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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

FORM 10-Q


                     (Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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)

  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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

                    Large accelerated filer o                                                        Accelerated filer þ                                                  Non-accelerated filer 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, 2007: 403,224,161
Number of shares of Class B common stock outstanding as of September 30, 2007: 50,000
 
 


 
 
Charter Communications, Inc.
Quarterly Report on Form 10-Q for the Period ended September 30, 2007

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, 2007
 
and December 31, 2006
4
Condensed Consolidated Statements of Operations for the three and nine
 
months ended September 30, 2007 and 2006
5
Condensed Consolidated Statements of Cash Flows for the
 
nine months ended September 30, 2007 and 2006
6
Notes to Condensed Consolidated Financial Statements
7
   
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations
20
   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
31
   
Item 4. Controls and Procedures
32
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings
33
   
Item 1A.  Risk Factors
33
   
Item 6. Exhibits
39
   
SIGNATURES
S-1
   
EXHIBIT INDEX
E-1

This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2007.  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.  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 availability, in general, of funds to meet interest payment obligations under our debt and to fund our operations and necessary capital expenditures, either through 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 could trigger a default of our other obligations under cross-default provisions;
 
·
our ability to pay or refinance debt prior to or when it becomes due and/or refinance that debt through new issuances, exchange offers or otherwise, including restructuring our balance sheet and leverage position;
 
·
competition from other distributors, including incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers, and DSL providers;
 
·
difficulties in introducing, growing, and operating our telephone services, such as our ability to adequately meet customer expectations for the reliability of voice services;
 
·
our ability to adequately meet demand for installations and customer service;
 
·
our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed Internet, telephone and other services, and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition;
 
·
our ability to obtain programming at reasonable prices or to adequately raise prices to offset the effects of higher programming costs;
 
·
general business conditions, economic uncertainty or slowdown; and
 
·
the effects of governmental regulation, including but not limited to local and state franchise authorities, on our business.

All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement.  We are under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.
 
 
3


PART I. FINANCIAL INFORMATION.

Item 1.          Financial Statements.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $
59
    $
60
 
Accounts receivable, less allowance for doubtful accounts of
               
$18 and $16, respectively
   
223
     
195
 
Prepaid expenses and other current assets
   
62
     
84
 
Total current assets
   
344
     
339
 
                 
INVESTMENT IN CABLE PROPERTIES:
               
Property, plant and equipment, net of accumulated
               
depreciation of $8,608 and $7,644, respectively
   
5,108
     
5,217
 
Franchises, net
   
9,144
     
9,223
 
Total investment in cable properties, net
   
14,252
     
14,440
 
                 
OTHER NONCURRENT ASSETS
   
323
     
321
 
                 
Total assets
  $
14,919
    $
15,100
 
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $
1,410
    $
1,298
 
Total current liabilities
   
1,410
     
1,298
 
                 
LONG-TERM DEBT
   
19,691
     
19,062
 
NOTE PAYABLE – RELATED PARTY
   
63
     
57
 
DEFERRED MANAGEMENT FEES – RELATED PARTY
   
14
     
14
 
OTHER LONG-TERM LIABILITIES
   
874
     
692
 
MINORITY INTEREST
   
196
     
192
 
PREFERRED STOCK – REDEEMABLE; $.001 par value; 1 million
               
shares authorized; 36,713 shares issued and outstanding
   
5
     
4
 
                 
SHAREHOLDERS’ DEFICIT:
               
Class A Common stock; $.001 par value; 10.5 billion shares authorized;
               
403,224,161 and 407,994,585 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
   
5,328
     
5,313
 
Accumulated deficit
    (12,637 )     (11,536 )
Accumulated other comprehensive income (loss)
    (25 )    
4
 
                 
Total shareholders’ deficit
    (7,334 )     (6,219 )
                 
Total liabilities and shareholders’ deficit
  $
14,919
    $
15,100
 

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

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
 
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
REVENUES
  $
1,525
    $
1,388
    $
4,449
    $
4,091
 
                                 
COSTS AND EXPENSES:
                               
Operating (excluding depreciation and amortization)
   
679
     
615
     
1,957
     
1,830
 
Selling, general and administrative
   
341
     
309
     
961
     
860
 
Depreciation and amortization
   
334
     
334
     
999
     
1,024
 
Asset impairment charges
   
56
     
60
     
56
     
159
 
Other operating expenses, net
   
8
     
4
     
13
     
14
 
                                 
     
1,418
     
1,322
     
3,986
     
3,887
 
                                 
Operating income from continuing operations
   
107
     
66
     
463
     
204
 
                                 
OTHER INCOME AND (EXPENSES):
                               
Interest expense, net
    (452 )     (466 )     (1,387 )     (1,409 )
Other income (expense), net
    (21 )    
131
      (55 )    
121
 
                                 
      (473 )     (335 )     (1,442 )     (1,288 )
                                 
Loss from continuing operations before income taxes
    (366 )     (269 )     (979 )     (1,084 )
                                 
INCOME TAX EXPENSE
    (41 )     (64 )     (169 )     (124 )
                                 
Loss from continuing operations
    (407 )     (333 )     (1,148 )     (1,208 )
                                 
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
   
--
     
200
     
--
     
234
 
                                 
Net loss
  $ (407 )   $ (133 )   $ (1,148 )   $ (974 )
                                 
LOSS PER COMMON SHARE, BASIC AND DILUTED:
                               
       Loss from continuing operations
  $ (1.10 )   $ (1.02 )   $ (3.12 )   $ (3.77 )
       Net loss
  $ (1.10 )   $ (0.41 )   $ (3.12 )   $ (3.04 )
                                 
Weighted average common shares outstanding, basic and diluted
   
369,239,742
     
326,960,632
     
367,671,479
     
320,730,698
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

 
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
Unaudited

   
Nine Months Ended September 30,
 
   
2007
   
2006
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (1,148 )   $ (974 )
Adjustments to reconcile net loss to net cash flows from operating activities:
               
Depreciation and amortization
   
999
     
1,032
 
Asset impairment charges
   
56
     
159
 
Noncash interest expense
   
33
     
108
 
Deferred income taxes
   
161
     
123
 
(Gain) loss on sale of assets
   
5
      (198 )
(Gain) loss on extinguishment of debt
   
23
      (101 )
Other, net
   
37
      (10 )
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
               
Accounts receivable
    (33 )    
46
 
Prepaid expenses and other assets
   
21
     
23
 
Accounts payable, accrued expenses and other
   
173
     
140
 
                 
Net cash flows from operating activities
   
327
     
348
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (890 )     (795 )
Change in accrued expenses related to capital expenditures
    (51 )    
4
 
Proceeds from sales of assets, including cable systems
   
37
     
988
 
Other, net
    (31 )     (1 )
                 
Net cash flows from investing activities
    (935 )    
196
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings of long-term debt
   
7,472
     
5,970
 
Repayments of long-term debt
    (6,841 )     (6,846 )
Proceeds from issuance of debt
   
--
     
440
 
Payments for debt issuance costs
    (33 )     (44 )
Other, net
   
9
     
--
 
                 
Net cash flows from financing activities
   
607
      (480 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (1 )    
64
 
CASH AND CASH EQUIVALENTS, beginning of period
   
60
     
21
 
                 
CASH AND CASH EQUIVALENTS, end of period
  $
59
    $
85
 
                 
CASH PAID FOR INTEREST
  $
1,230
    $
1,121
 
                 
NONCASH TRANSACTIONS:
               
Cumulative adjustment to Accumulated Deficit for the adoption of FIN 48
  $
56
    $
--
 
Issuance of debt by CCH I, LLC
  $
--
    $
419
 
Issuance of debt by CCH II, LLC
  $
--
    $
410
 
Issuance of debt by Charter Communications Operating, LLC
  $
--
    $
37
 
Retirement of Charter Communications Holdings, LLC debt
  $
--
    $ (796 )
Retirement of Renaissance Media Group LLC debt
  $
--
    $ (37 )
Issuance of Class A common stock
  $
--
    $
68
 
Retirement of convertible senior notes
  $
--
    $ (255 )
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
 
1.    Organization and Basis of Presentation
 
Charter Communications, Inc. ("Charter") is a holding company whose principal assets at September 30, 2007 are the 54% controlling common equity interest (52% for accounting purposes) 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 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 condensed 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."  Charter has 100% voting control over Charter Holdco and consolidates Charter Holdco as a variable interest entity under Financial Accounting Standards Board ("FASB") Interpretation ("FIN") 46(R) Consolidation of Variable Interest Entities.  Charter Holdco’s limited liability company agreement provides that so long as Charter’s Class B common stock retains its special voting rights, Charter will maintain a 100% voting interest in Charter Holdco.  Voting control gives Charter full authority and control over the operations of Charter Holdco.  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 (analog and digital video), high-speed Internet services, advanced broadband services such as high definition television, Charter OnDemand™, and digital video recorder service, and, in many of our markets, telephone service.  The Company sells its cable video programming, high-speed Internet, telephone, and advanced broadband services on a subscription basis.  The Company also sells local advertising on cable networks.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (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 preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Areas involving significant judgments and estimates include capitalization of labor and overhead costs; depreciation and amortization costs; impairments of property, plant and equipment, franchises and goodwill; income taxes; and contingencies.  Actual results could differ from those estimates.
 
2.    Liquidity and Capital Resources

The Company incurred net losses of $407 million and $133 million for the three months ended September 30, 2007 and 2006, respectively, and $1.1 billion and $974 million for the nine months ended September 30, 2007 and 2006, respectively.  The Company’s net cash flows from operating activities were $327 million and $348 million for the nine months ended September 30, 2007 and 2006, respectively.

The Company has a significant amount of debt.  The Company's long-term financing as of September 30, 2007 totaled $19.7 billion, consisting of $7.0 billion of credit facility debt, $12.3 billion accreted value of high-yield notes, and $412 million accreted value of convertible senior notes.  For the remainder of 2007, none of the Company’s debt matures.  As of September 30, 2007, the Company’s 2008 and 2009 debt maturities totaled $65 million and $666 million, respectively.  Of the debt scheduled to mature in 2009, $364 million was exchanged in October 2007 for notes maturing in 2027, subject to earlier mandatory redemption at the election of the holders in 2012 and at each five-year
 
 
7

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
anniversary.  In 2010 and beyond, significant additional amounts will become due under the Company’s remaining long-term debt obligations.

The Company requires significant cash to fund debt service costs, capital expenditures and ongoing operations.  The Company has historically funded these requirements through cash flows from operating activities, borrowings under its credit facilities, sales of assets, issuances of debt and equity securities, and cash on hand.  However, the mix of funding sources changes from period to period.  For the nine months ended September 30, 2007, the Company generated $327 million of net cash flows from operating activities, after paying cash interest of $1.2 billion.  In addition, the Company used $890 million for purchases of property, plant and equipment.  Finally, the Company generated net cash flows from financing activities of $607 million, as a result of refinancing transactions completed during the period.

The Company expects that cash on hand, cash flows from operating activities, and the amounts available under its credit facilities will be adequate to meet its cash needs through 2008.  The Company believes that cash flows from operating activities and amounts available under the Company’s credit facilities may not be sufficient to fund the Company’s operations and satisfy its interest and principal repayment obligations in 2009, and will not be sufficient to fund such needs in 2010 and beyond.  The Company continues to work with its financial advisors concerning its approach to addressing liquidity, debt maturities, and overall balance sheet leverage.

Credit Facility Availability

The Company’s ability to operate depends upon, among other things, its continued access to capital, including credit under the Charter Communications Operating, LLC (“Charter Operating”) credit facilities.  The Charter Operating credit facilities, along with the Company’s indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility, contain certain restrictive covenants, some of which require the Company to maintain specified leverage ratios, meet financial tests, and provide annual audited financial statements with an unqualified opinion from the Company’s independent auditors.  As of September 30, 2007, the Company was in compliance with the covenants under its indentures and credit facilities, and the Company expects to remain in compliance with those covenants for the next twelve months.  As of September 30, 2007, the Company’s potential availability under Charter Operating’s revolving credit facility totaled approximately $1.3 billion, none of which was limited by covenant restrictions.  Continued access to the Company’s credit facilities is subject to the Company remaining in compliance with these covenants, including covenants tied to the Company’s leverage ratio.  If any event of non-compliance were to occur, funding under the credit facilities may not be available and defaults on some or potentially all of the Company’s debt obligations could occur.  An event of default under any of the Company’s debt instruments could result in the acceleration of its payment obligations under that debt and, under certain circumstances, in cross-defaults under its other debt obligations, which could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

Limitations on Distributions

As long as Charter’s convertible senior notes remain outstanding and are not otherwise converted into shares of common stock, Charter must pay interest on the convertible senior notes and repay the principal amount.  In October 2007, Charter Holdco completed an exchange offer, in which $364 million of Charter’s 5.875% convertible senior notes due November 2009 were exchanged for $479 million of Charter’s 6.50% convertible senior notes.  Approximately $49 million of Charter’s 5.875% convertible senior notes remain outstanding, net of $814 million of the 5.875% convertible senior notes now held by Charter Holdco.  Charter’s ability to make interest payments on its convertible senior notes, and to repay the outstanding principal of its convertible senior notes will depend on its ability to raise additional capital and/or on receipt of payments or distributions from Charter Holdco and its subsidiaries.  As of September 30, 2007, Charter Holdco was owed $123 million in intercompany loans from Charter Communications Operating, LLC and had $44 million in cash, which amounts were available to pay interest and principal on Charter's convertible senior notes.  In addition, Charter has $25 million of U.S. government securities pledged as security for the semi-annual interest payments on Charter’s 5.875% convertible senior notes scheduled in November 2007.  As long as Charter Holdco continues to hold the $814 million of Charter’s 5.875% convertible senior notes, Charter Holdco will
 
 
8

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
receive interest payments from the government securities pledged for Charter’s 5.875% convertible senior notes.  The remaining amount of interest payments expected to be received by Charter Holdco in November 2007 is approximately $24 million, which may be available to pay semiannual interest on the outstanding principal amount of $49 million of Charter’s 5.875% convertible senior notes and $479 million of Charter’s 6.50% convertible senior notes, although Charter Holdco may use those amounts for other purposes.

Distributions by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco and CCHC) for payment of principal on parent company notes, are restricted under the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, Charter Operating notes, and under the CCO Holdings credit facilities, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution.  For the quarter ended September 30, 2007, there was no default under any of these indentures or credit facilities.  However, certain of the Company’s subsidiaries did not meet their applicable leverage ratio tests based on September 30, 2007 financial results.  As a result, distributions from certain of the Company’s subsidiaries to their parent companies will continue to be restricted unless those tests are met.  Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in its credit facilities.

Distributions by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company for payment of parent company interest are permitted if there is no default under the aforementioned indentures and CCO Holdings credit facilities.

The indentures governing the Charter Holdings notes permit Charter Holdings to make distributions to Charter Holdco for payment of interest or principal on Charter’s convertible senior notes, only if, after giving effect to the distribution, Charter Holdings can incur additional debt under the leverage ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures, and other specified tests are met.  For the quarter ended September 30, 2007, there was no default under Charter Holdings’ indentures and the other specified tests were met.  However, Charter Holdings did not meet the leverage ratio test of 8.75 to 1.0 based on September 30, 2007 financial results.  As a result, distributions from Charter Holdings to Charter or Charter Holdco would have been restricted at such time and will continue to be restricted unless that test is met.  During periods in which distributions are restricted, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments (that are not restricted payments) in Charter Holdco or Charter, up to an amount determined by a formula, as long as there is no default under the indentures.  

Recent Financing Transactions

In March 2007, Charter Operating entered into an Amended and Restated Credit Agreement (the “Charter Operating Credit Agreement”) which provides for a $1.5 billion senior secured revolving line of credit, a continuation of the existing $5.0 billion term loan facility (which was refinanced with new term loans in April 2007), and a $1.5 billion new term loan facility, which was funded in March and April 2007.  In March 2007, CCO Holdings entered into a credit agreement which consisted of a $350 million term loan facility funded in March and April 2007.  In April 2007, Charter Holdings completed a cash tender offer and purchased $97 million of its outstanding notes.  In addition, Charter Holdings redeemed $187 million of its 8.625% senior notes due April 1, 2009 and CCO Holdings redeemed $550 million of its senior floating rate notes due December 15, 2010.  These redemptions closed in April 2007.  See Note 6.
 
3.    Sale of Assets
 
In 2006, the Company sold certain cable television systems serving approximately 356,000 analog video customers in 1) West Virginia and Virginia to Cebridge Connections, Inc. (the “Cebridge Transaction”);  2) Illinois and Kentucky to Telecommunications Management, LLC, doing business as New Wave Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total sales price of approximately $971 million.  The Company used the net proceeds from the asset sales to reduce borrowings, but not commitments, under the revolving portion of the Company’s credit
 
 
9

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
facilities.  These cable systems met the criteria for assets held for sale.  As such, the assets were written down to fair value less estimated costs to sell, resulting in asset impairment charges during the nine months ended September 30, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction.  The Company determined that the West Virginia and Virginia cable systems comprise operations and cash flows that for financial reporting purposes meet the criteria for discontinued operations.  Accordingly, the results of operations for the West Virginia and Virginia cable systems have been presented as discontinued operations, net of tax, for the three and nine months ended September 30, 2006, including a gain of $200 million on the sale of cable systems.

Summarized consolidated financial information for the three and nine months ended September 30, 2006 for the West Virginia and Virginia cable systems is as follows:

   
Three Months
Ended September 30, 2006
   
Nine Months
Ended September 30, 2006
 
             
Revenues
  $
--
    $
109
 
Income before income taxes
  $
200
    $
238
 
Income tax expense
  $
--
    $ (4 )
Net income
  $
200
    $
234
 
Earnings per common share, basic and diluted
  $
0.61
    $
0.73
 

Also, during the three months ended September 30, 2007 and 2006, the Company recorded asset impairment charges of $56 million and $60 million, respectively, related to other cable systems meeting the criteria of assets held for sale during the respective periods.
 
4.    Franchises and Goodwill
 
Franchise rights represent the value attributed to agreements with local authorities that allow access to homes in cable service areas acquired through the purchase of cable systems.  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 Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets.  Franchises that qualify for indefinite-life treatment under SFAS No. 142 are tested for impairment annually each October 1 based on valuations, or more frequently as warranted by events or changes in circumstances.  The October 1, 2007 annual impairment test will be finalized in the fourth quarter of 2007 and any impairment resulting from such test will be recorded in the fourth quarter.  Franchises are aggregated into essentially inseparable asset groups to conduct the valuations.  The asset groups generally represent geographical 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 of September 30, 2007 and December 31, 2006, indefinite-lived and finite-lived intangible assets are presented in the following table:

   
September 30, 2007
   
December 31, 2006
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
   
Gross
Carrying
Amount
   
Accumulated Amortization
   
Net
Carrying
Amount
 
Indefinite-lived intangible assets:
                                   
Franchises with indefinite lives
  $
9,131
    $
--
    $
9,131
    $
9,207
    $
--
    $
9,207
 
Goodwill
   
79
     
--
     
79
     
61
     
--
     
61
 
                                                 
    $
9,210
    $
--
    $
9,210
    $
9,268
    $
--
    $
9,268
 
Finite-lived intangible assets:
                                               
Franchises with finite lives
  $
23
    $
10
    $
13
    $
23
    $
7
    $
16
 
 
 
10

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

For the nine months ended September 30, 2007, the net carrying amount of indefinite-lived franchises was reduced by $20 million, related to cable asset sales completed in the first nine months of 2007, and $56 million as a result of asset impairment charges recorded related to other cable asset sales.  Franchise amortization expense represents the amortization relating to franchises that did not qualify for indefinite-life treatment under SFAS No. 142, including costs associated with franchise renewals.  Franchise amortization expense for the three and nine months ended September 30, 2007 was approximately $1 million and $3 million, respectively, and for the three and nine months ended September 30, 2006 was approximately $0 and $1 million, respectively.  The Company expects that amortization expense on franchise assets will be approximately $3 million annually for each of the next five years.  Actual amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives and other relevant factors.

For the nine months ended September 30, 2007, goodwill increased $18 million as a result of the Company’s purchase of certain cable systems in June and August of 2007.  The amount recorded to goodwill is based on a preliminary allocation of purchase price and is subject to change based on finalization of the fair value allocations.

5.    Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of September 30, 2007 and December 31, 2006:

   
September 30,
2007
   
December 31,
2006
 
             
Accounts payable - trade
  $
124
    $
92
 
Accrued capital expenditures
   
46
     
97
 
Accrued expenses:
               
Interest
   
534
     
410
 
Programming costs
   
277
     
268
 
Franchise-related fees
   
56
     
68
 
Compensation
   
110
     
110
 
Other
   
263
     
253
 
                 
    $
1,410
    $
1,298
 
 
 
6.    Long-Term Debt

 
Long-term debt consists of the following as of September 30, 2007 and December 31, 2006:

   
September 30, 2007
   
December 31, 2006
 
   
Principal Amount
   
Accreted Value
   
Principal Amount
   
Accreted Value
 
Long-Term Debt
                       
Charter Communications, Inc.:
                       
5.875% convertible senior notes due November 16, 2009
  $
413
    $
412
    $
413
    $
408
 
Charter Communications Holdings, LLC:
                               
8.250% senior notes due April 1, 2007
   
--
     
--
     
105
     
105
 
8.625% senior notes due April 1, 2009
   
--
     
--
     
187
     
187
 
10.000% senior notes due April 1, 2009
   
88
     
88
     
105
     
105
 
10.750% senior notes due October 1, 2009
   
63
     
63
     
71
     
71
 
9.625% senior notes due November 15, 2009
   
37
     
37
     
52
     
52
 

 
11

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

10.250% senior notes due January 15, 2010
   
18
     
18
     
32
     
32
 
11.750% senior discount notes due January 15, 2010
   
16
     
16
     
21
     
21
 
11.125% senior notes due January 15, 2011
   
47
     
47
     
52
     
52
 
13.500% senior discount notes due January 15, 2011
   
60
     
60
     
62
     
62
 
9.920% senior discount notes due April 1, 2011
   
51
     
51
     
63
     
63
 
10.000% senior notes due May 15, 2011
   
69
     
69
     
71
     
71
 
11.750% senior discount notes due May 15, 2011
   
54
     
54
     
55
     
55
 
12.125% senior discount notes due January 15, 2012
   
75
     
75
     
91
     
91
 
CCH I Holdings, LLC:
                               
11.125% senior notes due January 15, 2014
   
151
     
151
     
151
     
151
 
13.500% senior discount notes due January 15, 2014
   
581
     
581
     
581
     
581
 
9.920% senior discount notes due April 1, 2014
   
471
     
471
     
471
     
471
 
10.000% senior notes due May 15, 2014
   
299
     
299
     
299
     
299
 
11.750% senior discount notes due May 15, 2014
   
815
     
815
     
815
     
815
 
12.125% senior discount notes due January 15, 2015
   
217
     
217
     
217
     
216
 
CCH I, LLC:
                               
11.000% senior notes due October 1, 2015
   
3,987
     
4,084
     
3,987
     
4,092
 
CCH II, LLC:
                               
10.250% senior notes due September 15, 2010
   
2,198
     
2,192
     
2,198
     
2,190
 
    10.250% senior notes due October 1, 2013
   
250
     
261
     
250
     
262
 
CCO Holdings, LLC:
                               
Senior floating notes due December 15, 2010
   
--
     
--
     
550
     
550
 
8 3/4% senior notes due November 15, 2013
   
800
     
795
     
800
     
795
 
Credit facility
   
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
 
Credit facilities
   
6,615
     
6,615
     
5,395
     
5,395
 
    $
19,595
    $
19,691
    $
18,964
    $
19,062
 
 
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.  However, certain of the CCH I notes and CCH II notes issued in exchange for Charter Holdings notes and Charter convertible senior notes in 2006 and 2005 are recorded for financial reporting purposes at values different from the current accreted value for legal purposes and notes indenture purposes (the amount that is currently payable if the debt becomes immediately due).  As of September 30, 2007, the accreted value of the Company’s debt for legal purposes and notes indenture purposes is approximately $19.6 billion.

In March 2007, Charter Operating entered into the Charter Operating Credit Agreement which provides for a $1.5 billion senior secured revolving line of credit, a continuation of the existing $5.0 billion term loan facility (the “Existing Term Loan”), and a $1.5 billion new term loan facility (the “New Term Loan”), which was funded in March and April 2007.  Borrowings under the Charter Operating Credit Agreement bear interest at a variable interest rate based on either LIBOR or a base rate, plus in either case, an applicable margin.  The applicable margin for LIBOR loans under the New Term Loan and revolving loans is 2.00% above LIBOR.  The revolving line of credit commitments terminate in March 2013.  The Existing Term Loan and the New Term Loan are subject to amortization at 1% of their initial principal amount per annum commencing on March 31, 2008 with the remaining principal amount of the New Term Loan due in March 2014.  The Charter Operating Credit Agreement also modified the quarterly consolidated leverage ratio to be less restrictive.

In March 2007, CCO Holdings entered into a credit agreement (the “CCO Holdings Credit Agreement”) which consisted of a $350 million term loan facility (the “Term Facility”).  The Term Facility matures in September 2014 (the “Maturity Date”).  Borrowings under the CCO Holdings Credit Agreement bear interest at a variable interest rate
 
 
12

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
based on either LIBOR or a base rate plus, in either case, an applicable margin.  The applicable margin for LIBOR term loans is 2.50% above LIBOR.  The CCO Holdings Credit Agreement is secured by the equity interests of Charter Operating, and all proceeds thereof.

As part of the refinancing, the existing $350 million revolving/term credit facility was terminated.  The refinancing resulted in a loss on extinguishment of debt of approximately $13 million for the nine months ended September 30, 2007, included in other income (expense), net on the Company’s condensed consolidated statements of operations.

In April 2007, Charter Holdings completed a tender offer, in which $97 million of Charter Holdings’ notes were accepted in exchange for $100 million of total consideration, including premiums and accrued interest.  In addition, Charter Holdings redeemed $187 million of its 8.625% senior notes due April 1, 2009 and CCO Holdings redeemed $550 million of its senior floating rate notes due December 15, 2010.  These redemptions closed in April 2007.  The redemptions and tender resulted in a loss on extinguishment of debt of approximately $22 million for the nine months ended September 30, 2007, included in other income (expense), net on the Company’s condensed consolidated statements of operations.

On April 1, 2007, $105 million of Charter Holdings 8.25% notes matured and were paid off with proceeds from the CCO Holdings Credit Agreement.

In October 2007, Charter Holdco completed a tender offer, in which $364 million of Charter’s 5.875% convertible senior notes due 2009 were accepted for $479 million of Charter’s 6.50% convertible senior notes due 2027.  The 6.50% convertible senior notes will have an initial conversion price of $3.41 and initial conversion rate of 293.3868 per $1,000 principal amount of 6.50% convertible senior notes, with a maturity date of October 1, 2027, subject to earlier redemption at the option of the Company or repurchase at the option of the holders.  The 6.50% convertible senior notes provide the holders with the right to require Charter to repurchase some or all of the 6.50% convertible senior notes for cash on October 1, 2012, 2017 and 2022 at a repurchase price equal to the principal amount plus accrued interest.

Charter may redeem the 6.50% convertible senior notes in whole or in part for cash at any time at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, but only if for any 20 trading days in any 30 consecutive trading day period the closing price has exceeded 180% of the conversion price provided such 30 trading day period begins prior to October 1, 2010, or 150% of the conversion price provided such 30 trading period begins thereafter up until October 1, 2012, or at the redemption price regardless of the closing price of Charter’s Class A common stock thereafter.  Holders who convert any 6.50% convertible senior notes prior to October 1, 2012 that Charter has called for redemption shall receive, in addition to the early conversion make whole amount, if applicable, the present value of the interest on the notes converted that would have been payable for the period from the redemption date to, but excluding, October 1, 2012.

Charter expects to record a loss on extinguishment of debt in the fourth quarter of 2007 related to this transaction.  Approximately $49 million of Charter’s 5.875% convertible senior notes remain outstanding.

7.    Minority Interest and Equity Interest of Charter Holdco

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 $413 million (at September 30, 2007 and December 31, 2006) 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% convertible senior notes.  Minority interest on the Company’s condensed consolidated balance sheets represents Mr. Allen’s, Charter’s chairman and controlling shareholder, 5.6% preferred membership interests in CC VIII, LLC ("CC VIII"), an indirect subsidiary of Charter Holdco, of $196 million and $192 million as of September 30, 2007 and December 31, 2006, respectively.  

In connection with the issuance of the 6.50% convertible senior notes described in Note 6, Charter entered into certain agreements with Charter Holdco to provide for the issuance of $479 million original principal amount of a 6.50%
 
 
13

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
mirror convertible senior note due 2027 of Charter Holdco (the “Mirror Note”) to Charter.  These agreements facilitated compliance with the certificate of incorporation of Charter and the governing documents of Charter Holdco regarding the required issuance of mirror securities by Charter Holdco.  The terms of the Mirror Note mirror the terms of the 6.50% convertible senior notes.  

8.    Share Lending Agreement

As of September 30, 2007, there were 29.8 million shares of Charter Class A common stock outstanding that were issued in various offerings as required by the share lending agreement, pursuant to which Charter had previously agreed to loan up to 150 million shares to Citigroup Global Markets Limited ("CGML").  These offerings of Charter’s Class A common stock were conducted to facilitate transactions by which investors in Charter’s 5.875% convertible senior notes, issued on November 22, 2004, hedged their investments in these convertible senior notes.  In conjunction with the October 2007 exchange of Charter convertible senior notes, Charter and CGML amended the share lending agreement in October 2007 to allow the use of the borrowed shares to hedge investments in Charter’s 6.50% convertible senior notes.  Charter did not receive any of the proceeds from the sale of this Class A common stock.  However, under the share lending agreement, Charter received a loan fee of $.001 for each share that it lent to CGML.  Charter has no further obligation to issue shares pursuant to this share lending agreement.

The issuance of shares pursuant to this share lending agreement is essentially analogous to a sale of shares coupled with a forward contract for the reacquisition of the shares at a future date.  An instrument that requires physical settlement by repurchase of a fixed number of shares in exchange for cash is considered a forward purchase instrument.  While the share lending agreement does not require a cash payment upon return of the shares, physical settlement is required (i.e., the shares borrowed must be returned at the end of the arrangement).  The fair value of the 29.8 million loaned shares outstanding was approximately $77 million as of September 30, 2007.  However, the net effect on shareholders’ deficit of the shares lent pursuant to the share lending agreement, which includes Charter’s requirement to lend the shares and the counterparties’ requirement to return the shares, is de minimis and represents the cash received upon lending of the shares and is equal to the par value of the common stock to be issued.
 
9.    Rights Agreement

In August 2007, Charter’s Board of Directors adopted a rights plan and declared a dividend of one preferred share purchase right for each issued and outstanding share of Charter’s Class A common stock and Class B common stock (a “Right”).  The dividend was payable to stockholders of record as of August 31, 2007 and 403,219,728 Rights were issued. In connection with the adoption of the rights plan, the Company increased the authorized Class A common stock and Class B common stock to 10.5 billion and 4.5 billion shares, respectively.  The terms of the Rights and rights plan were set forth in a Rights Agreement, by and between Charter and Mellon Investor Services LLC, dated as of August 14, 2007 (the “Rights Plan” or “Rights Agreement”). 

The Rights Plan was adopted in an effort to protect stockholder value by attempting to protect against a possible limitation on Charter’s ability to use its net operating loss carryforwards, which could significantly impair the value of that asset.  See Note 14.  The Rights Plan is intended to act as a deterrent to any person or group from acquiring 5.0% or more of Charter’s Class A common stock or any person or group holding 5.0% or more of Charter’s Class A common stock (“Acquiring Person”) from acquiring more shares without the approval of Charter’s Board of Directors.  The Rights will not be exercisable until 10 days after a public announcement by Charter that a person or group has become an Acquiring Person.  Except as may be determined by Charter’s Board of Directors, with the consent of the holders of the majority of the Class B common stock, all outstanding, valid, and exercisable Rights, except for those Rights held by any Acquiring Person, will be exchanged for 2.5 shares of Class A common stock and/or Class B common stock, as applicable, or an equivalent security.  If Charter’s Board of Directors and holders of the Class B common stock determine that such an exchange does not occur, all holders of Rights, except any Acquiring Person, may exercise their Rights upon payment of the purchase price to purchase five shares of Charter’s Class A common stock and/or Class B common stock, as applicable (or other securities or assets as determined by Charter’s Board of Directors) at a 50% discount to the then current market price.  The Rights and Rights Agreement will expire on December 31, 2008, if not terminated earlier.
 
 
14

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
10.    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 of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in accumulated other comprehensive income (loss).  Comprehensive loss was $480 million and $134 million for the three months ended September 30, 2007 and 2006, respectively, and $1.2 billion and $975 million for the nine months ended September 30, 2007 and 2006, respectively.
 
11.    Accounting for Derivative Instruments and Hedging Activities

The Company uses interest rate derivative instruments, including but not limited to interest rate swap agreements and interest rate collar agreements (collectively referred to herein as interest rate 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 has 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.

The Company’s hedging policy does not permit it to hold or issue derivative instruments for trading purposes.  The Company does, however, have certain interest rate derivative instruments that have been designated as cash flow hedging instruments.  Such instruments effectively convert variable interest payments on certain debt instruments into fixed payments.  For qualifying hedges, SFAS No. 133 allows derivative gains and losses to offset related results on hedged items in the consolidated statement of operations.  The Company has formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting.  For each of the three months ended September 30, 2007 and 2006, other income (expense), net includes $0, and for the nine months ended September 30, 2007 and 2006, other income (expense), net includes $0 and gains of $2 million, respectively, which represent cash flow hedge ineffectiveness on interest rate hedge agreements.  This ineffectiveness arises from differences between critical terms of the agreements and the related hedged obligations.  

Changes in the fair value of interest rate agreements that are designated as hedging instruments of the variability of cash flows associated with floating rate debt obligations, and that meet the effectiveness criteria of SFAS No. 133 are reported in accumulated other comprehensive income (loss).  For the three months ended September 30, 2007 and 2006, losses of $73 million and $1 million, respectively, and for the nine months ended September 30, 2007 and 2006, losses of $25 million and $1 million, respectively, related to derivative instruments designated as cash flow hedges, were recorded in accumulated other comprehensive income (loss).  The amounts are 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 affects earnings (losses).

Certain interest rate derivative instruments are not designated as hedges as they do not meet the effectiveness criteria specified by SFAS No. 133.  However, management believes such instruments are closely correlated with the respective debt, thus managing associated risk.  Interest rate derivative instruments not designated as hedges are marked to fair value, with the impact recorded as other income (expense) in the Company’s condensed consolidated statements of operations.  For the three months ended September 30, 2007 and 2006, other income (expense), net, includes losses of $21 million and $3 million, respectively, and for the nine months ended September 30, 2007 and 2006, other income (expense), net includes losses of $16 million and gains of $6 million, respectively, resulting from interest rate derivative instruments not designated as hedges.

As of September 30, 2007 and December 31, 2006, the Company had outstanding $4.3 billion and $1.7 billion, respectively, in notional amounts of interest rate swaps.  The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to credit loss.  The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts.
 
 
15

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

Certain provisions of the Company’s 5.875% convertible senior notes due 2009 are considered embedded derivatives for accounting purposes and are required to be accounted for separately from the convertible senior notes.  In accordance with SFAS No. 133, these derivatives are marked to market with gains or losses recorded in interest expense on the Company’s condensed consolidated statement of operations.  For the three months ended September 30, 2007 and 2006, the Company recognized gains of $7 million and $0, respectively, and for the nine months ended September 30, 2007 and 2006, the Company recognized losses of $2 million and gains of $2 million, respectively.  The losses resulted in an increase in interest expense related to these derivatives and the gains resulted in a decrease in interest expense.  At September 30, 2007 and December 31, 2006, $6 million and $12 million, respectively, is recorded in accounts payable and accrued expenses relating to the short-term portion of these derivatives and $8 million and $0, respectively, is recorded in other long-term liabilities related to the long-term portion.

12.    Other Operating Expenses, Net

Other operating expenses, net consist of the following for the three and nine months ended September 30, 2007 and 2006:

   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Loss on sale of assets, net
  $
2
    $
2
    $
5
    $
2
 
Special charges, net
   
6
     
2
     
8
     
12
 
                                 
    $
8
    $
4
    $
13
    $
14
 

Special charges, net for the three and nine months ended September 30, 2007 and 2006, primarily represent severance associated with the closing of call centers and divisional restructuring.
 
13.    Other Income (Expense), Net

Other income (expense), net consists of the following for the three and nine months ended September 30, 2007 and 2006:

   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Gain (loss) on derivative instruments and
hedging activities, net
  $ (21 )   $ (3 )   $ (16 )   $
8
 
Gain (loss) on extinguishment of debt
   
--
     
128
      (35 )    
101
 
Minority interest
    (1 )     (2 )     (4 )     (3 )
Gain on investments
   
2
     
8
     
1
     
12
 
Other, net
    (1 )    
--
      (1 )    
3
 
                                 
    $ (21 )   $
131
    $ (55 )   $
121
 
 
The Charter Operating refinancing in April 2006 resulted in a loss on extinguishment of debt for the nine months ended September 30, 2006 of approximately $27 million. The exchange in September 2006 of Charter Holdings notes for CCH I and CCH II notes resulted in a gain on extinguishment of debt for the three and nine months ended September 30, 2006 of approximately $108 million. The exchange in September 2006 of Charter convertible senior notes for a combination of cash, Charter common stock, and CCH II notes resulted in a gain on extinguishment of debt for the three and nine months ended September 30, 2006 of approximately $20 million.
 
 
16

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
14.    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, Charter Investment, Inc. (“CII”) and Vulcan Cable III Inc. ("Vulcan Cable").  Charter is responsible for its allocated share of taxable income or loss of Charter Holdco 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.

During the three and nine months ended September 30, 2007, the Company recorded $41 million and $169 million of income tax expense, respectively.  During the three and nine months ended September 30, 2006, the Company recorded $64 million and $128 million of income tax expense, respectively.  Income tax expense of $0 and $4 million was associated with discontinued operations for the three and nine months ended September 30, 2006, respectively.  Income tax expense is recognized through increases in the deferred tax liabilities related to Charter’s investment in Charter Holdco, as well as for certain of Charter’s subsidiaries, current federal and state income tax expense and increases to the related deferred tax liabilities.  

As of September 30, 2007 and December 31, 2006, the Company had net deferred income tax liabilities of approximately $629 million and $514 million, respectively.  Included in these deferred tax liabilities is approximately $230 million and $200 million of deferred tax liabilities at September 30, 2007 and December 31, 2006, respectively, relating to certain indirect subsidiaries of Charter Holdco that file separate income tax returns. The remainder of the Company’s deferred tax liability arises from Charter’s investment in Charter Holdco, and is largely attributable to the characterization of franchises for financial reporting purposes as indefinite-lived.

As of September 30, 2007 and December 31, 2006, the Company had approximately $7.6 billion and $6.7 billion, respectively, of tax net operating loss carryforwards, resulting in gross deferred tax assets of $3.0 billion and $2.7 billion, respectively, expiring in years 2007 through 2027.  Such tax net operating loss carryforwards accumulate and can be used to offset any of our future taxable income.  However, due to uncertainties in projected future taxable income, valuation allowances of $2.6 billion and $2.2 billion as of September 30, 2007 and December 31, 2006, respectively, have been established against these gross deferred tax assets except for deferred benefits available to offset specific deferred tax liabilities.  The Company recorded approximately $341 million of additional gross deferred tax assets during the nine months ended September 30, 2007, relating to net operating loss carryforwards, but recorded a valuation allowance with respect to this amount because of the uncertainty of the ability to realize a benefit from the Company’s carryforwards in the future.  The Company also had deferred tax assets of approximately $2.0 billion as of September 30, 2007 and December 31, 2006, representing financial losses in excess of the tax losses that were allocated to Charter from Charter Holdco.  Valuation allowances of $2.0 billion as of September 30, 2007 and December 31, 2006, existed with respect to these deferred tax assets.

The amount of any potential 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, as defined in the applicable federal income tax rules, would place significant limitations, on an annual basis, on the use of such net operating losses to offset any future taxable income the Company may generate.  Such limitations, in conjunction with the net operating loss expiration provisions, could effectively eliminate the Company’s ability to use a substantial portion of its net operating losses to offset future taxable income.  Although the Company has adopted the Rights Plan as an attempt to protect against an “ownership change,” certain transactions and the timing of such transactions could cause such an ownership change including, but not limited to, the following: The issuance of shares of common stock upon future conversion of Charter’s convertible senior notes; reacquisition of the shares borrowed under the share lending agreement by Charter (of which 29.8 million remain outstanding as of
 
 
17

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
September 30, 2007); or acquisitions or sales of shares by certain holders of Charter’s shares, including persons who have held, currently hold, or accumulate in the future five percent or more of Charter’s outstanding stock (including an exchange by Mr. Allen or his affiliates, directly or indirectly, of membership units of Charter Holdco into CCI common stock).  Many of the foregoing transactions, including whether Mr. Allen exchanges his Charter Holdco units, are beyond management’s control.

If certain exchanges, as described above, were to take place, Charter would likely record for financial reporting purposes additional deferred tax liability related to any increased interest in Charter Holdco.

Charter Holdco is currently under examination by the Internal Revenue Service for the tax years ending December 31, 2002 through 2005.  In addition, Charter is under examination by the Internal Revenue Service for the tax year ended December 31, 2004.  Management does not expect the results of these examinations to have a material adverse effect on the Company’s consolidated financial condition or results of operations.

In January 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.  The adoption of FIN 48 resulted in a deferred tax benefit of $56 million related to a settlement with Mr. Allen regarding ownership of the CC VIII preferred membership interests, which was recognized as a cumulative adjustment to the accumulated deficit in the first quarter of 2007.

15.    Contingencies

The Company is a defendant or co-defendant in several unrelated lawsuits claiming infringement of various patents relating to various aspects of its businesses.  Other industry participants are also defendants in certain of these cases, and, in many cases, the Company expects that any potential liability would be the responsibility of its equipment vendors pursuant to applicable contractual indemnification provisions. In the event that a court ultimately determines that the Company infringes on any intellectual property rights, it may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers.  While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, the lawsuits could be material to the Company’s consolidated results of operations of any one period, and no assurance can be given that any adverse outcome would not be material to the Company’s consolidated financial condition, results of operations, or liquidity.

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

16.    Stock Compensation Plans

The Company has stock option plans (the “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 restricted stock (not to exceed 20.0 million shares of Charter Class A common stock), as each term is defined in the Plans.  Employees, officers, consultants and directors of the Company and its subsidiaries and affiliates are eligible to receive grants under the Plans.  Options granted generally vest over four years from the grant date, with 25% generally vesting on the anniversary of the grant date and ratably thereafter.  Generally, options expire 10 years from the grant date.  The Plans allow 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).  During the three and nine months ended September 30, 2007, Charter granted 0.1 million and 4.0 million stock options, respectively, and 2.6 million and 9.5 million performance units, respectively, under Charter’s Long-Term Incentive Program.  During the three and nine months ended September 30, 2007, Charter issued 2.5 million and 2.8 million shares of restricted Class A common
 
 
18

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
 
stock.  The Company recorded $5 million and $3 million of stock compensation expense for the three months ended September 30, 2007 and 2006, respectively, and $15 million and $10 million for the nine months ended September 30, 2007 and 2006, which is included in selling, general, and administrative expense.
 

 
19

 
Item 2.        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, 2007 are the 54% controlling common equity interest (52% for accounting purposes) 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," "us" and "our" refer to Charter and its subsidiaries.

We are a broadband communications company operating in the United States.  We offer our residential and commercial customers traditional cable video programming (analog and digital video, which we refer to as “video service”), high-speed Internet services, advanced broadband cable services (such as Charter OnDemand™ video service (“OnDemand”), high definition television service, and digital video recorder (“DVR”) service) and, in many of our markets, telephone service.  We sell our cable video programming, high-speed Internet, telephone, and advanced broadband services on a subscription basis.

The following table summarizes our customer statistics for analog and digital video, residential high-speed Internet and residential telephone as of September 30, 2007 and 2006:

   
Approximate as of
 
   
September 30,
   
September 30,
 
   
2007 (a)
   
2006 (a)
 
             
Video Cable Services:
           
Analog Video:
           
Residential (non-bulk) analog video customers (b)
   
5,073,900
     
5,216,900
 
Multi-dwelling (bulk) and commercial unit customers (c)
   
273,900
     
259,700
 
Total analog video customers (b)(c)
   
5,347,800
     
5,476,600
 
                 
Digital Video:
               
Digital video customers (d)
   
2,882,900
     
2,767,900
 
                 
Non-Video Cable Services:
               
Residential high-speed Internet customers (e)
   
2,639,200
     
2,343,200
 
Telephone customers (f)
   
802,600
     
339,600
 

After giving effect to sales of cable systems in January 2007 and May 2007, and the acquisition of cable systems in August 2007, analog video customers, digital video customers, high-speed Internet customers and telephone customers would have been 5,442,300, 2,753,700, 2,342,900, and 339,600, respectively, as of September 30, 2006.

(a)
"Customers" include all persons our corporate billing records show as receiving service (regardless of their payment status), except for complimentary accounts (such as our employees).  At September 30, 2007 and 2006, "customers" include approximately 33,800 and 43,500 persons whose accounts were over 60 days past due in payment, approximately 5,700 and 8,400 persons whose accounts were over 90 days past due in payment, and approximately 2,100 and 5,100 of which were over 120 days past due in payment, respectively.
 
(b)
"Analog video customers" include all customers who receive video services.

(c)
Included within "video customers" are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit ("EBU") basis.  EBU is calculated for a system by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service.  The EBU method of estimating analog video customers is consistent with the methodology used in determining costs paid to programmers and has been used consistently.
 
 
20


(d)
"Digital video customers" include all households that have one or more digital set-top boxes or cable cards deployed.

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

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

Overview
 
For the three months ended September 30, 2007 and 2006, our operating income from continuing operations was $107 million and $66 million, respectively, and for the nine months ended September 30, 2007 and 2006, our operating income from continuing operations was $463 million and $204 million, respectively.  We had operating margins of 7% and 5% for the three months ended September 30, 2007 and 2006, respectively, and 10% and 5% for the nine months ended September 30, 2007 and 2006, respectively.  The increase in operating income from continuing operations and operating margins for the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 was principally due to revenues increasing at a faster rate than expenses, reflecting increased operational efficiencies, improved geographic footprint, and benefits from improved third-party contracts, coupled with a decrease of $103 million in asset impairment charges during the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006.

We have a history of net losses.  Further, we expect to continue to report net losses for the foreseeable future.  Our net losses are principally attributable to insufficient revenue to cover the combination of operating 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.  We expect that these expenses will remain significant.
 
Sales of Assets

In 2006, we sold certain cable television systems serving approximately 356,000 analog video customers in 1) West Virginia and Virginia to Cebridge Connections, Inc. (the “Cebridge Transaction”);  2) Illinois and Kentucky to Telecommunications Management, LLC, doing business as New Wave Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total sales price of approximately $971 million.  We used the net proceeds from the asset sales to reduce borrowings, but not commitments, under the revolving portion of our credit facilities.  These cable systems met the criteria for assets held for sale.  As such, the assets were written down to fair value less estimated costs to sell, resulting in asset impairment charges during the nine months ended September 30, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction.  We determined that the West Virginia and Virginia cable systems comprise operations and cash flows that for financial reporting purposes meet the criteria for discontinued operations.  Accordingly, the results of operations for the West Virginia and Virginia cable systems have been presented as discontinued operations, net of tax, for the three and nine months ended September 30, 2006, including a gain of $200 million on the sale of cable systems.

Also, during the three months ended September 30, 2007 and 2006, we recorded asset impairment charges of $56 million and $60 million, respectively, related to other cable systems meeting the criteria of assets held for sale during the respective periods.

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2006 Annual Report on Form 10-K.
 
 
21

 
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,
 
   
2007
   
2006
   
2007
   
2006
 
                                                 
REVENUES
  $
1,525
      100 %   $
1,388
      100 %   $
4,449
      100 %   $
4,091
      100 %
                                                                 
COSTS AND EXPENSES:
                                                               
Operating (excluding depreciation and amortization)
   
679
      45 %    
615
      44 %    
1,957
      44 %    
1,830
      45 %
Selling, general and administrative
   
341
      22 %    
309
      22 %    
961
      22 %    
860
      21 %
Depreciation and amortization
   
334
      22 %    
334
      24 %    
999
      23 %    
1,024
      25 %
Asset impairment charges
   
56
      4 %    
60
      5 %    
56
      1 %    
159
      4 %
Other operating expenses, net
   
8
     
--
     
4
     
--
     
13
     
--
     
14
     
--
 
                                                                 
     
1,418
      93 %    
1,322
      95 %    
3,986
      90 %    
3,887
      95 %
                                                                 
Operating income from continuing operations
   
107
      7 %    
66
      5 %    
463
      10 %    
204
      5 %
                                                                 
OTHER INCOME AND (EXPENSES):
                                                               
Interest expense, net
    (452 )             (466 )             (1,387 )             (1,409 )        
Other income (expense), net
    (21 )            
131
              (55 )            
121
         
                                                                 
      (473 )             (335 )             (1,442 )             (1,288 )        
                                                                 
Loss from continuing operations before income taxes
    (366 )             (269 )             (979 )             (1,084 )        
                                                                 
INCOME TAX EXPENSE
    (41 )             (64 )             (169 )             (124 )        
                                                                 
Loss from continuing operations
    (407 )             (333 )             (1,148 )             (1,208 )        
                                                                 
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
   
--
             
200
             
--
             
234
         
                                                                 
Net loss
  $ (407 )           $ (133 )           $ (1,148 )           $ (974 )        
                                                                 
LOSS PER COMMON SHARE, BASIC AND DILUTED:
                                                               
       Loss from continuing operations
  $ (1.10 )           $ (1.02 )           $ (3.12 )           $ (3.77 )        
       Net loss
  $ (1.10 )           $ (0.41 )           $ (3.12 )           $ (3.04 )        
                                                                 
Weighted average common shares outstanding, basic and diluted
   
369,239,742
             
326,960,632
             
367,671,479
             
320,730,698
         

Revenues.  Average monthly revenue per analog video customer increased to $95 for the three months ended September 30, 2007 from $83 for the three months ended September 30, 2006 and increased to $92 for the nine months ended September 30, 2007 from $81 for the nine months ended September 30, 2006, primarily as a result of increases in customers purchasing combinations of digital, high-speed Internet, and telephone services, incremental revenues from OnDemand, DVR, high-definition television services, and rate adjustments.  Average monthly revenue per analog video customer represents total quarterly revenue, divided by the number of respective months, divided by the average number of analog video customers during the respective period.
 
22

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

   
Three Months Ended September 30,
 
   
2007
   
2006
   
2007 over 2006
 
   
Revenues
   
% of
Revenues
   
Revenues
   
% of
Revenues
   
Change
   
% Change
 
                                     
Video
  $
845
      55 %   $
836
      60 %   $
9
      1 %
High-speed Internet
   
320
      21 %    
267
      19 %    
53
      20 %
Telephone
   
94
      6 %    
37
      3 %    
57
      154 %
Advertising sales
   
77
      5 %    
81
      6 %     (4 )     (5 %)
Commercial
   
87
      6 %    
78
      6 %    
9
      12 %
Other
   
102
      7 %    
89
      6 %    
13
      15 %
                                                 
    $
1,525
      100 %   $
1,388
      100 %   $
137
      10 %

   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007 over 2006
 
   
Revenues
   
% of
Revenues
   
Revenues
   
% of
Revenues
   
Change
   
% Change
 
                                     
Video
  $
2,542
      57 %   $
2,520
      62 %   $
22
      1 %
High-speed Internet
   
926
      21 %    
773
      19 %    
153
      20 %
Telephone
   
236
      5 %    
86
      2 %    
150
      174 %
Advertising sales
   
216
      5 %    
228
      6 %     (12 )     (5 %)
Commercial
   
251
      6 %    
227
      5 %    
24
      11 %
Other
   
278
      6 %    
257
      6 %    
21
      8 %
                                                 
    $
4,449
      100 %   $
4,091
      100 %   $
358
      9 %

Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers.  Analog video customers decreased by 128,800 customers from September 30, 2006, 34,300 of which was related to asset sales, net of acquisitions, compared to September 30, 2007.  Digital video customers increased by 115,000, offset by a loss of 14,200 customers related to asset sales, net of acquisitions.  The increase in video revenues is attributable to the following (dollars in millions):

 
 
Three months ended
September 30, 2007
compared to
three months ended
September 30, 2006
Increase / (Decrease)
   
Nine months ended
September 30, 2007
compared to
nine months ended
September 30, 2006
Increase / (Decrease)
 
             
Rate adjustments and incremental video services
  $
16
    $