Tax Issues Ground Charter

The stock drops anew as the company rolls out a third-quarter report without a bottom line.
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Charter Communications (CHTR) - Get Report admits it's caught in a mess of troubles. But the company insists it can untangle itself.

Yet even as Charter CEO Carl Vogel addressed issues such as a decline in basic cable customers, disconnecting digital customers and a grand jury investigation, the cable TV operator revealed another problem Tuesday for investors to mull over: an unresolved tax-liability issue that prevented the company from releasing bottom-line results for its latest quarter.

The multitude of large and small difficulties faced by Charter promises a suspenseful few quarters for Charter investors. On the one hand, the operator controlled by

Microsoft

(MSFT) - Get Report

billionaire Paul Allen vows it will be able to chop capital expenditures and achieve free cash flow by the end of 2003. But at the same time, Charter told analysts Tuesday, it has to make a variety of operational fixes, all of which presumably cost money to implement and some of which the company says have already spawned additional problems.

Charter shares in which were already 92% off their 52-week highs, fell 18 cents Tuesday, or 12.4%, to trade at $1.27.

Taxes ... and Death?

For the third quarter ended Sept. 30, the company met

the disappointing forecast it preannounced last month of a 12.6% growth in revenue and 8.7% growth in operating cash flow over pro forma figures for the third quarter of 2001.

But instead of reporting a net profit or loss, the St. Louis-based cable operator gave investors another uncertainty to worry about. The company says it is consulting with its auditor, KPMG, over the proper accounting for deferred tax liabilities related to certain companies Charter acquired in 1999. Any change could result in an adjustments to income tax expense in certain subsequent quarters, says Charter, though the company says the issue isn't expected to have any cash impact. Charter also says the issue won't affect any of the company's previously reported revenue, operating cash flow, current cash tax obligations or past such obligations.

Meanwhile, on a conference call with analysts, Charter detailed several operational problems it said it had to address as the company seeks to fight off competition from direct broadcast satellite service operators

EchoStar Communications

(DISH) - Get Report

and

Hughes Electronics

(GMH)

.

Like other operators, Charter has spent billions upgrading its cable TV systems over the past few years in order to offer advanced services such as high-speed Internet connections and an expanded menu of programming channels delivered via digital signals.

But Charter's Vogel told analysts Tuesday that digital video churn -- that is, the percentage of customers who drop the service in any given month -- has been higher than expected. That trend will likely cause Charter to slow its marketing of its digital offering in some markets.

Spreading Like Wildfire

That disclosure makes Charter the second cable operator to talk about a pullback in digital video marketing in the current earnings season. Last month,

Cox Communications

(COX)

, generally regarded as a better-performing operator than Charter, said that it was

pulling back on digital video marketing because telephony and Internet access were more profitable and enabled greater differentiation from DBS for cable TV.

In an attempt to fight DBS's ongoing cannibalization of Charter's basic cable customers, Charter told analysts Tuesday it was experimenting with the offer of a cheaper-than-usual entry-level cable package, one that would feature 60 channels for $35 to $37 a month, below the company's current basic cable price range of $42 to $45.

Saying that Charter needs to improve its "customer-facing" performance, Vogel said the company had to improve its technical operations and customer service through measures such as consolidating numerous call centers. The company is continuing to convert legacy billing operations to a standard billing system, but those conversions have led to increased call volumes and "customer confusion" in the past, said Vogel. In cities such as St. Louis and Birmingham, Ala., says Vogel, the company has suffered customer defections when, as it completed system upgrades and standardized channel lineups, it raised rates.

The company has a number of systems on the market, says Vogel, proceeds from the sale of which Charter hopes to cut debt and increase liquidity. The company hopes to get final bids by the end of the month, but he said the current challenge in the process was potential buyers' difficulty in securing the loans necessary to finance any transaction.