and $12 million of performance cash and restricted cash, respectively, under Charter’s 2009 incentive program.  In the first quarter of 2009, the majority of restricted stock and performance units and shares were voluntarily forfeited by participants without termination of the service period, and the remaining, along with all stock options, will be cancelled in connection with the Plan.  The Plan includes an allocation of not less than 3% of new equity for employee grants with 50% of the allocation to be granted within thirty days of the Company's emergence from bankruptcy.  Such grant of new awards is deemed to be a modification of old awards and will be accounted for as a modification of the original awards.

The Company recorded $6 million and $8 million of stock compensation expense for the three months ended September 30, 2009 and 2008, respectively, and $23 million and $24 million for the nine months ended September 30, 2009 and 2008, respectively, which is included in selling, general, and administrative expense.

16.           Recently Issued Accounting Standards

In May 2008, the FASB issued guidance included in ASC 470-20, Debt - Debt with Conversion and Other Options (“ASC 470-20”), which specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner reflecting their nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods.  This guidance included in ASC 470-20 is effective for interim periods and fiscal years beginning after December 15, 2008.  The Company

 
22

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



adopted this guidance included in ASC 470-20 effective January 1, 2009.  The carrying amount of the equity component at September 30, 2009 and December 31, 2008 was approximately $50 million.

In April 2009, the FASB issued guidance included in ASC 805-20, Business Combinations – Identifiable Assets, Liabilities and Any Noncontrolling Interest (“ASC 805-20”), which addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  This guidance included in ASC 805-20 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted this guidance included in ASC 805-20 effective January 1, 2009.  The adoption of this guidance included in ASC 805-20 did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued guidance included in ASC 820-10-65, Fair Value Measurements and Disclosures – Overall – Transition and Open Effective Date Information (“ASC 820-10-65”), which provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This guidance included in ASC 820-10-65 is effective for reporting periods ending after June 15, 2009. The Company adopted this guidance included in ASC 820-10-65 effective April 1, 2009.  The adoption of this guidance included in ASC 820-10-65 did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued guidance included in ASC 825-10-65, Financial Instruments – Overall – Transition and Open Effective Date Information (“ASC 825-10-65”), to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This ASC also requires those disclosures in summarized financial information at interim reporting periods.  This guidance included in ASC 825-10-65 is effective for reporting periods ending after June 15, 2009. The Company adopted this guidance included in ASC 825-10-65 effective April 1, 2009.  The adoption of this guidance included in ASC 825-10-65 did not have a material impact on the Company’s financial statements.

In May 2009, the FASB issued guidance included in ASC 855-10, Subsequent Events – Overall (“ASC 855-10”), to establish principles and requirements for the evaluation and disclosure of subsequent events.  This guidance included in ASC 855-10 is effective for interim or annual financial periods ending after June 15, 2009.  The Company adopted this guidance included in ASC 855-10 effective April 1, 2009 and has included the appropriate disclosure in its financial statements.

In March 2009, the FASB issued guidance included in ASC 470-20, which applies to entities that enter into share-lending arrangements on their own shares in contemplation of a convertible debt offering or other financing.  This guidance included in ASC 470-20 is effective for fiscal years beginning on or after December 14, 2009 and interim periods within those fiscal years.  The Company will adopt this guidance included in ASC 470-20 effective January 1, 2010.  The Company does not expect that the adoption of this guidance included in ASC 470-20 will have a material impact on its financial statements.

In June 2009, the FASB issued guidance included in ASC 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”).  ASC 105-10 is intended to be the source of GAAP and reporting standards as issued by the FASB. Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company adopted ASC 105-10 effective September 30, 2009.  The Codification does not change or alter existing GAAP and there was no impact on the Company’s financial statements.

In August 2009, the FASB issued guidance included in ASC 820-10-65 which states companies determining the fair value of a liability may use the perspective of an investor that holds the related obligation as an asset.  This guidance included in ASC 820-10-65 addresses practice difficulties caused by the tension between fair-value measurements

 
23

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place.  This guidance included in ASC 820-10-65 is effective for interim and annual periods beginning after August 27, 2009, and applies to all fair-value measurements of liabilities required by GAAP. No new fair-value measurements are required by this guidance. The Company will adopt this guidance included in ASC 820-10-65 effective October 1, 2009.  The Company is in the process of assessing the impact of the adoption of this guidance included in ASC 820-10-65 on its financial statements.

In October 2009, the FASB issued guidance included in ASC 605-25, Revenue Recognition – Multiple-Element Arrangements (“ASC 605-25”), which requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy.  The guidance eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method.  This guidance included in ASC 605-25 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The Company will adopt this guidance included in ASC 605-25 effective January 1, 2011.  The Company does not expect the adoption of this guidance included in ASC 605-25 will have a material impact on its financial statements.

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


 
24

 

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

General

Charter Communications, Inc. (“Charter”) is a holding company whose principal assets at September 30, 2009 are the 53% controlling common equity interest in Charter Communications Holding Company, LLC (“Charter Holdco”) and “mirror” notes that are payable by Charter Holdco to Charter and have the same principal amount and terms as Charter’s convertible senior notes.

We are a broadband communications company operating in the United States with approximately 5.3 million customers at September 30, 2009.  Through our hybrid fiber and coaxial cable network, we offer our customers traditional cable video programming (basic and digital, which we refer to as “video” services), high-speed Internet services, and telephone services, as well as advanced broadband services (such as Charter OnDemand™ (“OnDemand”) high definition television service, and digital video recorder (“DVR”) service).

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

   
Approximate as of
 
   
September 30,
   
September 30,
 
   
2009 (a)
   
2008 (a)
 
             
Residential (non-bulk) basic video customers (b)
    4,616,100       4,860,100  
Multi-dwelling (bulk) and commercial unit customers (c)
    263,000       263,600  
Total basic video customers (b)(c)
    4,879,100       5,123,700  
Digital video customers (d)
    3,174,800       3,118,500  
  Residential high-speed Internet customers (e)
    3,010,100       2,858,200  
  Telephone customers (f)
    1,535,300       1,274,300  
                 
   Total Revenue Generating Units (g)
    12,599,300       12,374,700  

After giving effect to sales of cable systems in 2008 and 2009, basic video customers, digital video customers, high-speed Internet customers and telephone customers would have been approximately 5,094,000, 3,109,700, 2,852,300, and 1,273,600, respectively, as of September 30, 2008.

 
(a)
Our billing systems calculate the aging of customer accounts based on the monthly billing cycle for each account.  On that basis, at September 30, 2009 and 2008, "customers" include approximately 33,300 and 42,100 persons, respectively, whose accounts were over 60 days past due in payment, approximately 5,700 and 7,700 persons, respectively, whose accounts were over 90 days past due in payment, and approximately 2,500 and 3,800 persons, respectively, of which were over 120 days past due in payment.

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

 
(c)
Included within "basic video customers" are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit (“EBU”) basis.  In the second quarter of 2009, we began calculating EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service rather than the most prevalent price charged as was used previously.  This EBU method of estimating basic video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators (“MSOs”).  As of September 30, 2008, EBUs decreased by 12,400 as a result of the change in methodology.  As we increase our published video rates 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 basic video customers that have one or more digital set-top boxes or cable cards deployed.

 
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(e)  
 "Residential high-speed Internet customers" represent those residential customers who subscribe to our high-speed Internet service.
 
(f)  
“Telephone customers" include all customers receiving telephone service.

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

Overview

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

For the three and nine months ended September 30, 2009, our loss from operations was $2.6 billion and $2.0 billion, respectively, and for the three and nine months ended September 30, 2008, our income from operations was $208 million and $643 million, respectively.  We had negative operating margins of 153% and 39% for the three and nine months ended September 30, 2009, respectively, and positive operating margin of 13% for each of the three and nine months ended September 30, 2008.  The decrease in income from operations and operating margins for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 was principally due to impairment of franchises incurred during the third quarter of 2009 offset by increased sales of our bundled services, improved cost efficiencies and favorable litigation settlements in 2009.

We believe that the weakening economic conditions in the United States, including a continued downturn in the housing market over the past year and increases in unemployment, and continued competition have adversely affected consumer demand for our services, especially premium services, and have contributed to an increase in the number of homes that replace their traditional telephone service with wireless service thereby impacting the growth of our telephone business and also had a negative impact on our advertising revenue.  These conditions have affected our net customer additions and revenue growth during the first three quarters of 2009, all of which contributed to the franchise impairment charge of $2.9 billion incurred in the third quarter of 2009.  If these conditions do not improve, we believe the growth of our business and results of operations will be adversely affected and additional impairments may occur.

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

Critical Accounting Policies and Estimates

Impairment of franchises, goodwill and other intangible assets.  We have recorded a significant amount of cost related to franchises, pursuant to which we are granted the right to operate our cable distribution network throughout our service areas.  The net carrying value of franchises as of September 30, 2009 and December 31, 2008 was approximately $4.5 billion (representing 41% of total assets) and $7.4 billion (representing 53% of total assets), respectively.  Furthermore, our noncurrent assets included approximately $68 million of goodwill as of September 30, 2009 and December 31, 2008.

Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other (“ASC 350”), requires that franchise intangible assets that meet specified indefinite-life criteria must be tested for impairment annually, or more frequently as warranted by events or changes in circumstances.  In determining whether our franchises have an indefinite-life, we considered the likelihood of franchise renewals, the expected costs of franchise renewals, and the technological state of the associated cable systems, with a view to whether or not we are in compliance with any technology upgrading requirements specified in a franchise agreement.  We have concluded that as of September 30,

 
 
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2009 and December 31, 2008 substantially all of our franchises qualify for indefinite-life treatment under ASC 350.  Costs associated with franchise renewals are amortized on a straight-line basis over 10 years, which represents management’s best estimate of the average term of the franchises.  Franchise amortization expense for each of the three months ended September 30, 2009 and 2008 was approximately $0.4 million, and franchise amortization expense for each of the nine months ended September 30, 2009 and 2008 was approximately $1 million.  Other intangible assets amortization expense for the three months ended September 30, 2009 and 2008 was approximately $2 million and $1 million, respectively, and for the nine months ended September 30, 2009 and 2008 was approximately $5 million and $3 million, respectively.  The Company expects that amortization expense on franchise assets and other intangible assets will be approximately $7 million annually for each of the next five years.  Actual amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, the application of fresh start accounting and other relevant factors.

We are required to evaluate the recoverability of our indefinite-life franchises, as well as goodwill, on an annual basis or more frequently as deemed necessary. Under ASC 350, if an asset is determined to be impaired, it is required to be written down to its estimated fair value as determined in accordance with accounting principles generally accepted in the United States (“GAAP”).  We determine estimated fair value utilizing an income approach model based on the present value of the estimated future cash flows assuming a discount rate. This approach makes use of unobservable factors such as projected revenues, expenses, capital expenditures, and a discount rate applied to the estimated cash flows. The determination of the discount rate is based on a weighted average cost of capital approach, which uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows.

Franchises are aggregated into essentially inseparable asset groups to conduct the valuations.  The asset groups generally represent geographic clustering of our cable systems into groups by which such systems are managed.  Management believes that such groupings represent the highest and best use of those assets.

Franchises, for ASC 350 valuation purposes, are defined as the future economic benefits of the right to solicit and service potential customers (customer marketing rights), and the right to deploy and market new services (service marketing rights).  Fair value is determined based on the discrete estimated discounted future cash flows of each unit of accounting using assumptions consistent with internal forecasts.  The franchise after-tax cash flow is calculated as the after-tax cash flow generated by the potential customers obtained (less the anticipated customer churn) and the new services added to those customers in future periods.  The sum of the present value of the franchises’ after-tax cash flow in years 1 through 10 and the continuing value of the after-tax cash flow beyond year 10 yields the fair value of the franchise.

Customer relationships, for ASC 350 valuation purposes, represent the value of the business relationship with our existing customers (less the anticipated customer churn), and are calculated by projecting future after-tax cash flows from these customers, including the right to deploy and market additional services to these customers.  The present value of these after-tax cash flows yields the fair value of the customer relationships.  Substantially all our acquisitions occurred prior to January 1, 2002.  We did not record any value associated with the customer relationship intangibles related to those acquisitions.  For acquisitions subsequent to January 1, 2002, we did assign a value to the customer relationship intangible, which is amortized over its estimated useful life.  Upon the effectiveness of our Plan, we will apply fresh start accounting in accordance with ASC 852-10, Reorganizations – Overall, and as such will adjust our customer relationships to reflect fair value and will also establish any previously unrecorded intangible assets at their fair values.  As such we expect the value of customer relationships to materially increase from that recorded at September 30, 2009.

Our ASC 350 valuations, which are based on the present value of projected after tax cash flows, result in a value of property, plant and equipment, franchises, customer relationships, and our total entity value.  The value of goodwill is the difference between the total entity value and amounts assigned to the other assets.  Upon the effectiveness of our Plan, we will apply fresh start accounting in accordance with ASC 852-10, Reorganizations – Overall, and as such will adjust our goodwill to reflect fair value. We expect the value of our goodwill to materially increase from that recorded at September 30, 2009.

The use of different valuation assumptions or definitions of franchises or customer relationships, such as our inclusion of the value of selling additional services to our current customers within customer relationships versus franchises, could significantly impact our valuations and any resulting impairment.

 
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As a result of the continued economic pressure on our customers from the recent economic downturn along with increased competition, we determined that our projected future growth would be lower than previously anticipated in our annual impairment testing in December 2008.  Accordingly, we determined that sufficient indicators existed to require us to perform an interim franchise impairment analysis as of September 30, 2009.  As of the date of the filing of this Quarterly Report on Form 10-Q, we determined that an impairment of franchises is probable and can be reasonably estimated.  Accordingly, for the quarter ended September 30, 2009, we recorded a preliminary non-cash franchise impairment charge of $2.9 billion which represents our best estimate of the impairment of our franchise assets.  We currently expect to finalize our franchise impairment analysis during the quarter ended December 31, 2009, which could result in an impairment charge that differs from the estimate.

We estimated discounted future cash flows using reasonable and appropriate assumptions including among others, penetration rates for basic and digital video, high-speed Internet, and telephone; revenue growth rates; and expected operating margins and capital expenditures.  The assumptions are derived based on our and our peers’ historical operating performance adjusted for current and expected competitive and economic factors surrounding the cable industry.  The estimates and assumptions made in our valuations are inherently subject to significant uncertainties, many of which are beyond our control, and there is no assurance that these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense growth rates, the amount and timing of capital expenditures and the discount rate utilized.  The assumptions used are consistent with internal forecasts, some of which differ from the assumptions used for the annual impairment testing in December 2008 as a result of the economic and competitive environment discussed previously.  The change in assumptions reflects the lower than anticipated growth in revenues experienced during the first three quarters of 2009 and the expected reduction of future cash flows as compared to those used in the December 2008 valuations.

While economic conditions applicable at the time of the valuations indicate the combination of assumptions utilized in the valuations are reasonable, as market conditions change so will the assumptions, with a resulting impact on the valuations and consequently the impairment charge.  At September 30, 2009, a 10% and 5% decline in the estimated fair value of our franchise assets in each of our units of accounting would have increased our impairment charge by approximately $446 million and $223 million, respectively.  A 10% and 5% increase in the estimated fair value of our franchise assets in each of our units of accounting would have reduced our impairment charge by approximately $446 million and $223 million, respectively.

We have other critical accounting policies which have not changed significantly from those disclosed in our 2008 Annual Report on Form 10-K.  For a discussion of those critical accounting policies and the means by which we develop estimates therefore, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2008 Annual Report on Form 10-K.


 
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RESULTS OF OPERATIONS

The following table sets forth the percentages of revenues that items in the accompanying condensed consolidated statements of operations constituted for the periods presented (dollars in millions, except per share data):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                                                 
REVENUES
  $ 1,693       100 %   $ 1,636       100 %   $ 5,045       100 %   $ 4,823       100 %
                                                                 
COSTS AND EXPENSES:
                                                               
Operating (excluding depreciation and
     amortization)
    736       43 %     710       43 %     2,164       43 %     2,089       43 %
Selling, general and administrative
    357       21 %     371       23 %     1,044       21 %     1,059       22 %
Depreciation and amortization
    327       19 %     332       20 %     977       19 %     981       21 %
Impairment of franchises
    2,854       169 %     --       --       2,854       57 %     --       --  
Other operating (income) expenses, net
    10       1 %     15       1 %     (38 )     (1 %)     51       1 %
                                                                 
      4,284       253 %     1,428       87 %     7,001       139 %     4,180       87 %
                                                                 
Income (loss) from operations
    (2,591 )     (153 %)     208       13 %     (1,956 )     (39 %)     643       13 %
                                                                 
OTHER INCOME (EXPENSES):
                                                               
Interest expense, net
    (206 )             (478 )             (885 )             (1,419 )        
Change in value of derivatives
    --               10