Document/ExhibitDescriptionPagesSize 1: 10-K Cci Form 2005 10-K HTML 2.64M
2: EX-10.38(B) Material Contract -- exhibit10_38b HTML 10K
3: EX-21.1 Subsidiaries of the Registrant -- exhibit21_1 HTML 79K
4: EX-23.1 Consent of Experts or Counsel -- exhibit23_1 HTML 11K
5: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 17K
-- exhibit31_1
6: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 18K
-- exhibit31_2
7: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) HTML 9K
-- exhibit32_1
8: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) HTML 9K
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(Address
of principal executive offices including zip code)
(Registrant’s
telephone number, including area
code)
Securities
registered pursuant to section 12(b) of the Act: None
Securities
registered pursuant to section 12(g) of the Act:
Class A
Common Stock, $.001 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No
þ
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 þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. þ
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
The
aggregate market value of the registrant of outstanding Class A Common
Stock held by non-affiliates of the registrant at June 30, 2005 was
approximately $325 million, computed based on the closing sale price as quoted
on the NASDAQ National Market on that date. For purposes of this calculation
only, directors, executive officers and the principal controlling shareholder
or
entities controlled by such controlling shareholder of the registrant are deemed
to be affiliates of the registrant.
There
were 438,288,757 shares of Class A Common Stock outstanding as of
February 23, 2006. There were 50,000 shares of Class B Common Stock
outstanding as of the same date.
This
annual report on Form 10-K is for the year ended December 31, 2005.
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 annual report. In addition, information that we file with the SEC in the
future will automatically update and supersede information contained in this
annual report. In this annual report, "we,""us" and "our" refer to Charter
Communications, Inc., Charter Communications Holding Company, LLC and their
subsidiaries.
This
annual 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 Part I. Item 1. under the heading
"Business - Focus for 2006," and in Part II. Item 7. under the heading
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations" in this annual 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 in Part I. Item 1A. under the heading "Risk
Factors" and in Part II. Item 7. under the heading "Management’s Discussion
and Analysis of Financial Condition and Results of Operations" in this annual
report. Many of the forward-looking statements contained in this annual report
may be identified by the use of forward-looking words such as "believe,""expect," "anticipate, " "should,""planned,""will,""may,""intend,""estimated" and "potential," among others. Important factors that could cause
actual results to differ materially from the forward-looking statements we
make
in this annual report are set forth in this annual report and in other reports
or documents that we file from time to time with the United States Securities
and Exchange Commission, or 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 be
able to
provide under the applicable debt instruments such funds (by dividend,
investment or otherwise) to the applicable obligor of such
debt;
·
our
ability to comply with all covenants in our indentures, bridge loan
and
credit facilities, any violation of which would result in a violation
of
the applicable facility or indenture and could trigger a default
of other
obligations under cross-default provisions;
·
our
ability to pay or refinance debt prior to or when it becomes due
and/or to
take advantage of market opportunities and market windows to refinance
that debt through new issuances, exchange offers or otherwise, including
restructuring our balance sheet and leverage
position;
·
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 a stable customer base, particularly
in
the face of increasingly aggressive competition from other service
providers;
·
our
ability to obtain programming at reasonable prices or to pass programming
cost increases on to our customers;
·
general
business conditions, economic uncertainty or slowdown;
and
·
the
effects of governmental regulation, including but not limited to
local
franchise 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 annual report.
Charter
Communications, Inc. ("Charter") is a broadband communications company operating
in the United States, with approximately 6.16 million customers at December31,2005. Through our broadband network of coaxial and fiber optic cable, we offer
our customers traditional cable video programming (analog and digital, which
we
refer to as "video" service), high-speed Internet access, advanced broadband
cable services (such as video on demand ("VOD"), high definition television
service and interactive television) and, in some of our markets, telephone
service. See "Item
1.
Business —
Products and Services"
for
further description of these terms, including "customers."
At
December 31, 2005, we served approximately 5.88 million analog video customers,
of which approximately 2.80 million were also digital video customers. We also
served approximately 2.20 million high-speed Internet customers (including
approximately 253,400 who received only high-speed Internet services). We also
provided telephone service to approximately 121,500 customers (including
approximately 19,300 who received telephone service only.)
At
December 31, 2005, our investment in cable properties, long-term debt,
accumulated deficit and total shareholders’ deficit were $15.7 billion, $19.4
billion, $10.2 billion and $4.9 billion, respectively. Our working capital
deficit was $864 million at December 31, 2005. For the year ended
December 31, 2005, our revenues, net loss applicable to common stock and
loss per common share were approximately $5.3 billion, $970 million and $3.13,
respectively.
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 interest costs we incur because of our high
level of debt, the depreciation expenses that we incur resulting from the
capital investments we have made in our cable properties, and the impairment
of
our franchise intangibles. We expect that these expenses (other than impairment
of franchises) will remain significant, and we therefore expect to continue
to
report net losses for the foreseeable future. Historically, a portion of the
losses were allocated to minority interest. However, at December 31, 2003,
the
minority interest in Charter Communications Holding Company, LLC ("Charter
Holdco") had been substantially eliminated by these loss allocations. Beginning
in 2004, we absorb substantially all future losses before income taxes that
otherwise would have been allocated to minority interest. Under our existing
capital structure, future losses will continue to be absorbed by Charter. The
remaining minority interest relates to CC VIII, LLC ("CC VIII") and the
related profit and loss allocations for these interests have not had a
significant impact on our statement of operations nor are they expected to
have
a significant impact in the future.
Charter
was organized as a Delaware corporation in 1999 and completed an initial public
offering of its Class A common stock in November 1999. Charter is a holding
company whose principal assets are, for accounting purposes, an approximate
48%
equity interest and a 100% voting interest in Charter Holdco, the direct parent
of CCHC, LLC, which is the direct parent of Charter Communications Holdings,
LLC
("Charter Holdings"). Charter also holds certain preferred equity and
indebtedness of Charter Holdco that mirror the terms of securities issued by
Charter. Charter's only business is to act as the sole manager of Charter Holdco
and its subsidiaries. As sole manager, Charter controls the affairs of Charter
Holdco and most of its subsidiaries. Certain of our subsidiaries commenced
operations under the "Charter Communications" name in 1994, and our growth
through 2001 was primarily due to acquisitions and business combinations. We
do
not expect to make any significant acquisitions in the foreseeable future,
but
plan to evaluate opportunities to consolidate our operations through exchanges
of cable systems with other cable operators, as they arise. We may also sell
certain assets from time to time. Paul G. Allen owns 45% of Charter Holdco
through affiliated entities. His membership units are convertible at any time
for shares of our Class A common stock on a one-for-one basis. Paul G. Allen
controls Charter with an as-converted common equity interest of approximately
49% and a voting control interest of 90% as of December 31, 2005.
Our
principal executive offices are located at Charter Plaza, 12405 Powerscourt
Drive, St. Louis, Missouri63131. Our telephone number is (314) 965-0555 and
we
have a website accessible at www.charter.com. Since January 1, 2002, our
annual reports, quarterly reports and current reports on Form 8-K, and all
amendments thereto, have been made available on our website free of charge
as
soon as reasonably practicable after they have been filed. The information
posted on our website is not incorporated into this annual report.
1
Certain
Significant Developments in 2005 and 2006
We
continue to pursue opportunities to improve our liquidity. Our
efforts in this regard have resulted in the completion of a number of financing
transactions in 2005 and 2006, as follows:
·
the
January 2006 sale by our subsidiaries, CCH II, LLC ("CCH II") and
CCH II
Capital Corp., of an additional $450 million principal amount of
their
10.250% senior notes due 2010;
·
the
October 2005 entry by our subsidiaries, CCO Holdings, LLC ("CCO Holdings")
and CCO Holdings Capital Corp., as guarantor thereunder, into a $600
million senior bridge loan agreement with various lenders (which
was
reduced to $435 million as a result of the issuance of CCH II
notes);
·
the
September 2005 exchange by Charter Holdings, CCH I, LLC ("CCH I")
and CCH
I Holdings, LLC ("CIH") of approximately $6.8 billion in total principal
amount of outstanding debt securities of Charter Holdings in a private
placement for new debt securities;
·
the
August 2005 sale by our subsidiaries, CCO Holdings and CCO Holdings
Capital Corp., of $300 million of 8 ¾% senior notes due
2013;
·
the
March and June 2005 issuance of $333 million of Charter Communications
Operating, LLC ("Charter Operating") notes in exchange for $346 million
of
Charter Holdings notes;
·
the
repurchase during 2005 of $136 million of Charter’s 4.75% convertible
senior notes due 2006 leaving $20 million in principal amount outstanding;
and
·
the
March 2005 redemption of all of CC V Holdings, LLC’s outstanding 11.875%
senior discount notes due 2008 at a total cost of $122
million.
Recent
Events
Asset
Sales
On
February 28, 2006, Charter announced the signing of two separate definitive
agreements to sell certain cable television systems serving a total of
approximately 316,000 analog video customers, including 142,000 digital video
customers and 91,000 high-speed Internet customers in West Virginia, Virginia,
Illinois and Kentucky for a total of approximately $896 million. The closings
of
these transactions are expected to occur in the third quarter of 2006. Under
the
terms of the bridge loan, bridge availability will be reduced by the proceeds
of
asset sales.
Appointment
of New Executive Vice President and Chief Financial Officer
Jeffrey
T. Fisher, 43, has been appointed to the position of Executive Vice President
and Chief Financial Officer, effective February 6, 2006. Mr. Fisher succeeds
the
Interim Chief Financial Officer, Paul E. Martin, who has indicated his intention
to continue as Charter’s Senior Vice President, Principal Accounting Officer and
Corporate Controller until at least March 31, 2006.
CCH
II, LLC Note Offering
On
January 30, 2006, CCH II and CCH II Capital Corp. issued an additional $450
million principal amount of their 10.250% senior notes due 2010, the proceeds
of
which will be provided, directly or indirectly, to Charter Operating, which
will
use such funds to reduce borrowings, but not commitments, under the revolving
portion of its credit facilities. As a result of the offering of these notes,
availability under the bridge loan has been reduced to $435 million.
Consummation
of Share Borrow Transaction
On
February 9, 2006, we issued 22.0 million shares of Class A common stock in
a
public offering. The shares were issued pursuant to a share lending agreement
pursuant to which we had previously agreed to loan up to 150 million shares
to
Citigroup Global Markets Limited ("CGML"). To date, 116.9 million shares have
been sold in share borrow transactions. Because less than the full 150 million
shares covered by the share lending agreement were sold in the prior share
borrow transactions, we remain obligated to issue, at CGML’s request, up to an
additional 33.1 million loaned shares in up to two additional subsequent
registered public offerings pursuant to the share lending
agreement.
These
transactions were conducted to facilitate transactions by which investors in
Charter’s 5.875% convertible senior notes due 2009 issued on November 22, 2004,
hedged their investments in those convertible senior notes.
2
Charter
did not receive any of the proceeds from the sale of shares in the share borrow
transactions. However, under the share lending agreement, Charter received
a
loan fee of $.001 for each share that it lent to CGML.
Focus
for 2006
Our
strategy is to leverage the capacity and the capabilities of our broadband
network to become the premier provider of in-home entertainment and
communications services in the communities we serve. By offering excellent
value
and variety to our customers through creative product bundles, strategic pricing
and packaging of all our products and services, our goal is to increase
profitable revenues that will enable us to maximize return on our invested
capital.
Building
on the foundation established throughout 2005, in 2006, we will strive
toward:
·
improving
the end-to-end customer experience and increasing customer
loyalty;
·
growing
sales and retention for all our products and services;
and
·
driving
operating and capital
effectiveness.
The
Customer Experience
Providing
superior customer service is an essential element of our fundamental business
strategy. We strive to continually improve the end-to-end customer experience
and increase customer loyalty by effectively managing our customer care contact
centers in alignment with technical operations. We are seeking to instill a
customer-service-oriented culture throughout the organization and will continue
to focus on excellence by pursuing further improvements in customer service,
technical operations, sales and marketing.
We
are
dedicated to fostering strong relationships and making not only financial
investments, but the investment of time and effort to strengthen the communities
we serve. We have developed programs and initiatives that provide valuable
television time to groups and organizations over our cable
networks.
Sales
and Retention
Providing
desirable products and services and investing in profitable marketing programs
are major components of our sales strategy. Bundling services, combining
two or more Charter services for one discounted price, is fundamental to our
marketing strategy. We believe that combining our products into bundled
offerings provides value to our customers that distinguishes us from the
competition. We believe bundled offerings increase penetration of all our
products and services and improves customer retention and perception. Through
targeted marketing of bundled services, we will pursue growth in our customer
base and improvements in customer satisfaction. Targeted marketing also promotes
the appropriate matching of services with customer needs leading to improved
retention of existing customers and lower bad debt expense.
Expanding
telephone service to additional markets and achieving increased telephone
service penetration will be a high priority in 2006 and will be important to
revenue growth. We plan to add enhancements to our high-speed Internet service
to provide customers the best possible Internet experience. Our digital video
platform enables us to provide customers advanced video products and services
such as VOD, high-definition television and digital video recorder ("DVR")
service. We will also continue to explore additional product and service
offerings to complement and enhance our existing offerings and generate
profitable revenue growth.
In
addition to the focus on our primary residential customer base, we will strive
to expand the marketing of our video and high-speed Internet services to the
business community and introduce telephone service, which we believe has growth
potential.
Operating
and Capital Effectiveness
We
plan
to further capitalize on initiatives launched during 2005 to continue to drive
operating and capital effectiveness. Specifically, additional improvements
in
work force management will enhance the efficient operation of our customer
care
centers and technical operations functions. We will continue to place the
highest priority for capital spending on revenue-generating initiatives such
as
telephone deployment.
3
With
over
92% of our homes passed having bandwidth of 550 megahertz or higher, we believe
our broadband network provides the infrastructure to deliver the products and
services today’s consumer desires. See " - Our Network Technology." In 2005 we
invested in programs and initiatives to improve all aspects of operations,
and
going forward we will seek to capitalize on that solid foundation. We plan
to
leverage both our broadband network and prior investments in operational
efficiencies to generate profitable revenue growth.
Through
our targeted marketing strategy, we plan to meet the needs of our current
customers and potential customers with desirable, value-based offerings. We
will
seek to capitalize on the capabilities of our broadband network in order to
bring innovative products and services to the marketplace. Our employees
are dedicated to Charter’s customer-first philosophy, and we will strive to
support their continued professional growth and development, providing the
right
tools and training necessary to accomplish our goals. We believe our strategy
differentiates us from the competition and plan to enhance our ability to
continue to grow our broadband operations in the communities we serve.
4
Organizational
Structure
The
chart
below sets forth our organizational structure and that of our direct and
indirect subsidiaries. This chart does not include all of our affiliates and
subsidiaries and, in some cases, we have combined separate entities for
presentation purposes. The equity ownership, voting percentages and indebtedness
amounts shown below are approximations as of December 31, 2005 giving effect
to
the issuance and sale of $450 million principal amount of 10.250% CCH II notes
in January 2006 and the use of such proceeds to pay down credit facilities
and
the issuance of 22.0 million shares on February 6, 2006 and do not give effect
to any exercise, conversion or exchange of then outstanding options, preferred
stock, convertible notes and other convertible or exchangeable securities.
5
(1)
Charter
acts as the sole manager of Charter Holdco and its direct and indirect
limited liability company subsidiaries. Charter’s certificate of
incorporation requires that its principal assets be securities of
Charter
Holdco, the terms of which mirror the terms of securities issued
by
Charter. See "Charter Communications, Inc." below.
(2)
These
membership units are held by Charter Investment, Inc. ("CII") and
Vulcan
Cable III Inc., each of which is 100% owned by Paul G. Allen, our
chairman
and controlling shareholder. They are exchangeable at any time on
a
one-for-one basis for shares of Charter Class A common
stock.
(3)
The
percentages shown in this table reflect the issuance of the
116.9 million shares of Class A common stock issued in 2005 and
February 2006 and the corresponding issuance of an equal number of
mirror
membership units by Charter Holdco to Charter. However, for accounting
purposes, Charter’s common equity interest in Charter Holdco is 48%, and
Paul G. Allen’s ownership of Charter Holdco is 52%. These percentages
exclude the 116.9 million mirror membership units issued to Charter
due to the required return of the issued mirror units upon return
of the
shares offered pursuant to the share lending agreement. See
Note 14 to the accompanying consolidated financial statements contained
in
"Item 8. Financial Statements and Supplementary Data."
(4)
Represents
preferred membership interests in CC VIII, a subsidiary of CC V Holdings,
LLC, and an exchangeable accreting note issued by CCHC related to
the
settlement of the CC VIII dispute. See "Item 13. Certain Relationships
and
Related Transactions — Transactions Arising Out of Our Organizational
Structure and Mr. Allen's Investment in Charter Communications,
Inc.
and Its Subsidiaries — Equity Put Rights — CC
VIII."
Charter
Communications, Inc. Certain
provisions of Charter’s certificate of incorporation and Charter Holdco’s
limited liability company agreement effectively require that Charter’s
investment in Charter Holdco replicate, on a "mirror" basis, Charter’s
outstanding equity and debt structure. As a result of these coordinating
provisions, whenever Charter issues equity or debt, Charter transfers the
proceeds from such issuance to Charter Holdco, and Charter Holdco issues a
"mirror" security to Charter that replicates the characteristics of the security
issued by Charter. Consequently, Charter’s principal assets, for accounting
purposes, are an approximate 48% common equity interest and a 100% voting
interest in Charter Holdco, "mirror" notes that are payable by Charter Holdco
to
Charter that have the same principal amount and terms as Charter’s convertible
senior notes and preferred units in Charter Holdco that mirror the terms and
liquidation preferences of Charter’s outstanding preferred stock. Charter
Holdco, through its subsidiaries, owns cable systems and certain strategic
investments. As sole manager under applicable operating agreements, Charter
controls the affairs of Charter Holdco and most of its subsidiaries. In
addition, Charter also provides management services to Charter Holdco and its
subsidiaries under a management services agreement.
6
The
following table sets forth information as of December 31, 2005 with respect
to
the shares of common stock of Charter on an actual outstanding, "as converted"
and "fully diluted" basis:
Employee,
Director and Consultant Stock Options (g)
29,416,012
2.52
%
CCHC:
14%
Exchangeable Accreting Note (h)
24,662,333
2.11
%
Fully
Diluted Common Shares Outstanding
1,166,777,517
100.00
%
__________
* Less
than
.01%.
(a)
Paul
G. Allen owns approximately 7% of Charter’s outstanding Class A common
stock (approximately 49% assuming the exchange by Mr. Allen of all
units
in Charter Holdco held by him and his affiliates for shares of Charter
common stock) and beneficially controls approximately 90% of the
voting
power of Charter’s capital stock. Mr. Allen is entitled to ten votes
for each share of Class B common stock held by him and his affiliates
and for each membership unit in Charter Holdco held by him and his
affiliates. These percentages do not reflect the remaining 55.1 million
shares of Class A common stock that may yet be issued under the share
lending agreements (22.0 million of which were issued in February
2006).
(b)
Assumes
only the exchange of Charter Holdco membership units held by Mr.
Allen and
his affiliates for shares of Charter Class A common stock on a
one-for-one basis pursuant to exchange agreements between the holders
of
such units and Charter. Does not include shares issuable on conversion
or
exercise of any other convertible securities, including stock options,
convertible notes and convertible preferred stock.
(c)
Represents
"fully diluted" common shares outstanding, assuming exercise, exchange
or
conversion of all outstanding options and exchangeable or convertible
securities, including the exchangeable membership units described
in note
(b) above, all shares of Charter Series A convertible redeemable
preferred stock, the 14% CCHC exchangeable accreting note, all outstanding
4.75% convertible senior notes and 5.875% convertible senior notes
of
Charter, and all employee, director and consultant stock
options.
(d)
Reflects
common shares issuable upon conversion of the 36,713 shares of
Series A convertible redeemable preferred stock. Such shares have a
current liquidation preference of approximately $4 million and
are
convertible at any time into shares of Class A common stock at an
initial conversion price of $24.71 per
7
share
(or
4.0469446 shares of Class A common stock for each share of convertible
redeemable preferred stock), subject to certain adjustments.
(e)
Reflects
shares issuable upon conversion of all outstanding 4.75% convertible
senior notes ($20 million total principal amount), which are
convertible into shares of Class A common stock at an initial
conversion rate of 38.0952 shares of Class A common stock per $1,000
principal amount of notes (or approximately $26.25 per share), subject
to
certain adjustments.
(f)
Reflects
shares issuable upon conversion of all outstanding 5.875% convertible
senior notes ($863 million total principal amount), which are convertible
into shares of Class A common stock at an initial conversion rate of
413.2231 shares of Class A common stock per $1,000 principal amount
of notes (or approximately $2.42 per share), subject to certain
adjustments.
(g)
The
weighted average exercise of outstanding stock options is
$4.46.
(h)
As
a result of the settlement of the CC VIII dispute, Mr. Allen, through
his
wholly owned subsidiary CII, received an accreting note (the "CCHC
note")
that as of December 31, 2005 is exchangeable for 24,662,333 Charter
Holdco
units. The CCHC note has a 15-year maturity. The CCHC note has an initial
accreted value of $48 million accreting at 14% compounded quarterly,
except that from and after February 28, 2009, CCHC may pay any increase
in
the accreted value of the CCHC note in cash and the accreted value
of the
CCHC note will not increase to the extent such amount is paid in cash.
The
CCHC note is exchangeable at CII’s option, at any time, for Charter Holdco
Class A Common units at a rate equal to the then accreted value, divided
by $2.00. See "Item 13. Certain Relationships and Related
Transactions — Transactions Arising Out of Our
Organizational Structure and Mr. Allen’s
Investment in Charter Communications, Inc. and Its Subsidiaries — Equity
Put Rights - CC VIII."
Charter
Communications Holding Company, LLC. Charter
Holdco, a Delaware limited liability company formed on May 25, 1999, is the
direct 100% parent of CCHC, LLC. The common membership units of Charter Holdco
are owned approximately 55% by Charter, 30% by Vulcan Cable III Inc. and 15%
by
CII. All of the outstanding common membership units in Charter Holdco held
by
Vulcan Cable III Inc. and CII are controlled by Mr. Allen and are
exchangeable on a one-for-one basis at any time for shares of high vote
Class B common stock of Charter, which are in turn convertible into
Class A common stock of Charter. Charter controls 100% of the voting power
of Charter Holdco and is its sole manager.
The
following table sets forth the information as of December 31, 2005 with respect
to the common units of Charter Holdco on an actual outstanding and "fully
diluted" basis.
Charter
Communications Holding Company, LLC
Fully
Diluted Units Outstanding (assuming
exchange
or conversion of all
Actual
Units Outstanding
exchangeable
and convertible securities)
Number
of
Percentage
Number
Percentage
Common
of
Common
of
Fully
of
Fully
Units
Units
Voting
Diluted
Common
Diluted
Common
Outstanding
Outstanding
Percentage
Units
Outstanding
Units
Outstanding
Common
Units Outstanding
Charter
Communications, Inc.
416,254,671
55.10
%
100
%
416,254,671
35.68
%
Vulcan
Cable III Inc. (a)
116,313,173
15.40
%
—
116,313,173
9.97
%
Charter
Investment, Inc. (b)
222,818,858
29.50
%
—
222,818,858
19.10
%
Total
Common Units Outstanding
755,386,702
100
%
100
%
Units
Issuable on Exchange of 14% Exchangeable Accreting Note
(c)
14%
Exchangeable Accreting Note
24,662,333
2.11
%
Units
Issuable on Conversion of Mirror Convertible Securities held by Charter
Communications, Inc.
Mirror
Convertible Preferred units (d)
148,575
0.01
%
8
Mirror
Convertible Debt:
4.75%
Convertible Senior Notes(d)
758,971
0.06
%
5.875%
Convertible Senior Notes(d)
356,404,924
30.55
%
Mirror
Employee, Director and Consultant Stock Options (d)
29,416,012
2.52
%
Fully
Diluted Common Units Outstanding
1,166,777,517
100.00
%
__________
(a)
Includes
106,715,233 non-voting Class A common units and 9,597,940 non-voting
Class C common units.
(b)
Includes
217,585,246 non-voting Class A common units and 5,233,612 non-voting
Class C common units.
(c)
As
a result of the settlement of the CC VIII dispute, Mr. Allen, through
his
wholly owned subsidiary CII, received the CCHC note that as of December31, 2005 is exchangeable for 24,662,333 Charter Holdco units. The
CCHC
note has a 15-year maturity. The CCHC note has an initial accreted
value
of $48 million accreting at 14% compounded quarterly, except that
from and
after February 28, 2009, CCHC may pay any increase in the accreted
value
of the CCHC note in cash and the accreted value of the CCHC note
will not
increase to the extent such amount is paid in cash. The CCHC note
is
exchangeable at CII’s option, at any time, for Charter Holdco Class A
Common units at a rate equal to the then accreted value, divided
by $2.00.
See "Item 13. Certain Relationships and Related Transactions —
Transactions Arising Out of Our
Organizational Structure and Mr. Allen’s
Investment in Charter Communications, Inc. and Its Subsidiaries — Equity
Put Rights - CC VIII."
(d)
Certain
provisions of Charter’s certificate of incorporation and Charter Holdco’s
limited liability company agreement effectively require that Charter’s
investment in Charter Holdco replicate, on a "mirror" basis, Charter’s
outstanding equity and debt structure. As a result, in addition to
its
equity interest in common units of Charter Holdco, Charter also holds
100%
of the 4.75% and 5.875% mirror convertible notes of Charter Holdco
that
automatically convert into common membership units upon the conversion
of
any Charter 4.75% and 5.875% convertible senior notes and 100% of
the
mirror preferred membership units of Charter Holdco that automatically
convert into common membership units upon the conversion of the
Series A convertible redeemable preferred stock of Charter. The table
reflects the common equity issuable on exercise or conversion of
these
mirror securities.
CCHC,
LLC.
CCHC,
LLC, a Delaware limited liability company formed on October 25, 2005, is the
issuer of an exchangeable accreting note. In October 2005, Charter, acting
through a Special Committee of Charter’s Board of Directors, and Mr. Allen,
settled a dispute that had arisen between the parties with regard to the
ownership of CC VIII. As part of that settlement, CCHC issued the CCHC note
to
CII. The CCHC note has a 15-year maturity. The CCHC note has an initial accreted
value of $48 million accreting at 14% compounded quarterly, except that from
and
after February 28, 2009, CCHC may pay any increase in the accreted value of
the
CCHC in cash and the accreted value of the CCHC note will not increase to the
extent such amount is paid in cash. The CCHC note is exchangeable at CII’s
option, at any time, for Charter Holdco Class A Common units at a rate equal
to
the then accreted value, divided by $2.00. CCHC owns 70% of the preferred
membership interests in CC VIII, LLC. See " — Preferred Equity in CC VIII, LLC"
below.
Charter
Communications Holdings, LLC. Charter
Holdings, a
Delaware limited liability company formed on February 9, 1999, is a
co-issuer of 13 series of notes that mature from 2007-2012, with an aggregate
outstanding principal amount of $1.8 billion. See "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Description of Our Outstanding Debt." Charter Holdings owns 100% of Charter
Communications Holdings Capital, the co-issuer of these notes. Charter Holdings
also directly owns CIH and
indirectly the subsidiaries that conduct all of our cable operations.
CCH
I Holdings, LLC. CIH,
a
Delaware limited liability company formed on August 8, 2005, is a co-issuer
of
six series of notes that mature in 2014 and 2015 with an aggregate outstanding
principal amount of $2.5 billion. See "Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Description of
Our
Outstanding Debt." CIH owns 100% of CCH I Capital Corp., the co-issuer of these
notes. CIH also directly owns CCH I and indirectly the subsidiaries that conduct
all of our cable operations.
CCH
I, LLC. CCH
I, a
Delaware limited liability company formed on July 9, 2003, is a co-issuer of
$3.5 billion principal amount of notes that mature in 2015. See "Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Description of Our Outstanding Debt." CCH I owns 100% of CCH I
Capital
9
Corp.,
the co-issuer of these notes. CCH I also directly owns CCH II and indirectly
the
subsidiaries that conduct all of our cable operations.
CCH
II, LLC. CCH
II, a
Delaware limited liability company formed on March 20, 2003, is a co-issuer
of
$1.6 billion principal amount of notes that mature in 2010. CCH II, LLC issued
$450 million additional principal amount of these notes in January 2006. See
"Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Description of Our Outstanding Debt." CCH II owns 100% of CCH II
Capital Corp., the co-issuer of these notes. CCH II also directly owns CCO
Holdings and indirectly, the subsidiaries that conduct all of our cable
operations.
CCO
Holdings, LLC. CCO
Holdings, a Delaware limited liability company formed on June 12, 2003, is
a
co-issuer of two series of notes that mature in 2010 and 2013. See "Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Description of Our Outstanding Debt." CCO Holdings owns 100% of
CCO
Holdings Capital Corp., the co-issuer of these notes. In October 2005, CCO
Holdings and CCO Holdings Capital Corp., as guarantor thereunder, entered into
a
$600 million bridge loan agreement with various lenders (which was reduced
to
$435 million as a result of the issuance of the CCH II notes in January 2006).
CCO Holdings also directly owns Charter Operating and indirectly the
subsidiaries that conduct all of our cable operations.
Charter
Operating.
Charter
Operating owns the subsidiariesthat
own
or operate all of our cable systems, subject to a minority interest held by
Mr.
Allen as described below. These subsidiaries include the public notes issuer,
Renaissance Media Group. Charter Operating is the obligor under a $6.5 billion
credit facility. In addition, Charter Operating is a co-issuer of two series
of
senior second-lien notes that mature in 2012 and 2014. See "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Description of Our Outstanding Debt." Charter Operating owns 100% of Charter
Communications Operating Capital Corp., the co-issuer of these notes.
Preferred
Equity in CC VIII, LLC.
CII owns
30% of the CC VIII preferred membership interests. CCHC, a direct subsidiary
of
Charter Holdco and the direct parent of Charter Holdings directly owns the
remaining 70% of these preferred interests. The common membership interests
in
CC VIII are indirectly owned by Charter Operating. See "Item 13. Certain
Relationships and Related Transactions — Transactions Arising Out of
Our
Organizational Structure and Mr. Allen’s
Investment in Charter Communications, Inc. and Its Subsidiaries — Equity Put
Rights — CC VIII."
Products
and Services
We
offer
our customers traditional cable video programming (analog and digital) and
in
some areas advanced broadband services such as high definition television,
VOD
and interactive television as well as high-speed Internet services. We sell
our
video programming and high-speed Internet services on a subscription basis,
with
prices and related charges, that vary primarily based on the types of service
selected, whether the services are sold as a "bundle" versus on an "à la carte"
basis, and the equipment necessary to receive the services, with some variation
in prices depending on geographic location. In addition, we offer telephone
service to a portion of our homes passed.
The
following table summarizes our customer statistics for analog and digital video,
residential high-speed Internet and residential telephone approximate as of
December 31, 2005 and 2004.
Multi-dwelling
(bulk) and commercial unit customers (c)
268,200
251,600
Total
analog video customers (b)(c)
5,884,500
5,991,500
Digital
Video:
Digital
video customers (d)
2,796,600
2,674,700
10
Non-Video
Cable Services:
Residential
high-speed Internet customers (e)
2,196,400
1,884,400
Residential
telephone customers (f)
121,500
45,400
Included
in the 107,000 net loss of analog video customers for the year ended December31, 2005 is approximately 8,200 of net losses related to systems impacted by
hurricanes Katrina and Rita. We currently estimate additional analog video
customer losses of approximately 10,000 to 15,000 related to hurricanes Katrina
and Rita in the first quarter of 2006.
After
giving effect to the sale of certain non-strategic cable systems in July 2005,
December 31, 2004 analog video customers, digital video customers and high-speed
Internet customers would have been 5,964,300, 2,663,200 and 1,883,800,
respectively.
(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). In addition, at December 31, 2005
and
2004, "customers" include approximately 50,500 and 44,700 persons
whose
accounts were over 60 days past due in payment, approximately 14,300
and
5,200 persons, whose accounts were over 90 days past due in payment
and
approximately 7,400 and 2,300 of which were over 120 days past due
in
payment, respectively.
(b)
"Analog
video customers" include all customers who receive video services
(including those who also purchase high-speed Internet and telephone
services) but excludes approximately 272,700 and 228,700 customers
at
December 31, 2005 and 2004, respectively, who receive high-speed
Internet
service only or telephone service only and who are only counted as
high-speed Internet customers or telephone
customers.
(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. As we increase our effective analog video prices
to
residential customers without a corresponding increase in the prices
charged to commercial service or multi-dwelling customers, our EBU
count
will decline even if there is no real loss in commercial service
or
multi-dwelling customers.
(d)
"Digital
video customers" include all households that have one or more digital
set-top terminals. Included in "digital video customers" on December31,2005 and 2004 are approximately 8,600 and 10,100 customers, respectively,
that receive digital video service directly through satellite
transmission.
(e)
"Residential
high-speed Internet customers" represent those customers who subscribe
to
our high-speed Internet service.
(f)
"Residential
telephone customers" include all households receiving telephone service.
Video
Services
Our
video
service offerings include the following:
•
Basic
Analog Video.All
of our video customers receive a package of basic programming which
generally consists of local broadcast television, local community
programming, including governmental and public access, and limited
satellite-delivered or non-broadcast channels, such as weather, shopping
and religious services. Our basic channel line-up generally has between
15
and 30 channels.
•
Expanded
Basic Video.This
expanded programming level includes a package of satellite-delivered
or
non-broadcast channels and generally has between 30 and 50 channels
in
addition to the basic channel line-up.
•
Premium
Channels.These
channels provide commercial-free movies, sports and other special
event
entertainment programming. Although we offer subscriptions to premium
channels on an individual basis, we offer an increasing number of
premium
channel packages and we offer premium channels with our advanced
services.
11
•
Pay-Per-View.These
channels allow customers to pay on a per event basis to view a single
showing of a recently released movie, a one-time special sporting
event,
music concert or similar event on a commercial-free
basis.
•
Digital
Video.
We
offer digital video service to our customers in several different
service
combination packages. All of our digital packages include a digital
set-top terminal, an interactive electronic programming guide, an
expanded
menu of pay-per-view channels and the option to also receive digital
packages which range from 4 to 30 additional video channels. We also
offer
our customers certain digital packages with one or more premium channels
that give customers access to several different versions of the same
premium channel. Some digital tier packages focus on the interests
of a
particular customer demographic and emphasize, for example, sports,
movies, family or ethnic programming. In addition to video programming,
digital video service enables customers to receive our advanced services
such as VOD and high definition television. Other digital packages
bundle
digital television with our advanced services, such as high-speed
Internet
services.
•
Video
On Demand and Subscription Video on Demand.
We
offer VOD service, which allows customers to access hundreds of movies
and
other programming at any time with digital picture quality. In some
systems we also offer subscription VOD ("SVOD") for a monthly fee
or
included in a digital tier premium channel subscription.
•
High
Definition Television.
High definition television offers our digital customers video programming
at a higher resolution than the standard analog or digital video
image.
•
Digital
Video Recorder.
DVR service enables customers to digitally record programming and
to pause
and rewind live programming.
High-Speed
Internet Services
We
offer
high-speed Internet services to our residential and commercial customers
primarily via cable modems attached to personal computers. We generally offer
our high-speed Internet service as Charter High-Speed InternetTM.
We also
offer traditional dial-up Internet access in a very limited number of our
markets.
We
ended
2005 with 20% penetration of high-speed Internet homes passed, up from the
18%
penetration of high-speed Internet homes passed at year-end 2004. This gave
us
an annual percentage increase in high-speed Internet customers of 17% and an
increase in high-speed Internet revenues of 23% in the year ended December31,2005.
Telephone
Services
We
provide voice communications services using voice over Internet protocol, or
"VoIP", to transmit digital voice signals over our systems. At December 31,2005, telephone service was available to approximately 2.9 million homes passed,
and we were marketing to approximately 77% of those homes. We will continue
to
prepare additional markets for telephone launches in 2006 and expect to have
6
to 8 million homes passed by the end of 2006.
Commercial
Services
We
offer
integrated network solutions to commercial and institutional customers. These
solutions include high-speed Internet and video services. In addition, we offer
high-speed Internet services to small businesses. We will continue to expand
the
marketing of our video and high-speed Internet services to the business
community and intend to introduce telephone services.
Sale
of Advertising
We
receive revenues from the sale of local advertising on satellite-delivered
networks such as MTV®, CNN® and ESPN®. In any particular market, we generally
insert local advertising on up to 48 channels. We also provide cross-channel
advertising to some programmers.
From
time
to time, certain of our vendors, including programmers and equipment vendors,
have purchased advertising from us. For the years ending December 31, 2005,
2004
and 2003, we had advertising revenues from
12
programmers
of approximately $15 million, $16 million, and $15 million, respectively. These
revenues resulted from purchases at market rates pursuant to binding agreements.
Pricing
of Our Products and Services
Our
revenues are derived principally from the monthly fees our customers pay for
the
services we offer. A one-time installation fee, which is sometimes waived or
discounted during certain promotional periods, is charged to new customers.
The
prices we charge vary based on the level of service the customer chooses and
the
geographic market. Most of our pricing is reviewed and adjusted on an annual
basis.
In
accordance with the Federal Communications Commission’s ("FCC") rules, the
prices we charge for cable-related equipment, such as set-top terminals and
remote control devices, and for installation services are based on actual costs
plus a permitted rate of return.
Although
our cable service offerings vary across the markets we serve because of various
factors including competition and regulatory factors, our services, when offered
on a stand-alone basis, are typically offered at monthly price ranges, excluding
franchise fees and other taxes, as follows:
Digital
video packages (including high-speed Internet service for higher
tiers)
$
34.00
- $114.98
High-speed
Internet service
$
21.95
- $59.99
Video
on demand (per selection)
$
0.99
- $29.99
High
definition television
$
3.99
- $9.99
Digital
video recorder (DVR)
$
6.99
- $14.99
In
addition, from time to time we offer free service or reduced-price service
during promotional periods in order to attract new customers. There is no
assurance that these customers will remain as customers when the period of
free
service expires.
Our
Network Technology
The
following table sets forth the technological capacity of our systems as of
December 31, 2005 based on a percentage of homes passed:
Less
than 550
750
860/870
Two-way
megahertz
550
megahertz
megahertz
megahertz
enabled
8%
5
%
40
%
47
%
87
%
Approximately
92% of our homes passed are served by systems that have bandwidth of 550
megahertz or greater. This bandwidth capacity enables us to offer digital
television, high-speed Internet services and other advanced services. It also
enables us to offer up to 82 analog channels, and even more channels when our
bandwidth is used for digital signal transmissions. Our increased bandwidth
also
permits two-way communication for Internet access, interactive services, and
telephone services.
We
have
reduced the number of headends that serve our customers from 1,138 at
January 1, 2001 to 720 at December 31, 2005. Because headends are the
control centers of a cable system, where incoming signals are amplified,
converted, processed and combined for transmission to the customer, reducing
the
number of headends reduces related equipment, service personnel and maintenance
expenditures. We believe that the headend consolidation, together with our
other
upgrades, allows us to provide enhanced picture quality and greater system
reliability. As of December 31, 2005, approximately 86% of our customers were
served by headends serving at least 10,000 customers.
13
As
of
December 31, 2005, our cable systems consisted of approximately 222,100
strand miles, including approximately 58,200 strand miles of fiber optic cable,
passing approximately 12.5 million households and served approximately 6.2
million customers.
We
adopted the hybrid fiber coaxial cable ("HFC") architecture as the standard
for
our systems upgrades. HFC architecture combines the use of fiber optic cable
with coaxial cable. Fiber optic cable is a communication medium that uses glass
fibers to transmit signals over long distances with minimum signal loss or
distortion. Fiber optic cable has excellent broadband frequency characteristics,
noise immunity and physical durability and can carry hundreds of video, data
and
voice channels over extended distances. Coaxial cable is less expensive but
requires a more extensive signal amplification in order to obtain the desired
transmission levels for delivering channels. In most systems, we deliver our
signals via fiber optic cable from the headend to a group of nodes, and use
coaxial cable to deliver the signal from individual nodes to the homes passed
served by that node. Our system design enables a maximum of 500 homes passed
to
be served by a single node. Currently, our average node serves approximately
385
homes passed. Our system design provides for six strands of fiber to each node,
with two strands activated and four strands reserved for spares and future
services. We believe that this hybrid network design provides high capacity
and
superior signal quality. The design also provides reserve capacity for the
addition of future services.
The
primary advantages of HFC architecture over traditional coaxial-only cable
networks include:
•
increased
bandwidth capacity, for more channels and other
services;
•
dedicated
bandwidth for two-way services, which avoids reverse signal interference
problems that can occur with two-way communication capability;
and
•
improved
picture quality and service
reliability.
We
currently maintain a national network operations center to monitor our data
networks and to further our strategy of providing high quality service.
Centralized monitoring is increasingly important as we increase the number
of
high-speed Internet customers utilizing two-way high-speed Internet service.
Our
local dispatch centers focus primarily on monitoring the HFC plant.
Management
of Our Systems
Many
of
the functions associated with our financial and administrative management are
centralized, including accounting, cash management, billing, finance and
acquisitions, payroll, accounts payable and benefits administration, information
system design and support, internal audit, purchasing, customer care, marketing,
programming contract administration and Internet service, network and circuits
administration. We operate with four divisions. Each division is supported
by
operational, financial, customer care, marketing and engineering functions.
Customer
Care
Our
customer care centers are managed centrally by Corporate Vice Presidents of
Customer Care. This team oversees and administers the deployment and execution
of care strategies and initiatives on a company-wide basis. We have 36 customer
service locations, including 14 regional contact centers that serve
approximately 97% of our customers. This reflects a substantial consolidation
of
our customer care facilities. We believe that this consolidation will continue
to allow us to improve the consistency of our service delivery and customer
satisfaction.
Specifically,
through this consolidation, we are now able to service our customers 24 hours
a
day, seven days a week and utilize technologically advanced equipment that
we
believe enhances interactions with our customers through more intelligent call
routing, data management, and forecasting and scheduling capabilities. We
believe this consolidation also allows us to more effectively provide our
customer care specialists with ongoing training intended to improve complaint
resolution, equipment troubleshooting, sales of new and additional services,
and
customer retention.
We
believe that, despite our consolidation, we still need to make improvements
in
the area of customer care, and that this has, in part, led to a continued loss
of customers. Accordingly, we have begun an internal operational improvement
initiative aimed at helping us gain new customers and retain existing customers,
which is focused on customer care, among other areas. We have increased our
efforts to focus management attention on instilling
14
a
customer service oriented culture throughout the company and to give those
areas
of our operations increased priority of resources for staffing levels, training
budgets and financial incentives for employee performance in those
areas.
In
a
further effort to better serve our customers, we have also entered into
outsource partnership agreements with two outsource providers. We believe the
establishment of these relationships expands our ability to achieve our service
objectives and increases our ability to support marketing activities by
providing additional capacity available to support customer
inquiries.
We
also
utilize our website to enhance customer care by enabling customers to view
and
pay their bills online, obtain useful information and perform various equipment
troubleshooting procedures. We also offer chat and email functionality on-line
to our customers.
Sales
and Marketing
Our
marketing infrastructure is intended to promote interaction, information flow
and sharing of best practices between our corporate office and our field
offices, which make local decisions as to when and how marketing programs will
be implemented. In 2005, our primary strategic direction was focused on
eliminating aggressive promotional pricing and implementing targeted marketing
programs designed to offer the optimal combination of products to the most
appropriate consumers to accelerate the growth of profitable
revenues.
In
2005,
we increased our targeted marketing efforts and related expenditures, the
long-term objective of which is to increase revenues through deeper market
penetration of all of our services. Marketing expenditures increased 19% over
the year ended December 31, 2004 to $145 million for the year ended December31,2005. We will continue to invest in targeted marketing efforts in 2006.
We
monitor customer perception, competition, pricing and product preferences,
among
other factors, to increase our responsiveness to our customers. Our coordinated
marketing strategies include door-to-door solicitation, telemarketing, media
advertising, e-marketing, direct mail solicitation and retail locations. In
2005, we increased our focus on marketing and selling our services through
consumer electronics retailers and other retailers that sell televisions or
cable modems.
Programming
General
We
believe that offering a wide variety of programming is an important factor
that
influences a customer’s decision to subscribe to and retain our cable services.
We rely on market research, customer demographics and local programming
preferences to determine channel offerings in each of our markets. We obtain
basic and premium programming from a number of suppliers, usually pursuant
to a
written contract. Our programming contracts generally continue for a fixed
period of time, usually from three to ten years, and are subject to negotiated
renewal. Some program suppliers offer financial incentives to support the launch
of a channel and/or ongoing marketing support. We also negotiate volume discount
pricing structures. Programming costs are usually payable each month based
on
calculations performed by us and are subject to audits by the programmers.
Costs
Programming
is usually made available to us for a license fee, which is generally paid
based
on the number of customers to whom we make such programming available. Such
license fees may include "volume" discounts available for higher numbers of
customers, as well as discounts for channel placement or service penetration.
Some channels are available without cost to us for a limited period of time,
after which we pay for the programming. For home shopping channels, we receive
a
percentage of the revenue attributable to our customers’ purchases.
Our
cable
programming costs have increased, in every year we have operated, in excess
of
customary inflationary and cost-of-living type increases. We expect them to
continue to increase due to a variety of factors, including annual increases
imposed by programmers and additional programming being provided to customers
as
a result of system rebuilds and bandwidth reallocation, both of which increase
channel capacity. In particular, sports programming costs have increased
significantly over the past several years. In addition, contracts to purchase
sports
15
programming
sometimes provide for optional additional programming to be available on a
surcharge basis during the term of the contract.
Over
the
past several years, we have not been able to increase prices sufficiently to
offset increased programming costs and with the impact of competition and other
marketplace factors, we will not be able to do so in the foreseeable future.
In
order to maintain or mitigate reductions of margins despite increasing
programming costs, we plan to continue to migrate certain program services
from
our analog level of service to our digital tiers. As we migrate our programming
to our digital tier packages, certain programming that was previously available
to all of our customers via an analog signal, may be part of an elective digital
tier package. As a result, the customer base upon which we pay programming
fees
will proportionately decrease, and the overall expense for providing that
service would likewise decrease. Reductions in the size of certain programming
customer bases may result in the loss of specific volume discount benefits.
As
measured by programming costs, and excluding premium services (substantially
all
of which were renegotiated and renewed in 2003), as of December 31, 2005
approximately 15% of our current programming contracts were expired, and
approximately another 4% are scheduled to expire by the end of 2006.
We
plan
to seek to renegotiate the terms of our agreements with certain programmers
as
these agreements come due for renewal. There
can
be no assurance that these agreements will be renewed on favorable or comparable
terms. To the extent that we are unable to reach agreement with certain
programmers on terms that we believe are reasonable, we may be forced to remove
such programming channels from our line-up, which may result in a loss of
customers. In addition, our inability
to fully pass these programming cost increases on to our customers has had
an
adverse impact on our cash flow and operating margins.
Franchises
As
of
December 31, 2005, our systems operated pursuant to a total of
approximately 4,100 franchises, permits and similar authorizations issued by
local and state governmental authorities. Each franchise, permit or similar
authorization is awarded by a governmental authority and such governmental
authority often must approve a transfer to another party. Most franchises are
subject to termination proceedings in the event of a material breach. In
addition, most franchises require us to pay the granting authority a franchise
fee of up to 5.0% of revenues as defined in the various agreements, which is
the
maximum amount that may be charged under the applicable federal law. We are
entitled to and generally do pass this fee through to the customer.
Prior
to
the scheduled expiration of most franchises, we initiate renewal proceedings
with the granting authorities. This process usually takes three years but can
take a longer period of time. The Communications Act of 1934, as amended ("the
Communications Act"), which is the primary federal statute regulating interstate
communications, provides for an orderly franchise renewal process in which
granting authorities may not unreasonably withhold renewals. In connection
with
the franchise renewal process, many governmental authorities require the cable
operator to make certain commitments. Historically we have been able to renew
our franchises without incurring significant costs, although any particular
franchise may not be renewed on commercially favorable terms or otherwise.
Our
failure to obtain renewals of our franchises, especially those in the major
metropolitan areas where we have the most customers, could have a material
adverse effect on our consolidated financial condition, results of operations
or
our liquidity, including our ability to comply with our debt covenants.
Approximately 11% of our franchises, covering approximately 13% of our analog
video customers were expired at December 31, 2005. Approximately 7% of
additional franchises, covering approximately 9% of additional analog video
customers will expire on or before December 31, 2006, if not renewed prior
to
expiration. We expect to renew substantially all of these
franchises.
Different
legislative proposals have been introduced in the United States Congress and
in
some state legislatures that would greatly streamline cable franchising. This
legislation is intended to facilitate entry by new competitors, particularly
local telephone companies. Such legislation has already passed in at least
one
state but is now subject to court challenge. Although various legislative
proposals provide some regulatory relief for incumbent cable operators, these
proposals are generally viewed as being more favorable to new entrants due
to a
number of varying factors including efforts to withhold streamlined cable
franchising from incumbents until after the expiration of their existing
franchises and the potential for new entrants to serve only higher-income areas
of a particular community. To the extent incumbent cable operators are not
able
to avail themselves of this streamlined franchising process, such operators
may
continue to be subject to more onerous franchise requirements at the local
level
than new entrants. The FCC recently initiated a proceeding to determine whether
local franchising authorities are impeding the deployment of competitive cable
services through unreasonable franchising requirements and whether any such
16
impediments
should be preempted. At this time, we are not able to determine what impact
such
proceeding may have on us.
Competition
We
face
competition in the areas of price, service offerings, and service reliability.
We compete with other providers of television signals and other sources of
home
entertainment. In addition, as we continue to expand into additional services
such as high-speed Internet access and telephone, we face competition from
other
providers of each type of service. We operate in a very competitive business
environment, which can adversely affect our business and operations.
In
terms
of competition for customers, we view ourselves as a member of the broadband
communications industry, which encompasses multi-channel video for television
and related broadband services, such as high-speed Internet, telephone and
other
interactive video services. In the broadband industry, our principal competitor
for video services throughout our territory is direct broadcast satellite
("DBS"), our principal competitor for data services is digital subscriber line
("DSL") provided by telephone companies and our principal competitors for
telephone services are established telephone companies and other carriers,
including VoIP providers. Based on telephone companies’ entry into video service
and the upgrade of their networks, they will likely increasingly become an
even
more significant competitor for both data and video services. We do not consider
other cable operators to be significant one-on-one competitors in the market
overall, as traditional overbuilds are infrequent and spotty geographically
(although in any particular market, a cable operator overbuilder would likely
be
a significant competitor at the local level). As of December 31, 2005, we
are aware of traditional overbuild situations in service areas covering
approximately 6% of our total homes passed and potential overbuilds in areas
servicing approximately an additional 4% of our total homes passed.
Although
cable operators tend not to be direct competitors for customers, their relative
size may affect the competitive landscape in terms of how a cable company
competes against non-cable competitors in the market place as well as in
relationships with vendors who deal with cable operators. For example, a larger
cable operator might have better access to and pricing for the multiple types
of
services cable companies offer. Also, a larger entity might have different
access to financial resources and acquisition opportunities.
Our
key
competitors include:
DBS
Direct
broadcast satellite is a significant competitor to cable systems. The DBS
industry has grown rapidly over the last several years, and now serves more
than
27 million subscribers nationwide. DBS service allows the subscriber to receive
video services directly via satellite using a relatively small dish antenna.
EchoStar and DirecTV both have entered into joint marketing agreements with
major telecommunications companies to offer bundled packages combining phone,
data and video services.
Video
compression technology and high powered satellites allow DBS providers to offer
more than 200 digital channels from a single satellite, thereby surpassing
the
typical analog cable system. In 2005, major DBS competitors offered a greater
variety of channel packages, and were especially competitive at the lower end
pricing, such as a monthly price of approximately $35 for 60 channels compared
to approximately $45 for the closest comparable package in most of our markets.
In addition, while we continue to believe that the initial investment by a
DBS
customer exceeds that of a cable customer, the initial equipment cost for DBS
has decreased substantially, as the DBS providers have aggressively marketed
offers to new customers of incentives for discounted or free equipment,
installation and multiple units. DBS providers are able to offer service
nationwide and are able to establish a national image and branding with
standardized offerings, which together with their ability to avoid franchise
fees of up to 5% of revenues and property tax, leads to greater efficiencies
and
lower costs in the lower tiers of service. We believe that cable-delivered
VOD
and SVOD service are superior to DBS service because cable headends can store
thousands of titles which customers can access and control independently,
whereas DBS technology can only make available a much smaller number of titles
with DVR-like customer control. We also believe that our higher tier products,
particularly our bundled premium packages, are price-competitive with DBS
packages and that many consumers prefer our ability to economically bundle
video
packages with data packages. Further, cable providers have the potential in
some
areas to provide a more complete "whole house" communications package when
combining video, high-speed Internet and telephone services. We believe that
this ability to bundle, combined with the introduction of more new products
that
DBS cannot readily offer (local high definition television and local interactive
television) differentiates us from DBS competitors and could enable us to
17
win
back
some of our former customers who migrated to satellite. However, joint marketing
arrangements between DBS providers and telecommunications carriers allow similar
bundling of services in certain areas and DBS providers are making investments
to offer more high definition programming, including local high definition
programming. Competition
from DBS service providers may also present greater challenges in areas of
lower
population density, and we believe that our systems serve a higher concentration
of such areas than those of other major cable service providers.
DBS
providers have made attempts at widespread deployment of high-speed Internet
access services via satellite but those services have been technically
constrained and of limited appeal. DBS providers continue to explore options,
such as combining satellite communications with terrestrial wireless networks,
to provide high-speed Internet and other services. DBS providers have entered
into joint marketing arrangements with telecommunications carriers allowing
them
to offer terrestrial DSL services in many markets.
DSL
and other Broadband Services
DSL
service allows Internet access to subscribers at data transmission speeds
greater than those available over conventional telephone lines. DSL service
therefore is competitive with high-speed Internet access over cable systems.
Most telephone companies which already have plant, an existing customer base,
and other operational functions in place (such as, billing, service personnel,
etc.) offer DSL service. DSL actively markets its service and many providers
have offered promotional pricing with a one-year service agreement. The FCC
has
determined that DSL service is an "information service," and based on that
classification removed DSL service from many traditional telecommunications
regulations. Legislative action and the FCC's decisions and policies in this
area are subject to change. We expect DSL to remain a significant competitor
to
our data services, particularly as we enter the telephone business and telephone
companies aggressively bundle DSL with telephone service to discourage customers
from switching. In addition, the continuing deployment of fiber by telephone
companies into their networks will enable them to provide higher bandwidth
Internet service than provided over traditional DSL lines.
DSL
and
other forms of high-speed Internet access provide competition to our high-speed
Internet service. For example, as discussed above, satellite-based delivery
options are in development. In addition, local wireless Internet services have
recently begun to operate in many markets using available unlicensed radio
spectrum. This service option, popularly known as "wi-fi", offers another
alternative to cable-based Internet access.
High-speed
Internet access facilitates the streaming of video into homes and businesses.
As
the quality and availability of video streaming over the Internet improves,
video streaming likely will compete with the traditional delivery of video
programming services over cable systems. It is possible that programming
suppliers will consider bypassing cable operators and market their services
directly to the consumer through video streaming over the Internet.
We
believe that pricing for residential and commercial Internet services on our
system is generally comparable to that for similar DSL services and that some
residential customers prefer our ability to bundle Internet services with video
services. However, DSL providers may currently be in a better position to offer
data services to businesses since their networks tend to be more complete in
commercial areas. They also have the ability to bundle telephone with Internet
services for a higher percentage of their customers, and that ability is
appealing to many consumers. Joint marketing arrangements between DSL providers
and DBS providers may allow some additional bundling of services. Moreover,
major telephone companies, such as AT&T and Verizon, are now deploying fiber
deep into their networks that enables them in some areas to offer high bandwidth
video services over their networks, in addition to established voice and
Internet services.
Telephone
Companies and Utilities
The
competitive environment has been significantly affected by technological
developments and regulatory changes enacted under the 1996 Telecom Act, which
amended the Communications Act and which is designed to enhance competition
in
the cable television and local telephone markets. Federal cross-ownership
restrictions historically limited entry by local telephone companies into the
cable business. The 1996 Telecom Act modified this cross-ownership restriction,
making it possible for local exchange carriers, who have considerable resources,
to provide a wide variety of video services competitive with services offered
by
cable systems.
Telephone
companies already provide facilities for the transmission and distribution
of
voice and data services, including Internet services, in competition with
our
existing or potential interactive services ventures and businesses. Telephone
companies can lawfully enter the cable television business and some telephone
companies have been
18
extensively
deploying fiber in their networks, which enables them to provide video services,
as well as telephone and Internet access service. At least one major telephone
company plans to provide Internet protocol video over its upgraded network
and
contends that its use of this technology should allow it to provide video
service without a cable franchise as required under Title VI of the
Communications Act. Telephone companies deploying fiber more extensively
are
already providing video services in some communities. Although telephone
companies have obtained franchises or alternative authorizations in some
areas
and are seeking them in others, they are attempting through various means
(including federal and state legislation and through FCC rulemaking) to weaken
or streamline the franchising requirements applicable to them. If telephone
companies are successful in avoiding or weakening the franchise and other
regulatory requirements that are applicable to cable operators like Charter,
their competitive posture would be enhanced. We cannot predict the likelihood
of
success of the broadband services offered by our competitors or the impact
on us
of such competitive ventures. The large scale entry of major telephone companies
as direct competitors in the video marketplace could adversely affect the
profitability and valuation of established cable systems.
Charter
provides telephone service over our broadband communications networks in a
number of its service areas. Charter also provides traditional circuit-switched
phone service in a few communities. In these areas, Charter competes directly
with established telephone companies and other carriers, including VoIP
providers, for voice service customers. As we expand our offerings to include
voice services, we will be subject to considerable competition from telephone
companies and other telecommunications providers. The telecommunications
industry is highly competitive and includes competitors with greater financial
and personnel resources, who have brand name recognition and long-standing
relationships with regulatory authorities and customers. Moreover, mergers,
joint ventures and alliances among franchise, wireless or private cable
operators, local exchange carriers and others may result in providers capable
of
offering cable television, Internet, and telecommunications services in direct
competition with us. For example, major local exchange carriers have entered
into arrangements with EchoStar and DirecTV in which they will market packages
combining phone service, DSL and DBS services.
Additionally,
we are subject to competition from utilities which possess fiber optic
transmission lines capable of transmitting signals with minimal signal
distortion. Utilities are also developing broadband over power line technology,
which will allow the provision of Internet and other broadband services to
homes
and offices. Utilities have deployed broadband over power line technology in
a
few limited markets.
Broadcast
Television
Cable
television has long competed with broadcast television, which consists of
television signals that the viewer is able to receive without charge using
an
"off-air" antenna. The extent of such competition is dependent upon the quality
and quantity of broadcast signals available through "off-air" reception compared
to the services provided by the local cable system. Traditionally, cable
television has provided a higher picture quality and more channel offerings
than
broadcast television. However, the recent licensing of digital spectrum by
the
FCC will provide traditional broadcasters with the ability to deliver high
definition television pictures and multiple digital-quality program streams,
as
well as advanced digital services such as subscription video and data
transmission.
Traditional
Overbuilds
Cable
systems are operated under non-exclusive franchises granted by local
authorities. More than one cable system may legally be built in the same area.
It is possible that a franchising authority might grant a second franchise
to
another cable operator and that such a franchise might contain terms and
conditions more favorable than those afforded us. In addition, entities willing
to establish an open video system, under which they offer unaffiliated
programmers non-discriminatory access to a portion of the system’s cable system,
may be able to avoid local franchising requirements. Well financed businesses
from outside the cable industry, such as public utilities that already possess
fiber optic and other transmission lines in the areas they serve, may over
time
become competitors. There are a number of cities that have constructed their
own
cable systems, in a manner similar to city-provided utility services. There
also
has been interest in traditional overbuilds by private companies. Constructing
a
competing cable system is a capital intensive process which involves a high
degree of risk. We believe that in order to be successful, a competitor’s
overbuild would need to be able to serve the homes and businesses in the
overbuilt area on a more cost-effective basis than we can. Any such overbuild
operation would require either significant access to capital or access to
facilities already in place that are capable of delivering cable television
programming.
As
of
December 31, 2005, we are aware of overbuild situations impacting
approximately 6% of our total homes passed and potential overbuild situations
in
areas servicing approximately an additional 4% of our total homes passed.
Additional overbuild situations may occur in other systems.
19
Private
Cable
Additional
competition is posed by satellite master antenna television systems, or SMATV
systems, serving multiple dwelling units, or MDUs, such as condominiums,
apartment complexes, and private residential communities. These private cable
systems may enter into exclusive agreements with such MDUs, which may preclude
operators of franchise systems from serving residents of such private complexes.
Private cable systems can offer both improved reception of local television
stations and many of the same satellite-delivered program services that are
offered by cable systems. SMATV systems currently benefit from operating
advantages not available to franchised cable systems, including fewer regulatory
burdens and no requirement to service low density or economically depressed
communities. Exemption from regulation may provide a competitive advantage
to
certain of our current and potential competitors.
Wireless
Distribution
Cable
systems also compete with wireless program distribution services such as
multi-channel multipoint distribution systems or "wireless cable," known as
MMDS, which uses low-power microwave frequencies to transmit television
programming over-the-air to paying customers. MMDS services, however, require
unobstructed "line of sight" transmission paths and MMDS ventures have been
quite limited to date.
The
FCC
has completed its auction of Multichannel Video Distribution & Data Service
("MVDDS") licenses. MVDDS is a new terrestrial video and data fixed wireless
service that the FCC hopes will spur competition in the cable and DBS
industries.
Regulation
and Legislation
The
following summary addresses the key regulatory and legislative developments
affecting the cable industry. Cable system operations are extensively regulated
by the FCC, some state governments and most local governments. A failure to
comply with these regulations could subject us to substantial penalties. Our
business can be dramatically impacted by changes to the existing regulatory
framework, whether triggered by legislative, administrative, or judicial
rulings. Congress and the FCC have expressed a particular interest in increasing
competition in the communications field generally and in the cable television
field specifically. The 1996 Telecom Act, which amended the Communications
Act,
altered the regulatory structure governing the nation's communications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. At the same time, the FCC has pursued
spectrum licensing options designed to increase competition to the cable
industry by wireless multichannel video programming distributors. We could
be
materially disadvantaged in the future if we are subject to new regulations
that
do not equally impact our key competitors.
Congress
and the FCC have frequently revisited the subject of communications regulation,
and they are likely to do so in the future. For example, under the
Communications Act, the FCC can establish rules "necessary to provide diversity
of information sources" when cable systems with at least 36 channels are
available to 70% of U.S. homes and 70% of those homes subscribe to cable
service. The FCC has concluded that cable systems with at least 36 channels
are
available to 70% of U.S. homes and is now exploring whether the second part
of
the test has been met. In addition, franchise agreements with local governments
must be periodically renewed, and new operating terms may be imposed. Future
legislative, regulatory, or judicial changes could adversely affect our
operations. We can provide no assurance that the already extensive regulation
of
our business will not be expanded in the future.
Cable
Rate Regulation
The
cable
industry has operated under a federal rate regulation regime for more than
a
decade. The regulations currently restrict the prices that cable systems charge
for the minimum level of video programming service, referred to as "basic
service", and associated equipment. All other cable offerings are now
universally exempt from rate regulation. Although basic rate regulation operates
pursuant to a federal formula, local governments, commonly referred to as local
franchising authorities, are primarily responsible for administering this
regulation. The majority of our local franchising authorities have never been
certified to regulate basic cable rates, but they retain the right to do so
(and
order rate reductions and refunds), except in those specific communities facing
"effective competition," as defined under federal law. With increased DBS
competition, our systems are increasingly likely to satisfy the effective
competition standard. We have already secured FCC recognition of effective
competition, and been rate deregulated, in many of our communities.
20
There
have been frequent calls to impose expanded rate regulation on the cable
industry. Confronted with rapidly increasing cable programming costs, it is
possible that Congress may adopt new constraints on the retail pricing or
packaging of cable programming. For example, there has been considerable
legislative and regulatory interest in requiring cable offers to offer
historically bundled programming services on an a la carte basis or to at least
offer a separately available child-friendly "Family Tier." Such constraints
could adversely affect our operations.
Federal
rate regulations generally require cable operators to allow subscribers to
purchase premium or pay-per-view services without the necessity of subscribing
to any tier of service, other than the basic service tier. The applicability
of
this rule in certain situations remains unclear, and adverse decisions by the
FCC could affect our pricing and packaging of services. As we attempt to respond
to a changing marketplace with competitive pricing practices, such as targeted
promotions and discounts, we may face additional legal restraints and challenges
that impede our ability to compete.
Must
Carry/Retransmission Consent
There
are
two alternative legal methods for carriage of local broadcast television
stations on cable systems. Federal law currently includes "must carry"
regulations, which require cable systems to carry certain local broadcast
television stations that the cable operator would not select voluntarily.
Alternatively, federal law includes "retransmission consent" regulations, by
which popular commercial television stations can prohibit cable carriage unless
the cable operator first negotiates for "retransmission consent," which may
be
conditioned on significant payments or other concessions. Either option has
a
potentially adverse effect on our business. The burden associated with must
carry could increase significantly if cable systems were required to
simultaneously carry both the analog and digital signals of each television
station (dual carriage), as the broadcast industry transitions from an analog
to
a digital format.
The
burden could also increase significantly if cable systems become required to
carry multiple program streams included within a single digital broadcast
transmission (multicast carriage). Additional
government-mandated broadcast carriage obligations could disrupt existing
programming commitments, interfere with our preferred use of limited channel
capacity and limit our ability to offer services that would maximize customer
appeal and revenue potential. Although the FCC issued a decision in 2005
confirming an earlier ruling against mandating either dual carriage or multicast
carriage, that decision has been appealed. In addition, the FCC could reverse
its own ruling or Congress could legislate additional carriage obligations.
The
President has signed into law legislation establishing February 2009 as the
deadline to complete the broadcast transition to digital spectrum and to reclaim
analog spectrum. Cable operators may need to take additional operational steps
at that time to ensure that customers not otherwise equipped to receive digital
programming, retain access to broadcast programming.
Access
Channels
Local
franchise agreements often require cable operators to set aside certain channels
for public, educational and governmental access programming. Federal law also
requires cable systems to designate a portion of their channel capacity for
commercial leased access by unaffiliated third parties. Increased activity
in
this area could further burden the channel capacity of our cable systems.
Access
to Programming
The
Communications Act and the FCC’s "program access" rules generally prevent
satellite video programmers affiliated with cable operators from favoring cable
operators over competing multichannel video distributors, such as DBS, and
limit
the ability of such programmers to offer exclusive programming arrangements
to
cable operators. The FCC has extended the exclusivity restrictions through
October 2007. Given the heightened competition and media consolidation that
Charter faces, it is possible that we will find it increasingly difficult to
gain access to popular programming at favorable terms. Such difficulty could
adversely impact our business.
Ownership
Restrictions
Federal
regulation of the communications field traditionally included a host of
ownership restrictions, which limited the size of certain media entities and
restricted their ability to enter into competing enterprises. Through a series
of legislative, regulatory, and judicial actions, most of these restrictions
recently were eliminated or substantially relaxed. For example, historic
restrictions on local exchange carriers offering cable service within their
telephone service area, as well as those prohibiting broadcast stations from
owning cable systems within their broadcast service area, no longer exist.
Changes in this regulatory area, including some still subject to judicial
review, could
21
alter
the
business landscape in which we operate, as formidable new competitors (including
electric utilities, local exchange carriers, and broadcast/media companies)
may
increasingly choose to offer cable services.
The
FCC
previously adopted regulations precluding any cable operator from serving more
than 30% of all domestic multichannel video subscribers and from devoting more
than 40% of the activated channel capacity of any cable system to the carriage
of affiliated national video programming services. These cable ownership
restrictions were invalidated by the courts, and the FCC is now considering
adoption of replacement regulations.
Internet
Service
Over
the
past several years, proposals have been advanced at the FCC and Congress that
would require cable operators offering Internet service to provide
non-discriminatory access to its network to competing Internet service
providers. In a 2005 ruling, commonly referred to as Brand
X,
the
Supreme Court upheld an FCC decision making it less likely that any
non-discriminatory "open access" requirements (which are generally associated
with common carrier regulation of "telecommunications services") will be imposed
on the cable industry by local, state or federal authorities. The Supreme Court
held that the FCC was correct in classifying cable-provided Internet service
as
an "information service," rather than a "telecommunications service." This
favorable regulatory classification limits the ability of various governmental
authorities to impose open access requirements on cable-provided Internet
service.
The
FCC’s
classification also means that it likely will not regulate Internet service
as
much as cable or telecommunications services. However, the FCC has set a
deadline for broadband providers to accommodate law enforcement wiretaps and
could impose further regulations in the future. The FCC also issued a
non-binding policy statement in 2005 establishing four basic principles that
the
FCC says will inform its ongoing policymaking activities regarding
broadband-related Internet services. Those principles state that consumers
are
entitled to access the lawful Internet content of their choice, consumers are
entitled to run applications and services of their choice, subject to the needs
of law enforcement, consumers are entitled to connect their choice of legal
devices that do not harm the network, and consumers are entitled to competition
among network providers, application and service providers and content
providers. It is unclear what, if any, additional regulations the FCC might
impose on our Internet service, and what, if any, impact, such regulations
might
have on our business.
As
the
Internet has matured, it has become the subject of increasing regulatory
interest. Congress and federal regulators have adopted a wide range of measures
directly or potentially affecting Internet use, including, for example, consumer
privacy, copyright protections, (which afford copyright owners certain rights
against us that could adversely affect our relationship with a customer accused
of violating copyright laws), defamation liability, taxation, obscenity, and
unsolicited commercial e-mail. State and local governmental organizations have
also adopted Internet-related regulations. These various governmental
jurisdictions are also considering additional regulations in these and other
areas, such as pricing, service and product quality, and intellectual property
ownership. The
adoption of new Internet regulations or the adaptation of existing laws to
the
Internet could adversely affect our business.
Phone
Service
The
1996
Telecom Act, which amended the Communications Act, created a more favorable
regulatory environment for us to provide telecommunications services. In
particular, it limited the regulatory role of local franchising authorities
and
established requirements ensuring that we could interconnect with other
telephone companies to provide a viable service. Many implementation details
remain unresolved, and there are substantial regulatory changes being considered
that could impact, in both positive and negative ways, our primary
telecommunications competitors and our own entry into the field of phone
service. The FCC and state regulatory authorities are considering, for example,
whether common carrier regulation traditionally applied to incumbent local
exchange carriers should be modified. The
FCC
has concluded that alternative voice technologies, like certain types of VoIP,
should be regulated only at the federal level, rather than by individual states.
A legal challenge to that FCC decision is pending. While the FCC’s decision
appears to be a positive development for VoIP offerings, it is unclear whether
and how the FCC will apply certain types of common carrier regulations, such
as
intercarrier compensations and universal service obligations to alternative
voice technology. The FCC has already determined that providers of phone
services using Internet Protocol technology must comply with traditional 911
emergency service obligations ("E911") and it has extended requirements for
accommodating law enforcement wiretaps to such providers. It is unclear how
these regulatory matters ultimately will be resolved and how they will affect
our potential expansion into phone service.
22
Pole
Attachments
The
Communications Act requires most utilities to provide cable systems with access
to poles and conduits and simultaneously subjects the rates charged for this
access to either federal or state regulation. The Act specifies that
significantly higher rates apply if the cable plant is providing
telecommunications service, as well as traditional cable service. The FCC has
clarified that a cable operator's favorable pole rates are not endangered by
the
provision of Internet access, and that determination was upheld by the United
States Supreme Court. It
remains possible that the underlying pole attachment formula, or its application
to Internet and telecommunications offerings, will be modified in a manner
that
substantially increases our pole attachment costs.
Cable
Equipment
The
FCC
has undertaken several steps to promote competition in the delivery of cable
equipment and compatibility with new digital technology. The FCC has expressly
ruled that cable customers must be allowed to purchase set-top terminals from
third parties and established a multi-year phase-in during which security
functions (which would remain in the operator's exclusive control) would be
unbundled from the basic converter functions, which could then be provided
by
third party vendors. The first phase of implementation has already passed.
A
prohibition on cable operators leasing digital set-top terminals that integrate
security and basic navigation functions is currently scheduled to go into effect
as of July 1, 2007. Charter is among the cable operators challenging that
provision in court.
The
FCC
has adopted rules implementing an agreement between major cable operators and
manufacturers of consumer electronics on "plug and play" specifications for
one-way digital televisions. The rules require cable operators to provide
"CableCard" security modules and support to customer owned digital televisions
and similar devices equipped with built-in set-top terminal functionality.
Cable
operators must support basic home recording rights and copy protection rules
for
digital programming content. The FCC’s plug and play rules are under appeal,
although the appeal has been stayed pending the FCC
reconsideration.
The
FCC
is conducting additional related rulemakings, and the cable and consumer
electronics industries are currently negotiating an agreement that would
establish additional specifications for two-way digital televisions. Congress
is
also considering companion "broadcast flag" legislation to provide copy
protection for digital broadcast signals. It is unclear how this process will
develop and how it will affect our offering of cable equipment and our
relationship with our customers.
Other
Communications Act Provisions and FCC Regulatory
Matters
In
addition to the Communications Act provisions and FCC regulations noted above,
there are other statutory provisions and FCC regulations affecting our business.
The Communications Act, for example, includes cable-specific privacy
obligations. The Act carefully limits our ability to collect and disclose
personal information.
FCC
regulations include a variety of additional areas, including, among other
things: (1) equal employment opportunity obligations; (2) customer service
standards; (3) technical service standards; (4) mandatory blackouts of certain
network, syndicated and sports programming; (5) restrictions on political
advertising; (6) restrictions on advertising in children's programming; (7)
restrictions on origination cablecasting; (8) restrictions on carriage of
lottery programming; (9) sponsorship identification obligations; (10) closed
captioning of video programming; (11) licensing of systems and facilities;
(12)
maintenance of public files; and
(13)
emergency alert systems.
It
is
possible that Congress or the FCC will expand or modify its regulation of cable
systems in the future, and we cannot predict at this time how that might impact
our business. For example, there have been recent discussions about imposing
"indecency" restrictions directly on cable programming.
Copyright
Cable
systems are subject to federal copyright licensing covering carriage of
television and radio broadcast signals. The possible modification or elimination
of this compulsory copyright license is the subject of continuing legislative
review and could adversely affect our ability to obtain desired broadcast
programming. Moreover, the Copyright Office has not yet provided any guidance
as
to the how the compulsory copyright license should apply to newly offered
digital broadcast signals.
23
Copyright
clearances for non-broadcast programming services are arranged through private
negotiations. Cable operators also must obtain music rights for locally
originated programming and advertising from the major music performing rights
organizations. These licensing fees have been the source of litigation in the
past, and we cannot predict with certainty whether license fee disputes may
arise in the future.
Franchise
Matters
Cable
systems generally are operated pursuant to nonexclusive franchises granted
by a
municipality or other state or local government entity in order to cross public
rights-of-way. Cable franchises generally are granted for fixed terms and in
many cases include monetary penalties for noncompliance and may be terminable
if
the franchisee fails to comply with material provisions.
The
specific terms and conditions of cable franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, franchise fees, system construction, maintenance, technical
performance, and customer service standards. A number of states subject cable
systems to the jurisdiction of centralized state government agencies, such
as
public utility commissions. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal protections. For example, federal law caps local franchise fees and
includes renewal procedures designed to protect incumbent franchisees from
arbitrary denials of renewal. Even if a franchise is renewed, however, the
local
franchising authority may seek to impose new and more onerous requirements
as a
condition of renewal. Similarly, if a local franchising authority's consent
is
required for the purchase or sale of a cable system, the local franchising
authority may attempt to impose more burdensome requirements as a condition
for
providing its consent.
Different
legislative proposals have been introduced in the United States Congress and
in
some state legislatures that would greatly streamline cable franchising. This
legislation is intended to facilitate entry by new competitors, particularly
local telephone companies. Such legislation has already passed in at least
one
state, but is now subject to court challenge. Although various legislative
proposals provide some regulatory relief for incumbent cable operators, these
proposals are generally viewed as being more favorable to new entrants due
to a
number of varying factors, including efforts to withhold streamlined cable
franchising from incumbents until after the expiration of their existing
franchises and the potential for new entrants to serve only higher-income areas
of a particular community. To the extent incumbent cable operators are not
able
to avail themselves of this streamlined franchising process, such operators
may
continue to be subject to more onerous franchise requirements at the local
level
than new entrants. The FCC recently initiated a proceeding to determine whether
local franchising authorities are impeding the deployment of competitive cable
services through unreasonable franchising requirements and whether any such
impediments should be preempted. At this time, we are not able to determine
what
impact such proceeding may have on us.
Employees
As
of
December 31, 2005, we had approximately 17,200 full-time equivalent employees.
At December 31, 2005, approximately 100 of our employees were represented by
collective bargaining agreements. We have never experienced a work stoppage.
The
corporate office, which includes employees of Charter and Charter Holdco, is
responsible for coordinating and overseeing our operations. The corporate office
performs certain financial and administrative functions on a centralized basis
such as accounting, taxes, billing, finance and acquisitions, payroll and
benefit administration, information system design and support, internal audit,
purchasing, customer care, marketing and programming contract administration
and
oversight and coordination of external auditors and consultants and related
professional fees. The corporate office performs these services on a cost
reimbursement basis pursuant to a management services agreement. See
"Item 13. Certain Relationships and Related Transactions — Transactions
Arising Out of Our Organizational Structure and Mr. Allen’s Investment in
Charter Communications, Inc. and
Its
Subsidiaries — Intercompany Management Agreements" and "— Mutual Services
Agreements."
Risks
Related to Significant Indebtedness of Us and Our
Subsidiaries
We
may not generate (or, in general, have available to the applicable obligor)
sufficient cash flow or access to additional external liquidity sources to
fund
our capital expenditures, ongoing operations and debt
obligations.
Our
ability to service our debt and to fund our planned capital expenditures and
ongoing operations will depend on both our ability to generate cash flow and
our
access to additional external liquidity sources, and in general our ability
to
provide (by dividend or otherwise), such funds to the applicable issuer of
the
debt obligation. Our ability to generate cash flow is dependent on many factors,
including:
·
our
future operating performance;
·
the
demand for our products and
services;
·
general
economic conditions and conditions affecting customer and advertiser
spending;
·
competition
and our ability to stabilize customer losses;
and
·
legal
and regulatory factors affecting our
business.
Some
of
these factors are beyond our control. If we are unable to generate sufficient
cash flow and/or access additional external liquidity sources, we may not be
able to service and repay our debt, operate our business, respond to competitive
challenges or fund our other liquidity and capital needs. Although our
subsidiaries, CCH II and CCH II Capital Corp., recently sold $450 million
principal amount of 10.250% senior notes due 2010, we may not be able to access
additional sources of external liquidity on similar terms, if at all. We believe
that cash flows from operating activities and amounts available under our credit
facilities and bridge loan will not be sufficient to fund our operations and
satisfy our interest payment and principal repayment obligations in 2007 and
beyond. See "Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources."
Additionally,
franchise valuations performed in accordance with the requirements of Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets,
are
based on the projected cash flows derived by selling products and services
to
new customers in future periods. Declines in future cash flows could result
in
lower valuations which in turn may result in impairments to the franchise assets
in our financial statements.
Charter
Operating may not be able to access funds under its credit facilities or bridge
loan if it fails to satisfy the covenant restrictions in its credit facilities,
which could adversely affect our financial condition and our ability to conduct
our business.
Our
subsidiaries have historically relied on access to credit facilities in order
to
fund operations and to service parent company debt, and we expect such reliance
to continue in the future. Our total potential borrowing availability under
the
Charter Operating credit facilities was approximately $553 million as of
December 31, 2005, none of which was limited by financial covenants that may
from time to time in the future limit the availability of funds. Although as
of
January 2, 2006 we had additional borrowing availability of $600 million under
the bridge loan (which was reduced to $435 million as a result of the issuance
of the CCH II notes), such availability is subject to the satisfaction of
certain conditions, including the satisfaction of certain of the conditions
to
borrowing under the credit facilities.
An
event
of default under the credit facilities, bridge loan or indentures, if not
waived, could result in the acceleration of those debt obligations and,
consequently, other debt obligations. Such acceleration could result in exercise
of remedies by our creditors and could force us to seek the protection of the
bankruptcy laws, which could materially adversely impact our ability to operate
our business and to make payments under our debt instruments. In addition,
an
event of default under the credit facilities, such as the failure to maintain
the applicable required financial ratios, would prevent additional borrowing
under our credit facilities, which could materially adversely
25
affect
our ability to operate our business and to make payments under our debt
instruments. Likewise, the failure to satisfy the conditions to borrowing under
the bridge loan would prevent any borrowing thereunder, which could materially
adversely affect our ability to operate our business and to make payments under
our debt instruments.
We
and our subsidiaries have a significant amount of existing debt and may incur
significant additional debt, including secured debt, in the future, which could
adversely affect our financial health and our ability to react to changes in
our
business.
Charter
and its subsidiaries have a significant amount of debt and may (subject to
applicable restrictions in their debt instruments) incur additional debt in
the
future. As of December 31, 2005, our total debt was approximately $19.4 billion,
our shareholders’ deficit was approximately $4.9 billion and the deficiency of
earnings to cover fixed charges for the year ended December 31, 2005 was $853
million. The maturities of these obligations are set forth in "Item 7.
Description of Our Outstanding Debt."
As
of
December 31, 2005, Charter had outstanding approximately $883 million aggregate
principal amount of convertible notes, $20 million of which mature in 2006.
We
will need to raise additional capital and/or receive distributions or payments
from our subsidiaries in order to satisfy our debt obligations beyond
2006. However, because of our significant indebtedness, our ability to
raise additional capital at reasonable rates or at all is uncertain, and the
ability of our subsidiaries to make distributions or payments to us is subject
to availability of funds and restrictions under our and our subsidiaries’
applicable debt instruments as more fully described in "Item 7. Description
of
Our Outstanding Debt." If we were to raise capital through the issuance of
additional equity or to engage in a recapitalization or other similar
transaction, our shareholders could suffer significant dilution.
Our
significant amount of debt could have other important consequences. For
example, the debt will or could:
·
require
us to dedicate a significant portion of our cash flow from operating
activities to payments on our debt, which will reduce our funds available
for working capital, capital expenditures and other general corporate
expenses;
·
limit
our flexibility in planning for, or reacting to, changes in our business,
the cable and telecommunications industries and the economy at
large;
·
place
us at a disadvantage as compared to our competitors that have
proportionately less debt;
·
make
us vulnerable to interest rate increases, because a significant portion
of
our borrowings are, and will continue to be, at variable rates of
interest;
·
expose
us to increased interest expense as we refinance all existing lower
interest rate instruments;
·
adversely
affect our relationship with customers and
suppliers;
·
limit
our ability to borrow additional funds in the future, if we need
them, due
to applicable financial and restrictive covenants in our debt;
and
·
make
it more difficult for us to satisfy our obligations to the holders
of our
notes and for our subsidiaries to satisfy their obligations to their
lenders under their credit facilities and to their
noteholders.
A
default
by one of our subsidiaries under its debt obligations could result in the
acceleration of those obligations, the obligations of our other subsidiaries
and
our obligations under our convertible notes. We and our subsidiaries may incur
substantial additional debt in the future. If current debt levels increase,
the
related risks that we now face will intensify.
The
agreements and instruments governing our debt and the debt of our subsidiaries
contain restrictions and limitations that could significantly affect our ability
to operate our business, as well as significantly affect our
liquidity.
The
Charter Operating credit facilities, the bridge loan and the indentures
governing our and our subsidiaries’ debt contain a number of significant
covenants that could adversely affect our ability to operate our business,
as
well as
26
significantly
affect our liquidity, and therefore could adversely affect our results of
operations and the price of our Class A common stock. These covenants will
restrict, among other things, our and our subsidiaries’ ability to:
·
incur
additional debt;
·
repurchase
or redeem equity interests and
debt;
·
issue
equity;
·
make
certain investments or
acquisitions;
·
pay
dividends or make other
distributions;
·
dispose
of assets or merge;
·
enter
into related party transactions;
·
grant
liens and pledge assets.
Furthermore,
Charter Operating’s credit facilities require our subsidiaries to, among other
things, maintain specified financial ratios, meet specified financial tests
and
provide audited financial statements, with an unqualified opinion from our
independent auditors. See "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital Resources
and Description of Our Outstanding Debt" for a summary of our outstanding
indebtedness and a description of our credit facilities and other indebtedness
and for details on our debt covenants and future liquidity. Charter Operating’s
ability to comply with these provisions may be affected by events beyond our
control.
The
breach of any covenants or obligations in the foregoing indentures, bridge
loan
or credit facilities, not otherwise waived or amended, could result in a default
under the applicable debt agreement or instrument and could trigger acceleration
of the related debt, which in turn could trigger defaults under other agreements
governing our long-term indebtedness. See "Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources." In addition, the secured lenders under the Charter Operating
credit facilities and the holders of the Charter Operating senior second-lien
notes could foreclose on their collateral, which includes equity interests
in
our subsidiaries, and exercise other rights of secured creditors. Any default
under those credit facilities, the bridge loan, the indentures governing our
convertible notes or our subsidiaries’ debt could adversely affect our growth,
our financial condition and our results of operations and our ability to make
payments on our notes, the bridge loan, and Charter Operating’s credit
facilities and other debt of our subsidiaries. See "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Description of Our Outstanding Debt" for a summary of outstanding indebtedness
and a description of credit facilities and other indebtedness.
All
of our and our subsidiaries’ outstanding debt is subject to change of control
provisions. We may not have the ability to raise the funds necessary to fulfill
our obligations under our indebtedness following a change of control, which
would place us in default under the applicable debt
instruments.
We
may
not have the ability to raise the funds necessary to fulfill our obligations
under our and our subsidiaries’ notes, the bridge loan, and credit facilities
following a change of control. Under the indentures governing our and our
subsidiaries’ notes, upon the occurrence of specified change of control events,
we are required to offer to repurchase all of these notes. However, Charter
and
our subsidiaries may not have sufficient funds at the time of the change of
control event to make the required repurchase of these notes, and our
subsidiaries are limited in their ability to make distributions or other
payments to fund any required repurchase. In addition, a change of control
under
our subsidiaries’ credit facilities and bridge loan would result in a default
under those credit facilities and bridge loan. Because such credit facilities,
bridge loan and our subsidiaries’ notes are obligations of our subsidiaries, the
credit facilities, bridge loan and our subsidiaries’ notes would have to be
repaid by our subsidiaries before their assets could be available to us to
repurchase our convertible senior notes. Our failure to make or complete a
change of control offer would place us in default under our convertible senior
notes. The failure of our
27
subsidiaries
to make a change of control offer or repay the amounts accelerated under their
credit facilities and bridge loan would place them in default.
Paul
G. Allen and his affiliates are not obligated to purchase equity from,
contribute to or loan funds to us or any of our
subsidiaries.
Paul
G.
Allen and his affiliates are not obligated to purchase equity from, contribute
to or loan funds to us or any of our subsidiaries.
Risks
Related to Our Business
We
operate in a very competitive business environment, which affects our ability
to
attract and retain customers and can adversely affect our business and
operations. We have lost a significant number of video customers to direct
broadcast satellite competition and further loss of video customers could have
a
material negative impact on our business.
The
industry in which we operate is highly competitive and has become more so in
recent years. In some instances, we compete against companies with fewer
regulatory burdens, easier access to financing, greater personnel resources,
greater brand name recognition and long-established relationships with
regulatory authorities and customers. Increasing consolidation in the cable
industry and the repeal of certain ownership rules may provide additional
benefits to certain of our competitors, either through access to financing,
resources or efficiencies of scale.
Our
principal competitor for video services throughout our territory is DBS.
Competition from DBS, including intensive marketing efforts and aggressive
pricing has had an adverse impact on our ability to retain customers. DBS has
grown rapidly over the last several years and continues to do so. The cable
industry, including us, has lost a significant number of subscribers to DBS
competition, and we face serious challenges in this area in the future. We
believe that competition from DBS service providers may present greater
challenges in areas of lower population density, and that our systems service
a
higher concentration of such areas than those of other major cable service
providers.
Local
telephone companies and electric utilities can offer video and other services
in
competition with us and they increasingly may do so in the future. Certain
telephone companies have begun more extensive deployment of fiber in their
networks that enable them to begin providing video services, as well as
telephone and high bandwidth Internet access services, to residential and
business customers and they are now offering such service in limited areas.
Some
of these telephone companies have obtained, and are now seeking, franchises
or
operating authorizations that are less burdensome than existing Charter
franchises.
The
subscription television industry also faces competition from free broadcast
television and from other communications and entertainment media. Further loss
of customers to DBS or other alternative video and Internet services could
have
a material negative impact on the value of our business and its performance.
With
respect to our Internet access services, we face competition, including
intensive marketing efforts and aggressive pricing, from telephone companies
and
other providers of DSL and "dial-up". DSL service is competitive with high-speed
Internet service over cable systems. In addition, DBS providers have entered
into joint marketing arrangements with Internet access providers to offer
bundled video and Internet service, which competes with our ability to provide
bundled services to our customers. Moreover, as we expand our telephone
offerings, we will face considerable competition from established telephone
companies and other carriers, including VoIP providers.
In
order
to attract new customers, from time to time we make promotional offers,
including offers of temporarily reduced-price or free service. These promotional
programs result in significant advertising, programming and operating expenses,
and also require us to make capital expenditures to acquire additional digital
set-top terminals. Customers who subscribe to our services as a result of these
offerings may not remain customers for any significant period of time following
the end of the promotional period. A failure to retain existing customers and
customers added through promotional offerings or to collect the amounts they
owe
us could have a material adverse effect on our business and financial results.
28
Mergers,
joint ventures and alliances among franchised, wireless or private cable
operators, satellite television providers, local exchange carriers and others,
may provide additional benefits to some of our competitors, either through
access to financing, resources or efficiencies of scale, or the ability to
provide multiple services in direct competition with us.
We
cannot
assure you that our cable systems will allow us to compete effectively.
Additionally, as we expand our offerings to include other telecommunications
services, and to introduce new and enhanced services, we will be subject to
competition from other providers of the services we offer. We cannot predict
the
extent to which competition may affect our business and operations in the
future. See "Item 1. Business — Competition."
We
have a history of net losses and expect to continue to experience net losses.
Consequently, we may not have the ability to finance future
operations.
We
have
had a history of net losses and expect to continue to report net losses for
the
foreseeable future. Our net losses are principally attributable to insufficient
revenue to cover the interest costs on our debt, the depreciation expenses
that
we incur resulting from the capital investments we have made in our cable
properties, and the amortization and impairment of our franchise intangibles.
We
expect that these expenses (other than amortization and impairment of
franchises) will remain significant, and we expect to continue to report net
losses for the foreseeable future. We reported losses before cumulative effect
of accounting change of $2.3 billion for 2002, $238 million for 2003, $3.6
billion for 2004 and $967 million for 2005. Continued losses would reduce our
cash available from operations to service our indebtedness, as well as limit
our
ability to finance our operations.
We
may not have the ability to pass our increasing programming costs on to our
customers, which would adversely affect our cash flow and operating
margins.
Programming
has been, and is expected to continue to be, our largest operating expense
item.
In recent years, the cable industry has experienced a rapid escalation in the
cost of programming, particularly sports programming. We expect programming
costs to continue to increase because of a variety of factors, including
inflationary or negotiated annual increases, additional programming being
provided to customers and increased costs to purchase programming. The inability
to fully pass these programming cost increases on to our customers has had
an
adverse impact on our cash flow and operating margins. As measured by
programming costs, and excluding premium services (substantially all of which
were renegotiated and renewed in 2003), as of December 31, 2005, approximately
15% of our current programming contracts were expired, and approximately another
4% were scheduled to expire at or before the end of 2006. There can be no
assurance that these agreements will be renewed on favorable or comparable
terms. Our programming costs increased by approximately 7% in 2005 and we expect
our programming costs in 2006 to increase at a higher rate than in 2005. To
the
extent that we are unable to reach agreement with certain programmers on terms
that we believe are reasonable we may be forced to remove such programming
channels from our line-up, which could result in a further loss of customers.
If
our required capital expenditures exceed our projections, we may not have
sufficient funding, which could adversely affect our growth, financial condition
and results of operations.
During
the year ended December 31, 2005, we spent approximately $1.1 billion on capital
expenditures. During 2006, we expect capital expenditures to be approximately
$1.0 billion to $1.1 billion. The actual amount of our capital expenditures
depends on the level of growth in high-speed Internet and telephone customers
and in the delivery of other advanced services, as well as the cost of
introducing any new services. We may need additional capital if there is
accelerated growth in high-speed Internet customers, telephone customers or
in
the delivery of other advanced services. If we cannot obtain such capital from
increases in our cash flow from operating activities, additional borrowings
or
other sources, our growth, financial condition and results of operations could
suffer materially.
Our
inability to respond to technological developments and meet customer demand
for
new products and services could limit our ability to compete
effectively.
Our
business is characterized by rapid technological change and the introduction
of
new products and services. We cannot assure you that we will be able to fund
the
capital expenditures necessary to keep pace with unanticipated technological
developments, or that we will successfully anticipate the demand of our
customers for products and services requiring new technology. Our inability
to
maintain and expand our upgraded systems and provide advanced services in a
timely manner, or to anticipate the demands of the marketplace, could materially
adversely
29
affect
our ability to attract and retain customers. Consequently, our growth, financial
condition and results of operations could suffer materially.
We
may not be able to carry out our strategy to improve operating results by
standardizing and streamlining operations and
procedures.
In
prior
years, we experienced rapid growth through acquisitions of a number of cable
operators and the rapid rebuild and rollout of advanced services. Our future
success will depend in part on our ability to standardize and streamline our
operations. The failure to implement a consistent corporate culture and
management, operating or financial systems or procedures necessary to
standardize and streamline our operations and effectively operate our enterprise
could have a material adverse effect on our business, results of operations
and
financial condition.
Malicious
and abusive Internet practices could impair our high-speed Internet
services
Our
high-speed Internet customers utilize our network to access the Internet and,
as
a consequence, we or they may become victim to common malicious and abusive
Internet activities, such as unsolicited mass advertising (i.e., "spam") and
dissemination of viruses, worms and other destructive or disruptive software.
These activities could have adverse consequences on our network and our
customers, including degradation of service, excessive call volume to call
centers and damage to our or our customers’ equipment and data. Significant
incidents could lead to customer dissatisfaction and, ultimately, loss of
customers or revenue, in addition to increased costs to us to service our
customers and protect our network. Any significant loss of high-speed Internet
customers or revenue or significant increase in costs of serving those customers
could adversely affect our growth, financial condition and results of
operations.
We
could be deemed an "investment company" under the Investment Company Act of
1940. This would impose significant restrictions on us and would be likely
to
have a material adverse impact on our growth, financial condition and results
of
operation.
Our
principal assets are our equity interests in Charter Holdco and certain
indebtedness of Charter Holdco. If our membership interest in Charter Holdco
were to constitute less than 50% of the voting securities issued by Charter
Holdco, then our interest in Charter Holdco could be deemed an "investment
security" for purposes of the Investment Company Act. This may occur, for
example, if a court determines that the Class B common stock is no longer
entitled to special voting rights and, in accordance with the terms of the
Charter Holdco limited liability company agreement, our membership units in
Charter Holdco were to lose their special voting privileges. A determination
that such interest was an investment security could cause us to be deemed to
be
an investment company under the Investment Company Act, unless an exemption
from
registration were available or we were to obtain an order of the Securities
and
Exchange Commission excluding or exempting us from registration under the
Investment Company Act.
If
anything were to happen which would cause us to be deemed an investment company,
the Investment Company Act would impose significant restrictions on us,
including severe limitations on our ability to borrow money, to issue additional
capital stock and to transact business with affiliates. In addition, because
our
operations are very different from those of the typical registered investment
company, regulation under the Investment Company Act could affect us in other
ways that are extremely difficult to predict. In sum, if we were deemed to
be an
investment company it could become impractical for us to continue our business
as currently conducted and our growth, our financial condition and our results
of operations could suffer materially.
If
a court determines that the Class B common stock is no longer entitled to
special voting rights, we would lose our rights to manage Charter Holdco. In
addition to the investment company risks discussed above, this could materially
impact the value of the Class A common stock.
If
a
court determines that the Class B common stock is no longer entitled to special
voting rights, Charter would no longer have a controlling voting interest in,
and would lose its right to manage, Charter Holdco. If this were to occur:
·
we
would retain our proportional equity interest in Charter Holdco but
would
lose all of our powers to direct the management and affairs of Charter
Holdco and its subsidiaries; and
30
·
we
would become strictly a passive investment vehicle and would be treated
under the Investment Company Act as an investment
company.
This
result, as well as the impact of being treated under the Investment Company
Act
as an investment company, could materially adversely impact:
·
the
liquidity of the Class A common
stock;
·
how
the Class A common stock trades in the
marketplace;
·
the
price that purchasers would be willing to pay for the Class A common
stock
in a change of control transaction or otherwise;
and
·
the
market price of the Class A common
stock.
Uncertainties
that may arise with respect to the nature of our management role and voting
power and organizational documents as a result of any challenge to the special
voting rights of the Class B common stock, including legal actions or
proceedings relating thereto, may also materially adversely impact the value
of
the Class A common stock.
Risks
Related to Mr. Allen’s Controlling Position
The
failure by Mr. Allen to maintain a minimum voting and economic interest in
us
could trigger a change of control default under our subsidiary’s credit
facilities.
The
Charter Operating credit facilities provide that the failure by Mr. Allen to
maintain a 35% direct or indirect voting interest in the applicable borrower
would result in a change of control default. Such a default could result in
the
acceleration of repayment of our and our subsidiaries’ indebtedness, including
borrowings under the Charter Operating credit facilities.
Mr.
Allen controls our stockholder voting and may have interests that conflict
with
your interests.
Mr.
Allen
has the ability to control us. Through his control as of December 31, 2005
of
approximately 90% of the voting power of our capital stock, Mr. Allen is
entitled to elect all but one of our board members and effectively has the
voting power to elect the remaining board member as well. Mr. Allen thus has
the
ability to control fundamental corporate transactions requiring equity holder
approval, including, but not limited to, the election of all of our directors,
approval of merger transactions involving us and the sale of all or
substantially all of our assets.
Mr.
Allen
is not restricted from investing in, and has invested in, and engaged in, other
businesses involving or related to the operation of cable television systems,
video programming, high-speed Internet service, telephone or business and
financial transactions conducted through broadband interactivity and Internet
services. Mr. Allen may also engage in other businesses that compete or may
in
the future compete with us.
Mr.
Allen’s control over our management and affairs could create conflicts of
interest if he is faced with decisions that could have different implications
for him, us and the holders of our Class A common stock. Further, Mr. Allen
could effectively cause us to enter into contracts with another entity in which
he owns an interest or to decline a transaction into which he (or another entity
in which he owns an interest) ultimately enters.
Current
and future agreements between us and either Mr. Allen or his affiliates may
not
be the result of arm’s-length negotiations. Consequently, such agreements may be
less favorable to us than agreements that we could otherwise have entered into
with unaffiliated third parties. See "Item 13. —
Certain
Relationships and Related Transactions."
We
are not permitted to engage in any business activity other than the cable
transmission of video, audio and data unless Mr. Allen authorizes us to pursue
that particular business activity, which could adversely affect our ability
to
offer new products and services outside of the cable transmission business
and
to enter into new businesses, and could adversely affect our growth, financial
condition and results of operations.
Our
certificate of incorporation and Charter Holdco’s limited liability company
agreement provide that Charter and Charter Holdco and our subsidiaries, cannot
engage in any business activity outside the cable transmission business
31
except
for specified businesses. This will be the case unless Mr. Allen consents
to our engaging in the business activity. The cable transmission business means
the business of transmitting video, audio (including telephone services), and
data over cable television systems owned, operated or managed by us from time
to
time. These provisions may limit our ability to take advantage of attractive
business opportunities.
The
loss of Mr. Allen’s services could adversely affect our ability to manage our
business.
Mr.
Allen
is Chairman of our board of directors and provides strategic guidance and other
services to us. If we were to lose his services, our growth, financial condition
and results of operations could be adversely impacted.
The
special tax allocation provisions of the Charter Holdco limited liability
company agreement may cause us in some circumstances to pay more taxes than
if
the special tax allocation provisions were not in
effect.
Charter
Holdco’s limited liability company agreement provided that through the end of
2003, net tax losses (such net tax losses being determined under the federal
income tax rules for determining capital accounts) of Charter Holdco that would
otherwise have been allocated to us based generally on our percentage ownership
of outstanding common membership units of Charter Holdco would instead be
allocated to the membership units held by Vulcan Cable III Inc. ("Vulcan Cable")
and Charter Investment, Inc. ("CII"). The purpose of these special tax
allocation provisions was to allow Mr. Allen to take advantage, for tax
purposes, the losses generated by Charter Holdco during such period. In some
situations, these special tax allocation provisions could result in our having
to pay taxes in an amount that is more or less than if Charter Holdco had
allocated net tax losses to its members based generally on the percentage of
outstanding common membership units owned by such members. For further
discussion on the details of the tax allocation provisions see "Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies and Estimates — Income Taxes."
The
recent issuance of our Class A common stock, as well as possible future
conversions of our convertible notes, significantly increase the risk that
we
will experience an ownership change in the future for tax purposes, resulting
in
a material limitation on the use of a substantial amount of our existing net
operating loss carryforwards.
As
of
December 31, 2005, we had approximately $5.9 billion of tax net operating losses
(resulting in a gross deferred tax asset of approximately $2.4 billion) expiring
in the years 2006 through 2025. Due to uncertainties in projected future taxable
income, valuation allowances have been established against the gross deferred
tax assets for book accounting purposes except for deferred benefits available
to offset certain deferred tax liabilities. Currently, such tax net operating
losses can accumulate and be used to offset any of our future taxable income.
An
"ownership change" as defined in Section 382 of the Internal Revenue Code of
1986, as amended, would place significant limitations, on an annual basis,
on
the use of such net operating losses to offset any future taxable income we
may
generate. Such limitations, in conjunction with the net operating loss
expiration provisions, could effectively eliminate our ability to use a
substantial portion of our net operating losses to offset future taxable income.
The
issuance of up to a total of 150 million shares of our Class A common stock
(of
which a total of 116.9 million have been issued through February 2006) offered
pursuant to a share lending agreement executed by Charter in connection with
the
issuance of the 5.875% convertible senior notes in November 2004, as well as
possible future conversions of our convertible notes, significantly increases
the risk that we will experience an ownership change in the future for tax
purposes, resulting in a material limitation on the use of a substantial amount
of our existing net operating loss carryforwards. As of December 31, 2005,
the
issuance of shares associated with the share lending agreement did not result
in
our experiencing an ownership change. However, future transactions and the
timing of such transactions could cause an ownership change. Such transactions
include additional issuances of common stock by us (including but not limited
to
issuances upon future conversion of our 5.875% convertible senior notes or
as
issued in the settlement of derivative class action litigation), reacquisitions
of the borrowed shares by us, or acquisitions or sales of shares by certain
holders of our shares, including persons who have held, currently hold, or
accumulate in the future five percent or more of our outstanding stock
(including upon an exchange by Mr. Allen or his affiliates, directly or
indirectly, of membership units of Charter Holdco into our Class A common
stock). Many of the foregoing transactions are beyond our control.
Risks
Related to Regulatory and Legislative Matters
Our
business is subject to extensive governmental legislation and regulation, which
could adversely affect our business.
Regulation
of the cable industry has increased cable operators’ administrative and
operational expenses and limited their revenues. Cable operators are subject
to,
among other things:
32
·
rules
governing the provision of cable equipment and compatibility with
new
digital technologies;
·
rules
and regulations relating to subscriber
privacy;
·
limited
rate regulation;
·
requirements
governing when a cable system must carry a particular broadcast station
and when it must first obtain consent to carry a broadcast
station;
·
rules
for franchise renewals and transfers;
and
·
other
requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Additionally,
many aspects of these regulations are currently the subject of judicial
proceedings and administrative or legislative proposals. There are also ongoing
efforts to amend or expand the federal, state and local regulation of some
of
our cable systems, which may compound the regulatory risks we already face.
Certain states and localities are considering new telecommunications taxes
that
could increase operating expenses.
Our
cable systems are operated under franchises that are subject to non-renewal
or
termination. The failure to renew a franchise in one or more key markets could
adversely affect our business.
Our
cable
systems generally operate pursuant to franchises, permits and similar
authorizations issued by a state or local governmental authority controlling
the
public rights-of-way. Many franchises establish comprehensive facilities and
service requirements, as well as specific customer service standards and
monetary penalties for non-compliance. In many cases, franchises are terminable
if the franchisee fails to comply with significant provisions set forth in
the
franchise agreement governing system operations. Franchises are generally
granted for fixed terms and must be periodically renewed. Local franchising
authorities may resist granting a renewal if either past performance or the
prospective operating proposal is considered inadequate. Franchise authorities
often demand concessions or other commitments as a condition to renewal. In
some
instances, franchises have not been renewed at expiration, and we have operated
and are operating under either temporary operating agreements or without a
license while negotiating renewal terms with the local franchising authorities.
Approximately 11% of our franchises, covering approximately 13% of our analog
video customers, were expired as of December 31, 2005. Approximately 7% of
additional franchises, covering approximately an additional 9% of our analog
video customers, will expire on or before December 31, 2006, if not renewed
prior to expiration.
We
cannot
assure you that we will be able to comply with all significant provisions of
our
franchise agreements and certain of our franchisors have from time to time
alleged that we have not complied with these agreements. Additionally, although
historically we have renewed our franchises without incurring significant costs,
we cannot assure you that we will be able to renew, or to renew as favorably,
our franchises in the future. A termination of or a sustained failure to renew
a
franchise in one or more key markets could adversely affect our business in
the
affected geographic area.
Our
cable systems are operated under franchises that are non-exclusive. Accordingly,
local franchising authorities can grant additional franchises and create
competition in market areas where none existed previously, resulting in
overbuilds, which could adversely affect results of
operations.
Our
cable
systems are operated under non-exclusive franchises granted by local franchising
authorities. Consequently, local franchising authorities can grant additional
franchises to competitors in the same geographic area or operate their own
cable
systems. In addition, certain telephone companies are seeking authority to
operate in local communities without first obtaining a local franchise. As
a
result, competing operators may build systems in areas in which we hold
franchises. In some cases municipal utilities may legally compete with us
without obtaining a franchise from the local franchising authority.
Different
legislative proposals have been introduced in the United States Congress and
in
some state legislatures that would greatly streamline cable franchising. This
legislation is intended to facilitate entry by new competitors,
33
particularly
local telephone companies. Such legislation has already passed in at least
one
state but is now subject to court challenge. Although various legislative
proposals provide some regulatory relief for incumbent cable operators, these
proposals are generally viewed as being more favorable to new entrants due
to a
number of varying factors including efforts to withhold streamlined cable
franchising from incumbents until after the expiration of their existing
franchises. To the extent incumbent cable operators are not able to avail
themselves of this streamlined franchising process, such operators may continue
to be subject to more onerous franchise requirements at the local level than
new
entrants. The FCC recently initiated a proceeding to determine whether local
franchising authorities are impeding the deployment of competitive cable
services through unreasonable franchising requirements and whether such
impediments should be preempted. At this time, we are not able to determine
what
impact such proceeding may have on us.
The
existence of more than one cable system operating in the same territory is
referred to as an overbuild. These overbuilds could adversely affect our growth,
financial condition and results of operations by creating or increasing
competition. As of December 31, 2005, we are aware of overbuild situations
impacting approximately 6% of our estimated homes passed, and potential
overbuild situations in areas servicing approximately an additional 4% of our
estimated homes passed. Additional overbuild situations may occur in other
systems.
Local
franchise authorities have the ability to impose additional regulatory
constraints on our business, which could further increase our
expenses.
In
addition to the franchise agreement, cable authorities in some jurisdictions
have adopted cable regulatory ordinances that further regulate the operation
of
cable systems. This additional regulation increases the cost of operating our
business. We cannot assure you that the local franchising authorities will
not
impose new and more restrictive requirements. Local franchising authorities
also
have the power to reduce rates and order refunds on the rates charged for basic
services.
Further
regulation of the cable industry could cause us to delay or cancel service
or
programming enhancements or impair our ability to raise rates to cover our
increasing costs, resulting in increased losses.
Currently,
rate regulation is strictly limited to the basic service tier and associated
equipment and installation activities. However, the FCC and the U.S. Congress
continue to be concerned that cable rate increases are exceeding inflation.
It
is possible that either the FCC or the U.S. Congress will again restrict the
ability of cable system operators to implement rate increases. Should this
occur, it would impede our ability to raise our rates. If we are unable to
raise
our rates in response to increasing costs, our losses would increase.
There
has
been considerable legislative and regulatory interest in requiring cable
operators to offer historically bundled programming services on an á la carte
basis or to at least offer a separately available child-friendly "Family Tier."
It is possible that new marketing restrictions could be adopted in the future.
Such restrictions could adversely affect our operations.
Actions
by pole owners might subject us to significantly increased pole attachment
costs.
Pole
attachments are cable wires that are attached to poles. Cable system attachments
to public utility poles historically have been regulated at the federal or
state
level, generally resulting in favorable pole attachment rates for attachments
used to provide cable service. The FCC clarified that a cable operator’s
favorable pole rates are not endangered by the provision of Internet access,
and
that approach ultimately was upheld by the Supreme Court of the United States.
Despite the existing regulatory regime, utility pole owners in many areas are
attempting to raise pole attachment fees and impose additional costs on cable
operators and others. In addition, the favorable pole attachment rates afforded
cable operators under federal law can be increased by utility companies if
the
operator provides telecommunications services, as well as cable service, over
cable wires attached to utility poles. Any significant increased costs could
have a material adverse impact on our profitability and discourage system
upgrades and the introduction of new products and services.
We
may be required to provide access to our networks to other Internet service
providers, which could significantly increase our competition and adversely
affect our ability to provide new products and
services.
A
number
of companies, including independent Internet service providers, or ISPs, have
requested local authorities and the FCC to require cable operators to provide
non-discriminatory access to cable’s broadband infrastructure, so that these
companies may deliver Internet services directly to customers over cable
facilities. In a June 2005 ruling, commonly referred to as Brand
X,
the
Supreme Court upheld an FCC decision (and overruled a conflicting Ninth
34
Circuit
opinion) making it much less likely that any nondiscriminatory "open access"
requirements (which are generally associated with common carrier regulation
of
"telecommunications services") will be imposed on the cable industry by local,
state or federal authorities. The Supreme Court held that the FCC was correct
in
classifying cable provided Internet service as an "information service," rather
than a "telecommunications service." This favorable regulatory classification
limits the ability of various governmental authorities to impose open access
requirements on cable-provided Internet service. Given how recently Brand
X
was
decided, however, the nature of any legislative or regulatory response remains
uncertain. The imposition of open access requirements could materially affect
our business.
If
we
were required to allocate a portion of our bandwidth capacity to other Internet
service providers, we believe that it would impair our ability to use our
bandwidth in ways that would generate maximum revenues.
Changes
in channel carriage regulations could impose significant additional costs on
us.
Cable
operators also face significant regulation of their channel carriage. They
currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. This carriage burden
could increase in the future, particularly if cable systems were required to
carry both the analog and digital versions of local broadcast signals (dual
carriage) or to carry multiple program streams included with a single digital
broadcast transmission (multicast carriage). Additional government-mandated
broadcast carriage obligations could disrupt existing programming commitments,
interfere with our preferred use of limited channel capacity and limit our
ability to offer services that would maximize customer appeal and revenue
potential. Although the FCC issued a decision in February 2005, confirming
an
earlier ruling against mandating either dual carriage or multicast carriage,
that decision has been appealed. In addition, the FCC could reverse its own
ruling or Congress could legislate additional carriage obligations.
Offering
voice communications service may subject us to additional regulatory burdens,
causing us to incur additional costs.
In
2002,
we began to offer voice communications services on a limited basis over our
broadband network. We continue to explore development and deployment of Voice
over Internet Protocol or VoIP services. The regulatory requirements applicable
to VoIP service are unclear although the FCC has declared that certain VoIP
services are not subject to traditional state public utility regulation. The
full extent of the FCC preemption of VoIP services is not yet clear. Expanding
our offering of these services may require us to obtain certain authorizations,
including federal, state and local licenses. We may not be able to obtain such
authorizations in a timely manner, or conditions could be imposed upon such
licenses or authorizations that may not be favorable to us. Furthermore,
telecommunications companies generally are subject to significant regulation,
including payments to the Federal Universal Service Fund and the intercarrier
compensation regime. In addition, pole attachment rates are higher for providers
of telecommunications services than for providers of cable service. If there
were to be a final legal determination by the FCC, a state Public Utility
Commission, or appropriate court that VoIP services are subject to these higher
rates, our pole attachment costs could increase significantly, which could
adversely affect our financial condition and results of operations.
Our
principal physical assets consist of cable distribution plant and equipment,
including signal receiving, encoding and decoding devices, headend reception
facilities, distribution systems and customer drop equipment for each of our
cable systems.
Our
cable
plant and related equipment are generally attached to utility poles under pole
rental agreements with local public utilities and telephone companies, and
in
certain locations are buried in underground ducts or trenches. We own or lease
real property for signal reception sites and own most of our service
vehicles.
Historically,
our subsidiaries have owned the real property and buildings for our data
centers, customer contact centers and our divisional administrative offices.
Since early 2003 we have reduced our total real estate portfolio square footage
by approximately 17% and have decreased our operating annual lease costs by
approximately 30%.
35
In
addition, Charter has sold $15 million worth of surplus land and buildings.
We
plan to continue to reduce costs and excess capacity in this area through
consolidation of sites within our system footprints. Our subsidiaries generally
have leased space for business offices throughout our operating divisions.
Our
headend and tower locations are located on owned or leased parcels of land,
and
we generally own the towers on which our equipment is located. Charter Holdco
owns the real property and building for our principal executive offices.
The
physical components of our cable systems require maintenance as well as periodic
upgrades to support the new services and products we introduce. See
"Item 1. Business - Our Network Technology." We believe that our properties
are generally in good operating condition and are suitable for our business
operations.
Charter
is a party to lawsuits and claims that have arisen in the ordinary course of
conducting its business. In the opinion of management, after taking into account
recorded liabilities, the outcome of these lawsuits and claims are not expected
to have a material adverse effect on our consolidated financial condition,
results of operations or our liquidity.
Item 4.
Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of the year ended December 31, 2005.
Item 5.
Market
for Registrant’s Common Equity and Related Stockholder
Matters.
(A)
Market
Information
Our
Class
A common stock is quoted on the NASDAQ National Market under the symbol "CHTR."
The following table sets forth, for the periods indicated, the range of high
and
low last reported sale price per share of Class A common stock on the NASDAQ
National Market. There is no established trading market for our Class B common
stock.
Class A
Common Stock
High
Low
2005
First
quarter
$
2.30
$
1.35
Second
quarter
1.53
0.90
Third
quarter
1.71
1.14
Fourth
quarter
1.50
1.12
2004
First
quarter
$
5.43
$
3.99
Second
quarter
4.70
3.61
Third
quarter
3.90
2.61
Fourth
quarter
3.01
2.03
(B)
Holders
As
of
December 31, 2005, there were 4,516 holders of record of our Class A common
stock, one holder of our Class B common stock, and 4 holders of record of our
Series A Convertible Redeemable Preferred Stock.
(C)
Dividends
Charter
has not paid stock or cash dividends on any of its common stock, and we do
not
intend to pay cash dividends on common stock for the foreseeable future. We
intend to retain future earnings, if any, to finance our business.
Charter
Holdco may make pro rata distributions to all holders of its common membership
units, including Charter. Covenants in the indentures and credit agreements
governing the debt obligations of Charter Communications Holdings and its
subsidiaries restrict their ability to make distributions to us, and
accordingly, limit our ability to declare or pay cash dividends. See
"Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations."
(D) Recent
Sales of Unregistered Securities
During
2005, there were no unregistered sales of securities of the registrant other
than those previously reported on a Form 10-Q or Form 8-K.
For
information regarding securities issued under our equity compensation plans,
see
"Item 12. Security Ownership of Certain Beneficial Owners and Management —
Securities authorized for issuance under equity compensation plans."
Gain
(loss) on extinguishment of debt and preferred stock
521
(31
)
267
--
--
Other,
net
22
3
(16
)
(4
)
(59
)
Loss
before minority interest, income taxes and
cumulative
effect of accounting change
(853
)
(3,698
)
(725
)
(5,944
)
(2,630
)
Minority
interest (c)
1
19
377
3,176
1,461
Loss
before income taxes and cumulative effect
of
accounting change
(852
)
(3,679
)
(348
)
(2,768
)
(1,169
)
Income
tax benefit (expense)
(115
)
103
110
460
12
Loss
before cumulative effect of accounting change
(967
)
(3,576
)
(238
)
(2,308
)
(1,157
)
Cumulative
effect of accounting change, net of tax
--
(765
)
--
(206
)
(10
)
Net
loss
(967
)
(4,341
)
(238
)
(2,514
)
(1,167
)
Dividends
on preferred stock - redeemable
(3
)
(4
)
(4
)
(3
)
(1
)
Net
loss applicable to common stock
$
(970
)
$
(4,345
)
$
(242
)
$
(2,517
)
$
(1,168
)
Loss
per common share, basic and diluted
$
(3.13
)
$
(14.47
)
$
(0.82
)
$
(8.55
)
$
(4.33
)
Weighted-average
common shares outstanding
310,159,047
300,291,877
294,597,519
294,440,261
269,594,386
Balance
Sheet Data (end of period):
Total
assets
$
16,431
$
17,673
$
21,364
$
22,384
$
26,463
Long-term
debt
19,388
19,464
18,647
18,671
16,343
Minority
interest (c)
188
648
689
1,050
4,434
Preferred
stock — redeemable
4
55
55
51
51
38
Shareholders’
equity (deficit)
(4,920
)
(4,406
)
(175
)
41
2,585
(a)
Certain prior year amounts have been reclassified
to
conform with the 2005 and 2004 presentation.
(b)
In
2002, we restated our consolidated financial statements for 2001
and prior
years. The restatements were primarily related to the following
categories: (i) launch incentives from programmers;
(ii) customer incentives and inducements; (iii) capitalized
labor and overhead costs; (iv) customer acquisition costs;
(v) rebuild and upgrade of cable systems; (vi) deferred tax
liabilities/franchise assets; and (vii) other adjustments. These
adjustments reduced revenue for the year ended December 31, 2001 by
$146 million. Our consolidated net loss decreased by $11 million
for the year ended December 31, 2001.
(c)
Minority
interest represents the percentage of Charter Holdco not owned by
Charter,
plus preferred membership interests in CC VIII. Reported losses allocated
to minority interest on the statement of operations are limited to
the
extent of any remaining minority interest on the balance sheet related
to
Charter Holdco. Because minority interest in Charter Holdco was
substantially eliminated at December 31, 2003, beginning in 2004,
Charter
began to absorb substantially all losses before income taxes that
otherwise would have been allocated to minority interest, resulting
in an
approximate additional $454 million and $2.4 billion of net losses
for the
years ended December 31, 2005 and 2004, respectively. Under our existing
capital structure, Charter will absorb all future losses. Paul G.
Allen
indirectly holds the preferred membership units in CC VIII. There
was an
issue regarding the ultimate ownership of the CC VIII membership
interest
and this dispute was settled October 31, 2005. See "Item 13. Certain
Relationships and Related Transactions — Transactions Arising Out of Our
Organizational Structure and Mr. Allen’s Investment in Charter and Its
Subsidiaries — Equity Put Rights — CC VIII."
Comparability
of the above information from year to year is affected by acquisitions and
dispositions completed by us. See Note 2 and Note 4 to our accompanying
consolidated financial statements contained in "Item 8. Financial
Statements and Supplementary Data" and "Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources."
Item 7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Reference
is made to "Item 1A. Risk Factors" and "Cautionary Statement Regarding
Forward-Looking Statements," which describes important factors that could cause
actual results to differ from expectations and non-historical information
contained herein. In addition, the following discussion should be read in
conjunction with the audited consolidated financial statements of Charter
Communications, Inc. and subsidiaries as of and for the years ended
December 31, 2005, 2004 and 2003.
Introduction
We
continue to pursue opportunities to improve our liquidity. Our
efforts in this regard have resulted in the completion of a number of financing
transactions in 2005 and 2006, as follows:
·
the
January 2006 sale by our subsidiaries, CCH II, LLC ("CCH II") and
CCH II
Capital Corp., of an additional $450 million principal amount of
their
10.250% senior notes due 2010;
·
the October 2005 entry by our subsidiaries, CCO
Holdings
and CCO Holdings Capital Corp., as
guarantor thereunder, into a $600 million senior bridge loan agreement
with various lenders (which was reduced to $435 million as a result
of the
issuance of CCH II notes);
·
the
September 2005 exchange by Charter Holdings, CCH I and CIH of
approximately $6.8 billion in total principal amount of outstanding
debt
securities of Charter Holdings in a private placement for new debt
securities;
·
the
August 2005 sale by our subsidiaries, CCO Holdings and CCO Holdings
Capital Corp., of $300 million of 8 3/4% senior notes due
2013;
·
the
March and June 2005 issuance of $333 million of Charter Operating
notes in
exchange for $346 million of Charter Holdings
notes;
·
the repurchase during 2005 of $136 million of Charter’s
4.75% convertible senior notes due 2006 leaving $20 million in principal
amount outstanding; and
·
the
March 2005 redemption of all of CC V Holdings, LLC’s outstanding 11.875%
senior discount notes due 2008 at a total cost of $122
million.
39
During
the years 1999 through 2001, we grew significantly, principally through
acquisitions of other cable businesses financed by debt and, to a lesser extent,
equity. We have no current plans to pursue any significant acquisitions.
However, we may pursue exchanges of non-strategic assets or divestitures, such
as the sale of cable systems to Atlantic Broadband Finance, LLC. We therefore
do
not believe that our historical growth rates are accurate indicators of future
growth.
The
industry's and our most significant operational challenges include competition
from DBS providers and DSL service providers. See "Item 1. Business —
Competition.'' We believe that competition from DBS has resulted in net analog
video customer losses and decreased growth rates for digital video customers.
Competition from DSL providers combined with limited opportunities to expand
our
customer base now that approximately 33% of our analog video customers subscribe
to our high-speed Internet services has resulted in decreased growth rates
for
high-speed Internet customers. In the recent past, we have grown revenues by
offsetting video customer losses with price increases and sales of incremental
advanced services such as high-speed Internet, video on demand, digital video
recorders and high definition television. We expect to continue to grow revenues
through price increases and through continued growth in high-speed Internet
and
incremental new services including telephone, high definition television, VOD
and DVR service.
Historically,
our ability to fund operations and investing activities has depended on our
continued access to credit under our credit facilities. We expect we will
continue to borrow under our credit facilities from time to time to fund cash
needs. The occurrence of an event of default under our credit facilities could
result in borrowings from these facilities being unavailable to us and could,
in
the event of a payment default or acceleration, trigger events of default under
our outstanding notes and would have a material adverse effect on us.
Approximately $30 million of indebtedness under our credit facilities is
scheduled to mature during 2006. We expect to fund payment of such indebtedness
through borrowings under our revolving credit facilities.
Overview
of Operations
Approximately
86% of our revenues for each of the years ended December 31, 2005 and 2004,
respectively, are attributable to monthly subscription fees charged to customers
for our video, high-speed Internet, telephone and commercial services provided
by our cable systems. Generally, these customer subscriptions may be
discontinued by the customer at any time. The remaining 14% of revenue is
derived primarily from advertising revenues, franchise fee revenues, which
are
collected by us but then paid to local franchising authorities, pay-per-view
and
VOD programming where users are charged a fee for individual programs viewed,
installation or reconnection fees charged to customers to commence or reinstate
service, and commissions related to the sale of merchandise by home shopping
services. We have increased revenues during the past three years, primarily
through the sale of digital video and high-speed Internet services to new and
existing customers and price increases on video services offset in part by
dispositions of systems. Going forward, our goal is to increase revenues by
offsetting video customer losses with price increases and sales of incremental
advanced services such as telephone, high-speed Internet, video on demand,
digital video recorders and high definition television. See "Item 1. Business
—
Sales and Marketing" for more details.
Our
success in our efforts to grow revenues and improve margins will be impacted
by
our ability to compete against companies with easier access to financing,
greater personnel resources, greater brand name recognition, long-established
relationships with regulatory authorities and customers, and, often fewer
regulatory burdens. Additionally, controlling our cost of operations is
critical, particularly cable programming costs, which have historically
increased at rates in excess of inflation and are expected to continue to
increase. See "Item 1. Business — Programming" for more details. We are
attempting to control our costs of operations by maintaining strict controls
on
expenses. More specifically, we are focused on managing our cost structure
by
managing our workforce to control cost increases and improve productivity,
and
leveraging our size in purchasing activities.
Our
expenses primarily consist of operating costs, selling, general and
administrative expenses, depreciation and amortization expense and interest
expense. Operating costs primarily include programming costs, the cost of our
workforce, cable service related expenses, advertising sales costs, franchise
fees and expenses related to customer billings. Our loss from operations
decreased from $2.0 billion for year ended December 31, 2004 to income of $343
million for the year ended December 31, 2005. We had a positive operating margin
(defined as income (loss) from operations divided by revenues) of 7% and a
negative operating margin of 41% for the years ended December 31, 2005 and
2004,
respectively. The improvement from a loss from operations and negative operating
margin to income from operations and positive operating margin for the year
end
December 31, 2005 is principally due to the impairment of franchises of $2.4
billion recorded in the third quarter of 2004 which did not recur in 2005.
For
the year ended December 31, 2003, income from operations was $516 million and
for the year ended December 31,
40
2004,
our
loss from operations was $2.0 billion. We had a negative operating margin of
41%
for the year ended December 31, 2004, whereas for the year ending December31,2003, we had positive operating margin of 11%. The decline in income from
operations and operating margin for the year end December 31, 2004 is
principally due to the impairment of franchises of $2.4 billion recorded in
the
third quarter of 2004. The year ended December 31, 2004 also includes a gain
on
the sale of certain cable systems to Atlantic Broadband Finance, LLC which
is
substantially offset by an increase in option compensation expense and special
charges when compared to the year ended December 31, 2003. Although we do not
expect charges for impairment in the future of comparable magnitude, potential
charges could occur due to changes in market conditions.
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 interest costs we incur because of our
high
level of debt, the depreciation expenses that we incur resulting from the
capital investments we have made in our cable properties, and the amortization
and impairment of our franchise intangibles. We expect that these expenses
(other than impairment of franchises) will remain significant, and we therefore
expect to continue to report net losses for the foreseeable future.
Historically, a portion of the losses were allocated to minority interest,
however, at December 31, 2003, the minority interest in Charter Holdco
was
substantially eliminated by these loss allocations. Beginning in 2004,
we absorb
substantially all future losses before income taxes that otherwise would
have
been allocated to minority interest, resulting in an additional $454 million
and
$2.4 billion of net losses for the year ended December 31, 2005 and 2004,
respectively. Under our existing capital structure, future losses will
continue
to be absorbed by Charter. The remaining minority interest relates to CC
VIII
and the related profit and loss allocations for the CC VIII interests.
Critical
Accounting Policies and Estimates
Certain
of our accounting policies require our management to make difficult, subjective
or complex judgments. Management has discussed these policies with the Audit
Committee of Charter’s board of directors and the Audit Committee has reviewed
the following disclosure. We consider the following policies to be the most
critical in understanding the estimates, assumptions and judgments that are
involved in preparing our financial statements and the uncertainties that could
affect our results of operations, financial condition and cash flows:
·
Capitalization
of labor and overhead costs;
·
Useful
lives of property, plant and
equipment;
·
Impairment
of property, plant, and equipment, franchises, and
goodwill;
·
Income
taxes; and
·
Litigation.
In
addition, there are other items within our financial statements that require
estimates or judgment but are not deemed critical, such as the allowance for
doubtful accounts, but changes in judgment, or estimates in these other items
could also have a material impact on our financial statements.
Capitalization
of labor and overhead costs. The
cable
industry is capital intensive, and a large portion of our resources are spent
on
capital activities associated with extending, rebuilding, and upgrading our
cable network. As of December 31, 2005 and 2004, the net carrying amount of
our property, plant and equipment (consisting primarily of cable network assets)
was approximately $5.8 billion (representing 36% of total assets) and $6.3
billion (representing 36% of total assets), respectively. Total capital
expenditures for the years ended December 31, 2005, 2004 and 2003 were
approximately $1.1 billion, $924 million and $854 million, respectively.
Costs
associated with network construction, initial customer installations (including
initial installations of new or advanced services), installation refurbishments
and the addition of network equipment necessary to provide new or advanced
services are capitalized. While our capitalization is based on specific
activities, once capitalized, we track these costs by fixed asset category
at
the cable system level and not on a specific asset basis. Costs
capitalized as part of initial customer installations include materials, direct
labor, and certain indirect costs ("overhead"). These indirect costs are
associated with the activities of personnel who assist in connecting and
activating the new service and consist of compensation and overhead costs
associated with these support functions. The costs of disconnecting service
at a
customer’s dwelling or reconnecting service to a previously installed dwelling
are charged to operating expense in the period incurred. Costs for repairs
and
maintenance are charged to operating expense as incurred, while equipment
replacement and betterments, including replacement of cable drops from the
pole
to the dwelling, are capitalized.
41
We
make
judgments regarding the installation and construction activities to be
capitalized. We capitalize direct labor and overhead using standards developed
from actual costs and applicable operational data. We calculate standards for
items such as the labor rates, overhead rates and the actual amount of time
required to perform a capitalizable activity. For example, the standard amounts
of time required to perform capitalizable activities are based on studies of
the
time required to perform such activities. Overhead rates are established based
on an analysis of the nature of costs incurred in support of capitalizable
activities and a determination of the portion of costs that is directly
attributable to capitalizable activities. The impact of changes that resulted
from these studies were not significant in the periods presented.
Labor
costs directly associated with capital projects are capitalized. We capitalize
direct labor costs associated with personnel based upon the specific time
devoted to network construction and customer installation activities.
Capitalizable activities performed in connection with customer installations
include such activities as:
·
Dispatching
a "truck roll" to the customer’s dwelling for service
connection;
·
Verification
of serviceability to the customer’s dwelling (i.e., determining whether
the customer’s dwelling is capable of receiving service by our cable
network and/or receiving advanced or Internet
services);
·
Customer
premise activities performed by in-house field technicians and third-party
contractors in connection with customer installations, installation
of
network equipment in connection with the installation of expanded
services
and equipment replacement and betterment;
and
·
Verifying
the integrity of the customer’s network connection by initiating test
signals downstream from the headend to the customer’s digital set-top
terminal.
Judgment
is required to determine the extent to which overhead is incurred as a result
of
specific capital activities, and therefore should be capitalized. The primary
costs that are included in the determination of the overhead rate are
(i) employee benefits and payroll taxes associated with capitalized direct
labor, (ii) direct variable costs associated with capitalizable activities,
consisting primarily of installation and construction vehicle costs,
(iii) the cost of support personnel, such as dispatch, that directly assist
with capitalizable installation activities, and (iv) indirect costs
directly attributable to capitalizable activities.
While
we
believe our existing capitalization policies are appropriate, a significant
change in the nature or extent of our system activities could affect
management’s judgment about the extent to which we should capitalize direct
labor or overhead in the future. We monitor the appropriateness of our
capitalization policies, and perform updates to our internal studies on an
ongoing basis to determine whether facts or circumstances warrant a change
to
our capitalization policies. We capitalized internal direct labor and overhead
of $190 million, $164 million and $174 million, respectively, for the years
ended December 31, 2005, 2004 and 2003. Capitalized internal direct labor
and overhead costs have increased in 2005 as a result of the use of more
internal labor for capitalizable installations rather than third party
contractors.
Useful
lives of property, plant and equipment. We
evaluate the appropriateness of estimated useful lives assigned to our property,
plant and equipment, based on annual analyses of such useful lives, and revise
such lives to the extent warranted by changing facts and circumstances. Any
changes in estimated useful lives as a result of these analyses, which were
not
significant in the periods presented, will be reflected prospectively beginning
in the period in which the study is completed. The effect of a one-year decrease
in the weighted average remaining useful life of our property, plant and
equipment would be an increase in depreciation expense for the year ended
December 31, 2005 of approximately $232 million. The effect of a one-year
increase in the weighted average useful life of our property, plant and
equipment would be a decrease in depreciation expense for the year ended
December 31, 2005 of approximately $172 million.
Depreciation
expense related to property, plant and equipment totaled $1.5 billion, $1.5
billion and $1.5 billion, representing approximately 31%, 21% and 34% of costs
and expenses, for the years ended December 31, 2005, 2004 and 2003,
respectively. Depreciation is recorded using the straight-line composite method
over management’s estimate of the estimated useful lives of the related assets
as listed below:
Cable
distribution systems………………….....…….…....................
7-20
years
Customer
equipment and installations……………..…....................
3-5
years
Vehicles
and equipment……………..………………….....................
1-5
years
Buildings
and leasehold improvements………..………..................
5-15
years
Furniture,
fixtures and equipment….…………………….................
5
years
42
Impairment
of property, plant and equipment, franchises and goodwill.
As
discussed above, the net carrying value of our property, plant and equipment
is
significant. We also 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 December 31, 2005 and 2004 was approximately $9.8 billion
(representing 60% of total assets) and $9.9 billion (representing 56% of total
assets), respectively. Furthermore, our noncurrent assets include approximately
$52 million of goodwill.
We
adopted SFAS No. 142, Goodwill
and Other Intangible Assets,
on
January 1, 2002. SFAS No. 142 requires that franchise intangible
assets that meet specified indefinite-life criteria no longer be amortized
against earnings, but instead must be tested for impairment annually based
on
valuations, or more frequently as warranted by events or changes in
circumstances. In determining whether our franchises have an indefinite-life,
we
considered the exclusivity of the franchise, 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. We have concluded that as of December 31, 2005, 2004 and 2003
more
than 99% of our franchises qualify for indefinite-life treatment under SFAS
No. 142, and that less than one percent of our franchises do not qualify
for indefinite-life treatment due to technological or operational factors that
limit their lives. Costs of finite-lived franchises, along with costs associated
with franchise renewals, are amortized on a straight-line basis over 10 years,
which represents management’s best estimate of the average remaining useful
lives of such franchises. Franchise amortization expense was $4 million, $4
million and $9 million for the years ended December 31, 2005, 2004 and
2003, respectively. We expect that amortization expense on franchise assets
will
be approximately $2 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. Our goodwill is also deemed to have an
indefinite life under SFAS No. 142.
SFAS
No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets,
requires that we evaluate the recoverability of our property, plant and
equipment and franchise assets which did not qualify for indefinite-life
treatment under SFAS No. 142 upon the occurrence of events or changes in
circumstances which indicate that the carrying amount of an asset may not be
recoverable. Such events or changes in circumstances could include such factors
as the impairment of our indefinite-life franchises under SFAS No. 142, changes
in technological advances, fluctuations in the fair value of such assets,
adverse changes in relationships with local franchise authorities, adverse
changes in market conditions or a deterioration of operating results. Under
SFAS
No. 144, a long-lived asset is deemed impaired when the carrying amount of
the
asset exceeds the projected undiscounted future cash flows associated with
the
asset. No impairments of long-lived assets to be held and used were recorded
in
the years ended December 31, 2005, 2004 or 2003, however, approximately $39
million of impairment on assets held for sale was recorded for the year ended
December 31, 2005. We were also required to evaluate the recoverability of
our
indefinite-life franchises, as well as goodwill, as of January 1, 2002 upon
adoption of SFAS No. 142, and on an annual basis or more frequently as
deemed necessary.
Under
both SFAS No. 144 and SFAS No. 142, if an asset is determined to be impaired,
it
is required to be written down to its estimated fair market value. We determine
fair market value based on estimated discounted future cash flows, using
reasonable and appropriate assumptions that are consistent with internal
forecasts. Our assumptions include these and other factors: penetration rates
for analog and digital video, high-speed Internet and telephone, revenue growth
rates, expected operating margins and capital expenditures. Considerable
management judgment is necessary to estimate future cash flows, and such
estimates include inherent uncertainties, including those relating to the timing
and amount of future cash flows and the discount rate used in the calculation.
Based
on
the guidance prescribed in Emerging
Issues Task Force ("EITF") Issue No. 02-7, Unit
of Accounting for Testing of Impairment of Indefinite-Lived Intangible
Assets,
franchises
were 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
such groupings represent the highest and best use of those assets.
Our
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. 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.
43
Franchises,
for 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 such as interactivity and telephone
to
the potential customers (service marketing rights). Fair value is determined
based on estimated discounted future cash flows 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 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. Prior to the adoption of EITF Topic D-108, Use
of the Residual Method to Value Acquired Assets Other than
Goodwill,
discussed below, we followed a residual method of valuing our franchise assets,
which had the effect of including goodwill with the franchise
assets.
We
follow
the guidance of EITF Issue 02-17, Recognition
of Customer Relationship Intangible Assets Acquired in a Business Combination,
in
valuing customer relationships. Customer relationships, for valuation purposes,
represent the value of the business relationship with our existing customers
and
are calculated by projecting future after-tax cash flows from these customers
including the right to deploy and market additional services such as
interactivity and telephone 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.
In
September 2004, EITF Topic D-108, Use
of the Residual Method to Value Acquired Assets Other than
Goodwill,
was
issued, which requires the direct method of separately valuing all intangible
assets and does not permit goodwill to be included in franchise assets. We
performed an impairment assessment as of September 30, 2004, and adopted Topic
D-108 in that assessment resulting in a total franchise impairment of
approximately $3.3 billion. We recorded a cumulative effect of accounting change
of $765 million (approximately $875 million before tax effects of $91 million
and minority interest effects of $19 million) for the year ended December 31,2004 representing the portion of our total franchise impairment attributable
to
no longer including goodwill with franchise assets. The effect of the adoption
was to increase net loss and loss per share by $765 million and $2.55,
respectively, for the year ended December 31, 2004. The remaining $2.4 billion
of the total franchise impairment was attributable to the use of lower projected
growth rates and the resulting revised estimates of future cash flows in our
valuation and was recorded as impairment of franchises in our consolidated
statements of operations for the year ended December 31, 2004. Sustained analog
video customer losses by us and our industry peers in the third quarter of
2004
primarily as a result of increased competition from DBS providers and decreased
growth rates in our and our industry peers’ high-speed Internet customers in the
third quarter of 2004, in part as a result of increased competition from DSL
providers, led us to lower our projected growth rates and accordingly revise
our
estimates of future cash flows from those used at October 1, 2003. See "Item
1.
Business — Competition."
The
valuations completed at October 1, 2003 and October 1, 2005 showed franchise
values in excess of book value and thus resulted in no impairment.
The
valuations used in our impairment assessments involve numerous assumptions
as
noted above. While economic conditions, applicable at the time of the valuation,
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 valuation and consequently the potential impairment
charge.
Sensitivity
Analysis.
The
effect on franchise values as of October 1, 2005 of the indicated
increase/decrease in the selected assumptions is shown below:
Assumption
Percentage/
Percentage
Point Change
Franchise
Value Increase/(Decrease)
(Dollars
in millions)
Annual
Operating Cash Flow(1)
+/-
5
%
$
1,200/$(1,200
)
Long-Term
Growth Rate (2)
+/-
1pts (3
)
1,700/(1,300
)
Discount
Rate
+/-
0.5 pts (3
)
(1,300)/1,500
(1)
Operating
Cash Flow is defined as revenues less operating expenses and selling
general and administrative
expenses.
44
(2)
Long-Term
Growth Rate is the rate of cash flow growth beyond year
ten.
(3)
A
percentage point change of one point equates to 100 basis
points.
Income
Taxes. All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are not
subject to income tax. However, certain of these subsidiaries are corporations
and are subject to income tax. All of the taxable income, gains, losses,
deductions and credits of Charter Holdco are passed through to its members:
Charter, CII and Vulcan Cable III Inc. Charter is responsible for its share
of
taxable income or loss of Charter Holdco allocated to it in accordance with
the
Charter Holdco limited liability company agreement ("LLC Agreement") and
partnership tax rules and regulations.
The
LLC
Agreement provides for certain special allocations of net tax profits and net
tax losses (such net tax profits and net tax losses being determined under
the
applicable federal income tax rules for determining capital accounts). Under
the
LLC Agreement, through the end of 2003, net tax losses of Charter Holdco that
would otherwise have been allocated to Charter based generally on its percentage
ownership of outstanding common units were allocated instead to membership
units
held by Vulcan Cable III Inc. and CII (the "Special Loss Allocations") to the
extent of their respective capital account balances. After 2003, under the
LLC
Agreement, net tax losses of Charter Holdco are allocated to Charter, Vulcan
Cable III Inc. and CII based generally on their respective percentage ownership
of outstanding common units to the extent of their respective capital account
balances. Allocations of net tax losses in excess of the members’ aggregate
capital account balances are allocated under the rules governing Regulatory
Allocations, as described below. Subject to the Curative Allocation Provisions
described below, the LLC Agreement further provides that, beginning at the
time
Charter Holdco generates net tax profits, the net tax profits that would
otherwise have been allocated to Charter based generally on its percentage
ownership of outstanding common membership units will instead generally be
allocated to Vulcan Cable III Inc. and CII (the "Special Profit Allocations").
The Special Profit Allocations to Vulcan Cable III Inc. and CII will generally
continue until the cumulative amount of the Special Profit Allocations offsets
the cumulative amount of the Special Loss Allocations. The amount and timing
of
the Special Profit Allocations are subject to the potential application of,
and
interaction with, the Curative Allocation Provisions described in the following
paragraph. The LLC Agreement generally provides that any additional net tax
profits are to be allocated among the members of Charter Holdco based generally
on their respective percentage ownership of Charter Holdco common membership
units.
Because
the respective capital account balance of each of Vulcan Cable III Inc. and
CII
was reduced to zero by December 31, 2002, certain net tax losses of Charter
Holdco that were to be allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable
III Inc. and CII instead have been allocated to Charter (the "Regulatory
Allocations"). As
a
result of the allocation of net tax losses to Charter in 2005, Charter’s capital
account balance was reduced to zero during 2005. The LLC Agreement provides
that
once the capital account balances of all members have been reduced to zero,
net
tax losses are to be allocated to Charter, Vulcan Cable III Inc. and CII based
generally on their respective percentage ownership of outstanding common units.
Such allocations are also considered to be Regulatory Allocations. The
LLC
Agreement further provides that, to the extent possible, the effect of the
Regulatory Allocations is to be offset over time pursuant to certain curative
allocation provisions (the "Curative Allocation Provisions") so that, after
certain offsetting adjustments are made, each member's capital account balance
is equal to the capital account balance such member would have had if the
Regulatory Allocations had not been part of the LLC Agreement. The cumulative
amount of the actual tax losses allocated to Charter as a result of the
Regulatory Allocations through the year ended December 31, 2005 is approximately
$4.1 billion.
As
a
result of the Special Loss Allocations and the Regulatory Allocations referred
to above (and their interaction with the allocations related to assets
contributed to Charter Holdco with differences between book and tax basis),
the
cumulative amount of losses of Charter Holdco allocated to Vulcan Cable III
Inc.
and CII
is in
excess of the amount that would have been allocated to such entities if the
losses of Charter Holdco had been allocated among its members in proportion
to
their respective percentage ownership of Charter Holdco common membership
units.
The cumulative amount of such excess losses was approximately $977 million
through December 31, 2005.
In
certain situations, the Special Loss Allocations, Special Profit Allocations,
Regulatory Allocations and Curative Allocation Provisions described above could
result in Charter paying taxes in an amount that is more or less than if Charter
Holdco had allocated net tax profits and net tax losses among its members based
generally on the number of common membership units owned by such members. This
could occur due to differences in (i) the character of the allocated income
(e.g., ordinary versus capital), (ii) the allocated amount and timing of
tax depreciation and tax amortization expense due to the application of section
704(c) under the Internal Revenue Code, (iii) the potential interaction
between the Special Profit Allocations and the Curative Allocation Provisions,
(iv) the amount and timing of alternative minimum taxes paid by Charter, if
any,
(v) the apportionment of the allocated income or loss among the states in
which Charter Holdco does business, and (vi) future federal and state tax
laws. Further, in the event
45
of
new
capital contributions to Charter Holdco, it is possible that the tax effects
of
the Special Profit Allocations, Special Loss Allocations, Regulatory Allocations
and Curative Allocation Provisions will change significantly pursuant to the
provisions of the income tax regulations or the terms of a contribution
agreement with respect to such contributions. Such change could defer the actual
tax benefits to be derived by Charter with respect to the net tax losses
allocated to it or accelerate the actual taxable income to Charter with respect
to the net tax profits allocated to it. As a result, it is possible under
certain circumstances, that Charter could receive future allocations of taxable
income in excess of its currently allocated tax deductions and available tax
loss carryforwards. The ability to utilize net operating loss carryforwards
is
potentially subject to certain limitations as discussed below.
In
addition, under their exchange agreement with Charter, Vulcan Cable III Inc.
and
CII may exchange some or all of their membership units in Charter Holdco for
Charter’s Class B common stock, be merged with Charter, or be acquired by
Charter in a non-taxable reorganization. If such an exchange were to take place
prior to the date that the Special Profit Allocation provisions had fully offset
the Special Loss Allocations, Vulcan Cable III Inc. and CII could elect to
cause
Charter Holdco to make the remaining Special Profit Allocations to Vulcan Cable
III Inc. and CII immediately prior to the consummation of the exchange. In
the
event Vulcan Cable III Inc. and CII choose not to make such election or to
the
extent such allocations are not possible, Charter would then be allocated tax
profits attributable to the membership units received in such exchange pursuant
to the Special Profit Allocation provisions. Mr. Allen has generally agreed
to reimburse Charter for any incremental income taxes that Charter would owe
as
a result of such an exchange and any resulting future Special Profit Allocations
to Charter. The ability of Charter to utilize net operating loss carryforwards
is potentially subject to certain limitations (See "Item 13. Certain Trends
and
Uncertainties — Utilization of Net Operating Loss Carryforwards".) If Charter
were to become subject to such limitations (whether as a result of an exchange
described above or otherwise), and as a result were to owe taxes resulting
from
the Special Profit Allocations, then Mr. Allen may not be obligated to reimburse
Charter for such income taxes.
As
of
December 31, 2005 and 2004, we have recorded net deferred income tax
liabilities of $326 million and $216 million, respectively. Additionally, as
of
December 31, 2005 and 2004, we have deferred tax assets of $4.2 billion and
$3.8 billion, respectively, which primarily relate to financial and tax losses
allocated to Charter from Charter Holdco. We are required to record a valuation
allowance when it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. Given the uncertainty
surrounding our ability to utilize our deferred tax assets, these items have
been offset with a corresponding valuation allowance of $3.7 billion and $3.5
billion at December 31, 2005 and 2004, respectively.
Charter
Holdco is currently under examination by the Internal Revenue Service for the
tax years ending December 31, 2002 and 2003. Our results (excluding Charter
and
our indirect corporate subsidiaries) for these years are subject to this
examination. Management does not expect the results of this examination to
have
a material adverse effect on our consolidated financial condition, results
of
operations or our liquidity, including our ability to comply with our debt
covenants.
Litigation.Legal
contingencies have a high degree of uncertainty. When a loss from a contingency
becomes estimable and probable, a reserve is established. The reserve reflects
management's best estimate of the probable cost of ultimate resolution of the
matter and is revised accordingly as facts and circumstances change and,
ultimately when the matter is brought to closure. We have established reserves
for certain matters and if any of these matters are resolved unfavorably
resulting in payment obligations in excess of management's best estimate of
the
outcome, such resolution could have a material adverse effect on our
consolidated financial condition, results of operations or our
liquidity.
46
Results
of Operations
The
following table sets forth the percentages of revenues that items in the
accompanying consolidated statements of operations constitute for the indicated
periods (dollars in millions, except share data):
Revenues.
The
overall increase in revenues in 2005 compared to 2004 is principally the result
of an increase of 312,000 and 121,900 high-speed Internet customers and digital
video customers, respectively, as well as price increases for video and
high-speed Internet services, and is offset partially by a decrease of 107,000
analog video customers and $12 million of credits issued to hurricane Katrina
and Rita impacted customers related to service outages. We have restored service
to our impacted customers. Included
in the reduction in analog video customers and reducing the increase in digital
video and high-speed Internet customers are 26,800 analog video customers,
47
12,000
digital video customers and 600 high-speed Internet customers sold in the cable
system sales in Texas and West Virginia, which closed in July 2005. The cable
system sales to Atlantic Broadband Finance, LLC, which closed in March and
April
2004 and the cable system sales in Texas and West Virginia, which closed in
July
2005 (collectively referred to in this section as the "Systems Sales") reduced
the increase in revenues by approximately $38 million. Our goal is to increase
revenues by improving customer service which we believe will stabilize our
analog video customer base and increase the number of our customers who purchase
bundled services including high-speed Internet, digital video and telephone
services, in addition to VOD, high-definition television and DVR services.
In
addition, we intend to increase revenues by expanding marketing of our services
to our commercial customers.
Average
monthly revenue per analog video customer increased
from $68.02 for the year ended December 31, 2004 to $73.68 for the year ended
December 31, 2005 primarily as a result of price increases and incremental
revenues from advanced services. Average monthly revenue per analog video
customer represents total annual revenue, divided by twelve, divided by the
average number of analog video customers during the respective
period.
Revenues
by service offering were as follows (dollars in millions):
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Approximately $108 million of the
increase in video revenues was the result of price increases and incremental
video revenues from existing customers and approximately $17 million was the
result of an increase in digital video customers. The increases were offset
by
decreases of approximately $59 million related to a decrease in analog video
customers, approximately $29 million resulting from the System Sales and
approximately $9 million of credits issued to hurricanes Katrina and Rita
impacted customers related to service outages.
Approximately
$138 million of the increase in revenues from high-speed Internet services
provided to our non-commercial customers related to the increase in the average
number of customers receiving high-speed Internet services, whereas
approximately $35 million related to the increase in average price of the
service. The increase was offset by approximately $3 million of credits issued
to hurricanes Katrina and Rita impacted customers related to service outages
and
$3 million resulting from the System Sales.
Revenues
from telephone services increased primarily as a result of an increase of 76,100
telephone customers in 2005.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. Advertising sales revenues increased
primarily as a result of an increase in local advertising sales and offset
by a
decline in national advertising sales. In addition, the increase was offset
by a
decrease of $1 million as a result of the System Sales. For the years ended
December 31, 2005 and 2004, we received $15 million and $16 million,
respectively, in advertising sales revenues from programmers.
Commercial
revenues consist primarily of revenues from cable video and high-speed Internet
services provided to our commercial customers. Commercial revenues increased
primarily as a result of an increase in commercial high-speed Internet revenues.
The increase was reduced by approximately $3 million as a result of the System
Sales.
48
Other
revenues consist of revenues from franchise fees, equipment rental, customer
installations, home shopping, dial-up Internet service, late payment fees,
wire
maintenance fees and other miscellaneous revenues. For the years ended December31, 2005 and 2004, franchise fees represented approximately 54% and 52%,
respectively, of total other revenues. The increase in other revenues was
primarily the result of an increase in franchise fees of $14 million and
installation revenue of $8 million offset by a decrease of $2 million in
equipment rental and $2 million in processing fees. In addition, other revenues
were offset by approximately $2 million as a result of the System Sales.
Operating
expenses.
The
overall increase in operating expenses was reduced by approximately $15 million
as a result of the System Sales. Programming costs were $1.4 billion and $1.3
billion, representing 62% and 63% of total operating expenses for the years
ended December 31, 2005 and 2004, respectively. Key expense components as a
percentage of revenues were as follows (dollars in millions):
Programming
costs consist primarily of costs paid to programmers for analog, premium,
digital channels and pay-per-view programming. The increase in programming
was a
result of price increases, particularly in sports programming, partially offset
by a decrease in analog video customers. Additionally,
the increase in programming costs was reduced by $11 million as a result of
the
Systems Sales. Programming
costs were offset by the amortization of payments received from programmers
in
support of launches of new channels of $42 million and $62 million for the
year
ended December 31, 2005 and 2004, respectively. Programming costs for the
year ended December 31, 2004 also include a $5 million reduction related to
the
settlement of a dispute with TechTV, Inc., a related party. See Note 25 to
the
accompanying consolidated financial statements contained in "Item 8.
Financial Statements and Supplementary Data."
Our
cable
programming costs have increased in every year we have operated in excess of
customary inflationary and cost-of-living increases. We expect them to continue
to increase due to a variety of factors, including annual increases imposed
by
programmers and additional programming being provided to customers as a result
of system rebuilds and bandwidth reallocation, both of which increase channel
capacity. In 2006, we expect programming costs to increase at a higher rate
than
in 2005. These costs will be determined in part on the outcome of programming
negotiations in 2006 and will likely be subject to offsetting events or
otherwise affected by factors similar to the ones mentioned in the preceding
paragraph. Our increasing programming costs have resulted in declining operating
margins for our video services because we have been unable to pass on cost
increases to our customers. We expect to partially offset any resulting margin
compression from our traditional video services with revenue from advanced
video
services, increased telephone revenues, high-speed Internet revenues,
advertising revenues and commercial service revenues.
Service
costs consist primarily of service personnel salaries and benefits, franchise
fees, system utilities, cost of providing high-speed Internet and telephone
service, maintenance and pole rental expense. The increase in service costs
resulted primarily from increased labor and maintenance costs to support
improved service levels and our advanced products, increased costs of providing
high-speed Internet and telephone service as a result of the increase in these
customers and higher fuel prices. The increase in service costs was reduced
by
$4 million as a result of the System Sales. Advertising sales expenses consist
of costs related to traditional advertising services provided to advertising
customers, including salaries, benefits and commissions. Advertising sales
expenses increased primarily as a result of increased salary, benefit and
commission costs.
Selling,
general and administrative expenses.The
overall increase in selling, general and administrative expenses was reduced
by
$6 million as a result of the System Sales. Key components of expense as a
percentage of revenues were as follows (dollars in millions):
General
and administrative expenses consist primarily of salaries and benefits,
rent
expense, billing costs, call center costs, internal network costs, bad
debt
expense and property taxes. The increase in general and administrative
expenses
resulted primarily from increases in salaries and benefits of $43 million
and
professional fees associated with consulting services of $18 million both
related to investments to improve service levels in our customer care centers
as
well as an increase of $13 million in legal and other professional fees
offset
by decreases in bad debt expense of $17 million related to a reduction
in the
use of discounted pricing, property taxes of $6 million, property and casualty
insurance of $6 million and the System Sales of $6 million.
Marketing
expenses increased as a result of an increased investment in targeted marketing
campaigns.
Depreciation
and amortization.Depreciation
and amortization expense increased by $4 million in 2005. The increase in
depreciation is related to an increase in capital expenditures, which was
partially offset by lower depreciation as the result of the Systems Sales and
certain assets becoming fully depreciated.
Impairment
of franchises. We
performed an impairment assessment during the third quarter of 2004. The use
of
lower projected growth rates and the resulting revised estimates of future
cash
flows in our valuation, primarily as a result of increased competition, led
to
the recognition of a $2.4 billion impairment charge for the year ended December31, 2004. Our annual assessment in 2005 did not result in an
impairment.
Asset
impairment charges.
Asset
impairment charges for the year ended December 31, 2005 represent the write-down
of assets related to cable asset sales to fair value less costs to sell. See
Note 4 to the accompanying consolidated financial statements contained in "Item
8. Financial Statements and Supplementary Data."
(Gain)
loss on sale of assets, net. Loss
on
sale of assets for the year ended December 31, 2005 primarily represents the
loss recognized on the disposition of plant and equipment. Gain on sale of
assets for the year ended December 31, 2004 primarily represents the pretax
gain
of $106 million realized on the sale of systems to Atlantic Broadband Finance,
LLC which closed in March and April 2004 offset by losses recognized on the
disposition of plant and equipment.
Option
compensation expense, net.Option
compensation expense decreased $17 million, or 55%, for the year ended December31, 2005 compared to the year ended December 31, 2004. Option compensation
expense for the year ended December 31, 2005 primarily represents options
expensed in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS
No.
123).
Option
compensation expense for the year ended December 31, 2004 primarily represents
$22 million related to options expensed in accordance with SFAS No.
123.
The
decrease in option compensation expense is primarily the result of a decrease
in
the fair value of options granted related to a decrease in the price of our
Class A common stock combined with a decrease in the number of options granted.
Additionally,during
the year ended December 31, 2004, we expensed approximately $8 million related
to a stock option exchange program, under which our employees were offered
the
right to exchange all stock options (vested and unvested) issued under the
1999
Charter Communications Option Plan and 2001 Stock Incentive Plan that had an
exercise price over $10 per share for shares of restricted Charter Class A
common stock or, in some instances, cash. See
Note
21 to the accompanying consolidated financial statements contained in
"Item 8. Financial Statements and Supplementary Data" for more information
regarding our option compensation plans.
Hurricane
asset retirement loss.
Hurricane asset retirement loss represents the loss associated with the
write-off of the net book value of assets destroyed by hurricanes Katrina and
Rita in the third quarter of 2005.
Special
charges, net.
Special
charges for the year ended December 31, 2005 represent approximately $6 million
of severance and related costs of our management realignment and
$1
million related to legal settlements.
Special
50
charges
for the year ended December 31, 2004 represents approximately $85 million as
part of a settlement of the consolidated federal class actions, state derivative
actions and federal derivative action lawsuits, approximately $10 million of
litigation costs related to the settlement of a 2004 national class action
suit
(see Note 26 to the accompanying consolidated financial statements contained
in
"Item 8. Financial Statements and Supplementary Data") and approximately $12
million of severance and related costs of our workforce reduction and
realignment. Special charges for the year ended December 31, 2004 were offset
by
$3 million received from a third party in settlement of a dispute.
Unfavorable
contracts and other settlements.
Unfavorable
contracts and other settlements for the year ended December 31, 2004 relates
to
changes in estimated legal reserves established in connection with prior
business combinations, which based on an evaluation of current facts and
circumstances, are no longer required.
Interest
expense, net.Net
interest expense increased by $119 million, or 7%, for the year ended December31, 2005 compared to the year ended December 31, 2004. The increase in net
interest expense was a result of an increase in our average borrowing rate
from
8.66% in the year ended December 31, 2004 to 9.04% in the year ended December31, 2005 and an increase of $612 million in average debt outstanding from $18.6
billion in 2004 to $19.2 billion in 2005 combined with approximately $11 million
of liquidated damages on our 5.875% convertible senior notes. The increase
was
offset partially by $29 million in gains related to embedded derivatives in
Charter’s 5.875% convertible senior notes. See Note 16 to the accompanying
consolidated financial statements contained in "Item 8. Financial Statements
and
Supplementary Data."
Gain
on derivative instruments and hedging activities, net.
Net
gain
on derivative instruments and hedging activities decreased $19 million in the
year ended December 31, 2005 compared to the year ended December 31, 2004.
The
decrease is primarily the result of a decrease in gains on interest rate
agreements that do not qualify for hedge accounting under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
which
decreased from a gain of $65 million for the year ended December 31, 2004 to
$47
million for the year ended December 31, 2005. This was coupled with a decrease
in gains on interest rate agreements, as a result of hedge ineffectiveness
on
designated hedges, which decreased from $4 million for the year ended December31, 2004 to $3 million for the year ended December 31, 2005.
Loss
on debt to equity conversions.
Loss on
debt to equity conversions for the year ended December 31, 2004 represents
the
loss recognized from privately negotiated exchanges of a total of $30 million
principal amount of Charter’s 5.75% convertible senior notes held by two
unrelated parties for shares of Charter Class A common stock. The exchange
resulted in the issuance of more shares in the exchange transaction than would
have been issuable under the original terms of the convertible senior notes.
Gain
(loss) on extinguishment of debt and preferred stock.Gain
on
extinguishment of debt and preferred stock for the year ended December 31,2005
represents $490 million related to the exchange of approximately
$6.8 billion total principal amount of outstanding debt securities of
Charter Holdings for new CCH I and CIH debt securities, approximately $10
million related to the issuance of Charter Operating notes in exchange for
Charter Holdings notes, approximately $3 million related to the repurchase
of
$136 million principal amount of our 4.75% convertible senior notes due 2006
and
$23 million of gain realized on the repurchase of 508,546 shares of Series
A
convertible redeemable preferred stock. These gains were offset by approximately
$5 million of losses related to the redemption of our subsidiary’s CC V
Holdings, LLC 11.875% notes due 2008. See Note 9 to the accompanying
consolidated financial statements contained in "Item 8. Financial Statements
and
Supplementary Data." Loss on extinguishment of debt for the year ended December31, 2004 represents the write-off of deferred financing fees and third party
costs related to the Charter Communications Operating refinancing in April
2004
and the redemption of our 5.75% convertible senior notes due 2005 in December
2004.
Other,
net. Net
other
income for the year ended December 31, 2005 represents the gain realized on
an
exchange of our interest in an equity investee for an investment in a larger
enterprise. Net other income for the year ended December 31, 2004 represents
gains realized on equity investments.
Minority
interest.
Minority
interest represents the 2% accretion of the preferred membership interests
in
our indirect subsidiary, CC VIII, LLC, and the pro rata share of the profits
and
losses of CC VIII, LLC. See "Item 13. Certain Relationships and Related
Transactions — Transactions Arising Out of Our
Organizational Structure and Mr. Allen’s
Investment in Charter Communications, Inc. and Its Subsidiaries — Equity Put
Rights — CC VIII."
Income
tax benefit (expense).Income
tax expense for the year ended December 31, 2005 was recognized through
increases in deferred tax liabilities related to our investment in Charter
Holdco, as well as through current federal
51
and
state
income tax expense and increases in the deferred tax liabilities of certain
of
our indirect corporate subsidiaries. Income tax benefit for the year ended
December 31, 2004 was realized as a result of decreases in certain deferred
tax
liabilities related to our investment in Charter Holdco as well as decreases
in
the deferred tax liabilities of certain of our indirect corporate subsidiaries,
attributable to the write-down of franchise assets for financial statement
purposes and not for tax purposes. We do not expect to recognize a similar
benefit associated with the impairment of franchises in future periods. However,
the actual tax provision calculations in future periods will be the result
of
current and future temporary differences, as well as future operating results.
Cumulative
effect of accounting change, net of tax.Cumulative
effect of accounting change of $765 million (net of minority interest effects
of
$19 million and tax effects of $91 million) in 2004 represents the impairment
charge recorded as a result of our adoption of Topic D-108.
Net
loss.Net
loss
decreased by $3.4 billion in 2005 compared to 2004 as a result of the factors
described above. The impact to net loss in 2005 of the asset impairment charges,
extinguishment of debt and preferred stock was to decrease net loss by
approximately $482 million. The impact to net loss in 2004 of the impairment
of
franchises, cumulative effect of accounting change and the reduction in losses
allocated to minority interest was to increase net loss by approximately $3.7
billion.
Preferred
stock dividends.On
August31, 2001, Charter issued 505,664 shares (and on February 28, 2003 issued an
additional 39,595 shares) of Series A Convertible Redeemable Preferred
Stock in connection with the Cable USA acquisition, on which Charter pays or
accrues a quarterly cumulative cash dividend at an annual rate of 5.75% if
paid
or 7.75% if accrued on a liquidation preference of $100 per share. Beginning
January 1, 2005, Charter accrued the dividend on its Series A Convertible
Redeemable Preferred Stock. In November 2005, we repurchased 508,546 shares
of
our Series A Convertible Redeemable Preferred Stock. Following the repurchase,
36,713 shares or preferred stock remain outstanding. In addition, the
Certificate of Designation governing the Series A Convertible Redeemable
Preferred Stock was amended to (i) delete the dividend rights of the remaining
shares outstanding and (ii) increase the liquidation preference and redemption
price from $100 to $105.4063 per share, which amount shall further increase
at
the rate of 7.75% per annum, compounded quarterly, from September 30,2005.
Loss
per common share.The
loss
per common share decreased by $11.34, or 78%, as a result of the factors
described above.
Revenues.
The
overall increase in revenues in 2004 compared to 2003 is principally the result
of an increase of 318,800 and 2,800 high-speed Internet customers and digital
video customers, respectively, as well as price increases for video and
high-speed Internet services, and is offset partially by a decrease of 439,800
analog video customers. Included in the reduction in analog video customers
and
reducing the increase in digital video and high-speed Internet customers are
230,800 analog video customers, 83,300 digital video customers and 37,800
high-speed Internet customers sold in the cable system sales to Atlantic
Broadband Finance, LLC, which closed in March and April 2004 (collectively,
with
the cable system sale to WaveDivision Holdings, LLC in October 2003, referred
to
in this section as the "Systems Sales"). The Systems Sales reduced the increase
in revenues by $160 million.
Average
monthly revenue per analog video customer increased from $61.92 for the year
ended December 31, 2003 to $68.02 for the year ended December 31, 2004 primarily
as a result of price increases and incremental revenues from advanced services.
Average monthly revenue per analog video customer represents total annual
revenue, divided by twelve, divided by the average number of analog video
customers during the respective period.
Revenues
by service offering were as follows (dollars in millions):
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Approximately $116 million of the
decrease in video revenues was the result of the Systems Sales and approximately
an additional $65 million related to a decline in analog video customers. These
decreases were offset by increases of approximately $66 million resulting from
price increases and incremental video revenues from existing customers and
approximately $27 million resulting from an increase in digital video
customers.
Approximately
$163 million of the increase in revenues from high-speed Internet services
provided to our non-commercial customers related to the increase in the average
number of customers receiving high-speed Internet services, whereas
approximately $35 million related to the increase in average price of the
service. The increase in high-speed Internet revenues was reduced by
approximately $12 million as a result of the Systems Sales.
Revenues
from telephone services increased primarily as a result of an increase of 20,500
telephone customers.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. Advertising sales revenues increased
primarily as a result of an increase in national advertising campaigns and
election related advertising. The increase was offset by a decrease of $7
million as a result of the System Sales. For the years ended December 31,2004 and 2003, we received $16 million and $15 million, respectively, in
advertising revenue from programmers.
Commercial
revenues consist primarily of revenues from cable video and high-speed Internet
services to our commercial customers. Commercial revenues increased primarily
as
a result of an increase in commercial high-speed Internet revenues. The increase
was reduced by approximately $14 million as a result of the Systems
Sales.
Other
revenues consist of revenues from franchise fees, equipment rental, customer
installations, home shopping, dial-up Internet service, late payment fees,
wire
maintenance fees and other miscellaneous revenues. For the year ended December31, 2004 and 2003, franchise fees represented approximately 52% and 50%,
respectively, of total other revenues. Approximately $11 million of the decrease
in other revenues was the result of the Systems Sales offset by an increase
in
home shopping and infomercial revenue.
Operating
expenses.
The
overall increase in operating expenses was reduced by approximately $59 million
as a result of the System Sales. Programming costs were $1.3 billion and $1.2
billion, representing 63% and 64% of total operating expenses for the years
ended December 31, 2004 and 2003, respectively. Key expense components as a
percentage of revenues were as follows (dollars in millions):
Programming
costs consist primarily of costs paid to programmers for analog, premium
and
digital channels and pay-per-view programming. The increase in programming
costs
was a result of price increases, particularly in sports programming, an
increased number of channels carried on our systems, and an increase in digital
video customers, partially offset by a decrease in analog video customers.
Additionally,
the increase in programming costs was reduced by $42 million as a result
of the
Systems Sales. Programming
costs were offset by the amortization of payments received from programmers
in
support of launches of new channels of $62 million and $64 million for the
year
ended December 31, 2004 and 2003, respectively. Programming costs for the
year ended December 31, 2004 also include a $5 million reduction related
to the
settlement of a dispute with TechTV, Inc., a related party. See
53
Note
25
to the accompanying consolidated financial statements contained in "Item 8.
Financial Statements and Supplementary Data."
Service
costs consist primarily of service personnel salaries and benefits, franchise
fees, system utilities, Internet service provider fees, maintenance and pole
rental expense. The increase in service costs resulted primarily from additional
activity associated with ongoing infrastructure maintenance. The increase in
service costs was reduced by $15 million as a result of the System Sales.
Advertising sales expenses consist of costs related to traditional advertising
services provided to advertising customers, including salaries, benefits and
commissions. Advertising sales expenses increased primarily as a result of
increased salary, benefit and commission costs. The increase in advertising
sales expenses was reduced by $2 million as a result of the System Sales.
Selling,
general and administrative expenses.
The
overall increase in selling, general and administrative expenses was reduced
by
$22 million as a result of the System Sales. Key components of expense as a
percentage of revenues were as follows (dollars in millions):
General
and administrative expenses consist primarily of salaries and benefits,
rent
expense, billing costs, call center costs, internal network costs, bad
debt
expense and property taxes. The increase in general and administrative
expenses
resulted primarily from increases in costs associated with our commercial
business of $21 million, third party call center costs resulting from increased
emphasis on customer service of $10 million and bad debt expense of $10
million
offset by decreases in costs associated with salaries and benefits of $21
million and rent expense of $3 million.
Marketing
expenses increased as a result of an increased investment in marketing and
branding campaigns.
Depreciation
and amortization.Depreciation
and amortization expense increased by $42 million, or 3%. The increase in
depreciation related to an increase in capital expenditures, which was partially
offset by lower depreciation as the result of the Systems Sales.
Impairment
of franchises. We
performed an impairment assessment during the third quarter of 2004. The use
of
lower projected growth rates and the resulting revised estimates of future
cash
flows in our valuation, primarily as a result of increased competition, led
to
the recognition of a $2.4 billion impairment charge for the year ended December31, 2004.
(Gain)
loss on sale of assets, net. Gain
on
sale of assets for the year ended December 31, 2004 primarily represents the
pretax gain of $106 million realized on the sale of systems to Atlantic
Broadband Finance, LLC which closed in March and April 2004 offset by losses
recognized on the disposition of plant and equipment. Loss on sale of assets
for
the year ended December 31, 2003 represents the loss recognized on the
disposition of plant and equipment offset by a gain of $21 million recognized
on
the sale of cable systems in Port Orchard, Washington which closed on October1,2003.
Option
compensation expense, net.Option
compensation expense of $31 million for the year ended December 31, 2004
primarily represents $22 million related to options granted and expensed in
accordance with SFAS No. 123.
Additionally,during
the year ended December 31, 2004, we expensed approximately $8 million related
to a stock option exchange program, under which our employees were offered
the
right to exchange all stock options (vested and unvested) issued under the
1999
Charter Communications Option Plan and 2001 Stock Incentive Plan that had an
exercise price over $10 per share for shares of restricted Charter Class A
common stock or, in some instances, cash. The exchange offer closed in February
2004. Option
compensation expense of $4 million for the year ended December 31, 2003
primarily represents options expensed in accordance with SFAS No.
123.
See
Note
21 to the
54
accompanying
consolidated financial statements contained in "Item 8. Financial
Statements and Supplementary Data" for more information regarding our option
compensation plans.
Special
charges, net.
Special
charges for the year ended December 31, 2004 represents approximately $85
million as part of a settlement of the consolidated federal class actions,
state
derivative actions and federal derivative action lawsuits, approximately $10
million of litigation costs related to the settlement of a 2004 national class
action suit (see Note 26 to the accompanying consolidated financial statements
contained in "Item 8. Financial Statements and Supplementary Data") and
approximately $12 million of severance and related costs of our workforce
reduction and realignment. Special charges for the year ended December 31,2004
were offset by $3 million received from a third party in settlement of a
dispute. Special charges for the year ended December 31, 2003 represents
approximately $26 million of severance and related costs of our workforce
reduction partially offset by a $5 million credit from a settlement from the
Internet service provider Excite@Home related to the conversion of about 145,000
high-speed Internet customers to our Charter Pipeline service in 2001.
Unfavorable
contracts and other settlements.
Unfavorable
contracts and other settlements for the year ended December 31, 2004 relates
to
changes in estimated legal reserves established in connection with prior
business combinations, which based on an evaluation of current facts and
circumstances, are no longer required.
Unfavorable
contracts and other settlements for the year ended December 31, 2003 represents
the settlement of estimated liabilities recorded in connection with prior
business combinations. The majority of this benefit (approximately $52 million)
is due to the renegotiation in 2003 of a major programming contract, for which
a
liability had been recorded for the above market portion of that agreement
in
conjunction with the Falcon acquisition in 1999 and the Bresnan acquisition
in
2000. The remaining benefit relates to the reversal of previously recorded
liabilities, which are no longer required.
Interest
expense, net.Net
interest expense increased by $113 million, or 7%, for the year ended December31, 2004 compared to the year ended December 31, 2003. The increase in net
interest expense was a result of an increase in our average borrowing rate
from
7.99% in the year ended December 31, 2003 to 8.66% in the year ended December31, 2004 partially offset by a decrease of $306 million in average debt
outstanding from $18.9 billion in 2003 to $18.6 billion in 2004.
Gain
(loss) on derivative instruments and hedging activities, net.
Net
gain
on derivative instruments and hedging activities increased $4 million in the
year ended December 31, 2004 compared to the year ended December 31, 2003.
The
increase is primarily the result of an increase in gains on interest rate
agreements that do not qualify for hedge accounting under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
which
increased from a gain of $57 million for the year ended December 31, 2003 to
a
gain of $65 million for the year ended December 31, 2004. This was coupled
with
a decrease in gains on interest rate agreements, as a result of hedge
ineffectiveness on designated hedges, which increased from $8 million for the
year ended December 31, 2003 to $4 million for the year ended December 31,2004.
Loss
on debt to equity conversions.
Loss on
debt to equity conversions for the year ended December 31, 2004 represents
the
loss recognized from privately negotiated exchanges of a total of $30 million
principal amount of Charter’s 5.75% convertible senior notes held by two
unrelated parties for shares of Charter Class A common stock. The exchange
resulted in the issuance of more shares in the exchange transaction than would
have been issuable under the original terms of the convertible senior notes.
Gain
(loss) on extinguishment of debt.Loss
on
extinguishment of debt for the year ended December 31, 2004 represents the
write-off of deferred financing fees and third party costs related to the
Charter Communications Operating refinancing in April 2004 and the redemption
of
our 5.75% convertible senior notes due 2005 in December 2004. Gain on
extinguishment of debt for the year ended December 31, 2003 represents the
gain
realized on the purchase of an aggregate $609 million principal amount of our
outstanding convertible senior notes and $1.3 billion principal amount of
Charter Holdings’ senior notes and senior discount notes in consideration for an
aggregate of $1.6 billion principal amount of 10.25% notes due 2010 issued
by
our indirect subsidiary, CCH II. The gain is net of the write-off of deferred
financing costs associated with the retired debt of $27 million.
Other,
net.Net
other
expense decreased by $19 million from expense of $16 million in 2003 to income
of $3 million in 2004. Other expense in 2003 included $11 million associated
with amending a revolving credit facility of our subsidiaries and costs
associated with terminated debt transactions that did not recur in 2004. In
addition, gains on equity investments increased $7 million in 2004 over
2003.
55
Minority
interest.
Minority
interest represents the 2% accretion of the preferred membership interests
in
our indirect subsidiary, CC VIII, LLC, and since June 6, 2003, the pro rata
share of the profits and losses of CC VIII, LLC. See "Item 13. Certain
Relationships and Related Transactions — Transactions Arising Out of
Our
Organizational Structure and Mr. Allen’s
Investment in Charter Communications, Inc. and Its Subsidiaries — Equity Put
Rights — CC VIII." Reported losses allocated to minority interest on the
statement of operations are limited to the extent of any remaining minority
interest on the balance sheet related to Charter Holdco. Because minority
interest in Charter Holdco was substantially eliminated at December 31, 2003,
beginning in the first quarter of 2004, Charter began to absorb substantially
all future losses before income taxes that otherwise would have been allocated
to minority interest. For the year ended December 31, 2003, 53.5% of our losses
were allocated to minority interest. As a result of negative equity at Charter
Holdco during the year ended December 31, 2004, no additional losses were
allocated to minority interest, resulting in an additional $2.4 billion of
net
losses. Under our existing capital structure, future losses will be
substantially absorbed by Charter.
Income
tax benefit.
Income
tax benefits were realized for the years ended December 31, 2004 and 2003 as
a
result of decreases in certain deferred tax liabilities related to our
investment in Charter Holdco as well as decreases in the deferred tax
liabilities of certain of our indirect corporate subsidiaries.
The
income tax benefit recognized in the year ended December 31, 2004 was directly
related to the impairment of franchises as discussed above because the deferred
tax liabilities decreased as a result of the write-down of franchise assets
for
financial statement purposes and not for tax purposes. We do not expect to
recognize a similar benefit associated with the impairment of franchises in
future periods. However, the actual tax provision calculations in future periods
will be the result of current and future temporary differences, as well as
future operating results.
The
income tax benefit recognized in the year ended December 31, 2003 was directly
related to the tax losses allocated to Charter from Charter Holdco. In the
second quarter of 2003, Charter started receiving tax loss allocations from
Charter Holdco. Previously, the tax losses had been allocated to Vulcan Cable
III Inc. and CII in accordance with the Special Loss Allocations provided under
the Charter Holdco limited liability company agreement. We do not expect to
recognize a similar benefit related to our investment in Charter Holdco after
2003 related to tax loss allocations received from Charter Holdco, due to
limitations associated with our ability to offset future tax benefits against
the remaining deferred tax liabilities. However, the actual tax provision
calculations in future periods will be the result of current and future
temporary differences, as well as future operating results.
Cumulative
effect of accounting change, net of tax.Cumulative
effect of accounting change of $765 million (net of minority interest effects
of
$19 million and tax effects of $91 million) in 2004 represents the impairment
charge recorded as a result of our adoption of Topic D-108.
Net
loss.Net
loss
increased by $4.1 billion in 2004 compared to 2003 as a result of the factors
described above. The impact to net loss in 2004 of the impairment of franchises,
cumulative effect of accounting change and the reduction in losses allocated
to
minority interest was to increase net loss by approximately $3.7 billion. The
impact to net loss in 2003 of the gain on the sale of systems, unfavorable
contracts and settlements and gain on debt exchange, net of income tax impact,
was to decrease net loss by $168 million.
Preferred
stock dividends.On
August31, 2001, in connection with the Cable USA acquisition, Charter issued 505,664
shares (and on February 28, 2003 issued an additional 39,595 shares) of
Series A Convertible Redeemable Preferred Stock, on which it pays a
quarterly cumulative cash dividend at an annual rate of 5.75% on a liquidation
preference of $100 per share.
Loss
per common share.The
loss
per common share increased by $13.65 as a result of the factors described above.
Liquidity
and Capital Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
56
Overview
We
have a
significant level of debt. In 2006, $50 million of our debt matures, and in
2007, an additional $385 million matures. In 2008 and beyond, significant
additional amounts will become due under our remaining long-term debt
obligations.
Recent
Financing Transactions
On
January 30, 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which were provided, directly or indirectly, to
Charter Operating, which used such funds to reduce borrowings, but not
commitments, under the revolving portion of its credit facilities.
In
October 2005, CCO Holdings and CCO Holdings Capital Corp., as guarantor
thereunder, entered into a senior bridge loan agreement with JPMorgan Chase
Bank, N.A., Credit Suisse, Cayman Islands Branch and Deutsche Bank AG Cayman
Islands Branch (the "Lenders") whereby the Lenders committed to make loans
to
CCO Holdings in an aggregate amount of $600 million. Upon the issuance of $450
million of CCH II notes discussed above, the commitment under the bridge loan
was reduced to $435 million. CCO Holdings may draw upon the facility between
January 2, 2006 and September 29, 2006 and the loans will mature on the sixth
anniversary of the first borrowing under the bridge loan.
In
September 2005, Charter Holdings and its wholly owned subsidiaries, CCH I and
CIH, completed the exchange of approximately $6.8 billion total principal amount
of outstanding debt securities of Charter Holdings in a private placement for
new debt securities. Holders of Charter Holdings notes due in 2009 and 2010
exchanged $3.4 billion principal amount of notes for $2.9 billion principal
amount of new 11% CCH I notes due 2015. Holders of Charter Holdings notes due
2011 and 2012 exchanged $845 million principal amount of notes for $662 million
principal amount of 11% CCH I notes due 2015. In addition, holders of Charter
Holdings notes due 2011 and 2012 exchanged $2.5 billion principal amount of
notes for $2.5 billion principal amount of various series of new CIH notes.
Each
series of new CIH notes has the same interest rate and provisions for payment
of
cash interest as the series of old Charter Holdings notes for which such CIH
notes were exchanged. In addition, the maturities for each series were extended
three years.
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. We have historically funded these
requirements through cash flows from operating activities, borrowings under
our
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 year ended December 31, 2005, we generated $260 million of net cash
flows from operating activities after paying cash interest of $1.5 billion.
In
addition, the Company used $1.1 billion for purchases of property, plant and
equipment. Finally,
we had net cash flows from financing activities of $136 million. We expect
that
our mix of sources of funds will continue to change in the future based on
overall needs relative to our cash flow and on the availability of funds under
the credit facilities of our subsidiaries, our access to the debt and equity
markets, the timing of possible asset sales and our ability to generate cash
flows from operating activities. We continue to explore asset dispositions
as
one of several possible actions that we could take in the future to improve
our
liquidity, but we do not presently consider unannounced future asset sales
as a
significant source of liquidity.
We
expect
that cash on hand, cash flows from operating activities and the amounts
available under our credit facilities and bridge loan will be adequate to meet
our cash needs in 2006. We believe that cash flows from operating activities
and
amounts available under our credit facilities and bridge loan will not be
sufficient to fund our operations and satisfy our interest and principal
repayment obligations in 2007 and beyond. We are working with our financial
advisors to address these funding requirements. However, there can be no
assurance that such funding will be available to us. In addition, Mr. Allen
and
his affiliates are not obligated to purchase equity from, contribute to or
loan
funds to us.
Debt
Covenants
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Operating credit facilities and
bridge loan. The Charter Operating credit facilities, along with our and our
subsidiaries’ indentures and bridge loan, contain certain restrictive covenants,
some of which require us to maintain specified financial ratios and meet
financial tests and to provide audited financial statements with an unqualified
opinion from our independent auditors. As of December 31, 2005, we are in
compliance with the covenants under our indentures, bridge loan and credit
facilities, and we expect to remain in compliance with those covenants for
the
57
next
twelve months. As of December 31, 2005, our potential availability under our
credit facilities totaled approximately $553 million, none of which was limited
by covenants. In addition, as of January 2, 2006 we have additional borrowing
availability of $600 million under the bridge loan (which was reduced to $435
million as a result of the issuance of the CCH II notes). Continued access
to
our credit facilities and bridge loan is subject to our remaining in compliance
with these covenants, including covenants tied to our operating performance.
If
any events of non-compliance occur, funding under the credit facilities and
bridge loan may not be available and defaults on some or potentially all of
our
debt obligations could occur. An event of default under any of our debt
instruments could result in the acceleration of our payment obligations under
that debt and, under certain circumstances, in cross-defaults under our other
debt obligations, which could have a material adverse effect on our consolidated
financial condition and results of operations.
Specific
Limitations
Our
ability to make interest payments on our convertible senior notes, and, in
2006
and 2009, to repay the outstanding principal of our convertible senior notes
of
$20 million and $863 million, respectively, will depend on our ability to raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco and its subsidiaries. During 2005, Charter Holdings distributed $60
million to Charter Holdco. As of December 31, 2005, Charter Holdco was owed
$22
million in intercompany loans from its subsidiaries, which were available to
pay
interest and principal on our convertible senior notes. In addition, Charter
has
$98 million of governmental securities pledged as security for the next four
scheduled semi-annual interest payments on Charter’s 5.875% convertible senior
notes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, CCHC and
Charter Holdco) for
payment of principal on parent company notes are
restricted under the indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes and Charter Operating notes unless
there is no default, each applicable subsidiary’s leverage ratio test is met at
the time of such distribution and, in the case of our convertible senior notes,
other specified tests are met. For
the
quarter ended December 31, 2005, there was no default under any of these
indentures and each such subsidiary met its applicable leverage ratio tests
based on December 31, 2005 financial results. Such
distributions would be restricted, however, if any such subsidiary fails to
meet
these tests. In the past, certain subsidiaries have from time to time failed
to
meet their leverage ratio test. There can be no assurance that they will satisfy
these tests at the time of such distribution. Distributions
by Charter Operating and CCO Holdings for payment of principal on parent company
notes are further restricted by the covenants in the credit facilities and
bridge loan, respectively.
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. However, distributions for payment of
interest on our convertible senior notes are further limited to when each
applicable subsidiary’s leverage ratio test is met and other specified tests are
met. There can be no assurance that they will satisfy these tests at the time
of
such distribution.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on the
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 December31, 2005, there was no default under Charter Holdings’ indentures and Charter
Holdings met its leverage ratio test based on December 31, 2005 financial
results.
Such
distributions would be restricted, however, if Charter Holdings fails to meet
these tests. In the past, Charter Holdings has from time to time failed to
meet
this leverage ratio test. There can be no assurance that Charter Holdings will
satisfy these tests at the time of such distribution. 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.
Our
significant amount of debt could negatively affect our ability to access
additional capital in the future. Additionally, our ability to incur additional
debt may be limited by the restrictive covenants in our indentures, bridge
loan
and credit facilities. No assurances can be given that we will not experience
liquidity problems if we do not obtain sufficient additional financing on a
timely basis as our debt becomes due or because of adverse market conditions,
increased competition or other unfavorable events. If, at any time, additional
capital or borrowing capacity is required beyond amounts internally generated
or
available under our credit facilities and bridge loan or through additional
debt
or equity financings, we would consider:
58
•
issuing
equity that would significantly dilute existing shareholders;
•
issuing
convertible debt or some other securities that may have structural
or
other priority over our existing notes and may also significantly
dilute
Charter’s existing shareholders;
•
further
reducing our expenses and capital expenditures, which may impair
our
ability to increase revenue;
•
selling
assets; or
•
requesting
waivers or amendments with respect to our credit facilities, the
availability and terms of which would be subject to market conditions.
If
the
above strategies are not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. In addition, if we
need to raise additional capital through the issuance of equity or find it
necessary to engage in a recapitalization or other similar transaction, our
shareholders could suffer significant dilution and our noteholders might not
receive principal and interest payments to which they are contractually
entitled.
Issuance
of Charter Operating Notes in Exchange for Charter Holdings Notes; Repurchase
of
Convertible Notes
In
March
and June 2005, our subsidiary, Charter Operating, consummated exchange
transactions with a small number of institutional holders of Charter Holdings
8.25% senior notes due 2007 pursuant to which Charter Operating issued, in
private placement transactions, approximately $333 million principal amount
of
its 8.375% senior second lien notes due 2014 in exchange for approximately
$346
million of the Charter Holdings 8.25% senior notes due 2007. In addition, during
the year ended December 31, 2005, we repurchased, in private transactions,
from
a small number of institutional holders, a total of $136 million principal
amount of our 4.75% convertible senior notes due 2006. Approximately $20 million
principal amount of these notes remain outstanding.
Sale
of Assets
In
July
2005, we closed the sale of certain cable systems in Texas and West Virginia
and
closed the sale of an additional cable system in Nebraska in October 2005 for
a
total sales price of approximately $37 million, representing a total of 33,000
analog video customers.
In
March
2004, we closed the sale of certain cable systems in Florida, Pennsylvania,
Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC. We
closed the sale of an additional cable system in New York to Atlantic Broadband
Finance, LLC in April 2004. The total net proceeds from the sale of all of
these
systems were approximately $735 million. The proceeds were used to repay a
portion of our revolving credit facilities.
Acquisition
In
January 2006, we closed the purchase of certain cable systems in Minnesota
from
Seren Innovations, Inc. We acquired approximately 18,900 analog video customers
and 14,800 telephone customers for a total purchase price of approximately
$43
million.
Summary
of Outstanding Contractual Obligations
The
following table summarizes our payment obligations as of December 31, 2005
under
our long-term debt and certain other contractual obligations and commitments
(dollars in millions).
Payments
by Period
Less
than
1-3
3-5
More
than
Total
1
year
years
years
5
years
Contractual
Obligations
Long-Term
Debt Principal Payments (1)
$
19,336
$
50
$
1,129
$
5,781
$
12,376
Long-Term
Debt Interest Payments (2)
11,426
1,469
3,224
3,066
3,667
Payments
on Interest Rate Instruments (3)
18
8
10
--
--
Capital
and Operating Lease Obligations (1)
94
20
27
23
24
Programming
Minimum Commitments (4)
1,253
342
678
233
--
59
Other
(5)
301
146
70
42
43
Total
$
32,428
$
2,035
$
5,138
$
9,145
$
16,110
(1)
The
table presents maturities of long-term debt outstanding as of
December 31, 2005. Refer to Notes 9 and 26 to our accompanying
consolidated financial statements contained in "Item 8. Financial
Statements and Supplementary Data" for a description of our long-term
debt
and other contractual obligations and commitments.
(2)
Interest
payments on variable debt are estimated using amounts outstanding
at
December 31, 2005 and the average implied forward London Interbank
Offering Rate (LIBOR) rates applicable for the quarter during the
interest
rate reset based on the yield curve in effect at December 31, 2005.
Actual
interest payments will differ based on actual LIBOR rates and actual
amounts outstanding for applicable periods.
(3)
Represents
amounts we will be required to pay under our interest rate hedge
agreements estimated using the average implied forward LIBOR applicable
rates for the quarter during the interest rate reset based on the
yield
curve in effect at December 31, 2005.
(4)
We
pay programming fees under multi-year contracts ranging from three
to ten
years typically based on a flat fee per customer, which may be fixed
for
the term or may in some cases, escalate over the term. Programming
costs
included in the accompanying statement of operations were $1.4 billion,
$1.3 billion and $1.2 billion for the years ended December 31, 2005,
2004 and 2003, respectively. Certain of our programming agreements
are
based on a flat fee per month or have guaranteed minimum payments.
The
table sets forth the aggregate guaranteed minimum commitments under
our
programming contracts.
(5)
"Other"
represents other guaranteed minimum commitments, which consist primarily
of commitments to our billing services vendors.
The
following items are not included in the contractual obligations table because
the obligations are not fixed and/or determinable due to various factors
discussed below. However, we incur these costs as part of our
operations:
·
We
also rent utility poles used in our operations. Generally, pole rentals
are cancelable on short notice, but we anticipate that such rentals
will
recur. Rent expense incurred for pole rental attachments for the
years
ended December 31, 2005, 2004 and 2003, was $46 million, $43 million
and $40 million, respectively.
·
We
pay franchise fees under multi-year franchise agreements based on
a
percentage of revenues earned from video service per year. We also
pay
other franchise related costs, such as public education grants under
multi-year agreements. Franchise fees and other franchise-related
costs
included in the accompanying statement of operations were $170 million,
$164 million and $162 million for the years ended December 31, 2005,
2004
and 2003, respectively.
·
We
also have $165 million in letters of credit, primarily to our various
worker’s compensation, property casualty and general liability carriers
as
collateral for reimbursement of claims. These letters of credit reduce
the
amount we may borrow under our credit facilities.
Historical
Operating, Financing and Investing Activities
We
held
$21 million in cash and cash equivalents as of December 31, 2005 compared to
$650 million as of December 31, 2004. For the year ended December 31, 2005,
we
generated $260 million of net cash flows from operating activities after paying
cash interest of $1.5 billion. In addition, we used approximately $1.1 billion
for purchases of property, plant and equipment. Finally, we had net cash flows
from financing activities of $136 million.
Operating
Activities.Net
cash
provided by operating activities decreased $212 million, or 45%, from $472
million for the year ended December 31, 2004 to $260 million for the year ended
December 31, 2005. For the year ended December 31, 2005, net cash provided
by
operating activities decreased primarily as a result of an increase in cash
interest expense of $189 million over the corresponding prior period and changes
in operating assets and liabilities that used $45 million more cash during
the
year ended December 31, 2005 than the corresponding period in 2004.
60
The
change in operating assets and liabilities is primarily the result of the
finalization of the class action settlement in the third quarter of
2005.
Net
cash
provided by operating activities decreased $293 million, or 38%, from $765
million for the year ended December 31, 2003 to $472 million for the year ended
December 31, 2004. For the year ended December 31, 2004, net cash provided
by
operating activities decreased primarily as a result of an increase in cash
interest expense of $203 million over the corresponding prior period and changes
in operating assets and liabilities that provided $83 million less cash during
the year ended December 31, 2004 than the corresponding period in 2003. The
change in operating assets and liabilities is primarily the result of the
benefit in the year ended December 31, 2003 from collection of receivables
from
programmers related to network launches, while accounts receivable remained
essentially flat in the year ended December 31, 2004.
Investing
Activities.Net
cash
used in investing activities for the years ended December 31, 2005 and 2004
was
$1.0 billion and $243 million, respectively. Investing activities used $782
million more cash during the year ended December 31, 2005 than the corresponding
period in 2004 primarily as a result of cash provided by proceeds from the
sale
of certain cable systems to Atlantic Broadband Finance, LLC in 2004 which did
not recur in 2005 combined with increased cash used for capital expenditures.
Net
cash
used in investing activities for the years ended December 31, 2004 and 2003
was
$243 million and $817 million, respectively. Investing activities used $574
million less cash during the year ended December 31, 2004 than the corresponding
period in 2003 primarily as a result of cash provided by proceeds from the
sale
of certain cable systems to Atlantic Broadband Finance, LLC offset by increased
cash used for capital expenditures.
Financing
Activities.Net
cash
provided by financing activities was $136 million and $294 million for the
years
ended December 31, 2005 and 2004, respectively. The decrease in cash provided
during the year ended December 31, 2005, as compared to the corresponding period
in 2004, was primarily the result of an decrease in borrowings of long-term
debt
and proceeds from issuance of debt offset by a decrease in repayments of
long-term debt.
Net
cash
provided by financing activities for the year ended December 31, 2004 was $294
million and the net cash used in financing activities for the year ended
December 31, 2003 was $142 million. The increase in cash provided during the
year ended December 31, 2004, as compared to the corresponding period in 2003,
was primarily the result of an increase in borrowings of long-term debt and
proceeds from issuance of debt reduced by repayments of long-term debt.
Capital
Expenditures
We
have
significant ongoing capital expenditure requirements. Capital expenditures
were
$1.1 billion, $924 million and $854 million for the years ended December 31,2005, 2004 and 2003, respectively. The majority of the capital expenditures
in
2005, 2004 and 2003 related to our customer premise equipment costs. See the
table below for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt and borrowings under credit facilities. In
addition, during the years ended December 31, 2005, 2004 and 2003, our
liabilities related to capital expenditures increased $8 million and decreased
$43 million and $33 million, respectively.
The
increase in capital expenditures for 2005 compared to 2004 is the result of
expected increases in scalable infrastructure costs related to telephone
services, deployment of advanced digital set-top terminals and capital
expenditures to replace plant and equipment destroyed by hurricanes Katrina
and
Rita. During
2006, we expect capital expenditures to be approximately $1.0 billion to $1.1
billion. We expect that the nature of these expenditures will continue to be
composed primarily of purchases of customer premise equipment related to
telephone and other advanced services, support capital and for scalable
infrastructure costs. We expect to fund capital expenditures for 2006 primarily
from cash flows from operating activities and borrowings under our credit
facilities.
We
have
adopted capital expenditure disclosure guidance, which was developed by eleven
publicly traded cable system operators, including Charter, with the support
of
the National Cable & Telecommunications Association ("NCTA"). The disclosure
is intended to provide more consistency in the reporting of operating statistics
in capital expenditures and customers among peer companies in the cable
industry. These disclosure guidelines are not required disclosure under GAAP,
nor do they impact our accounting for capital expenditures under
GAAP.
61
The
following table presents our major capital expenditures categories in accordance
with NCTA disclosure guidelines for the years ended December 31, 2005, 2004
and 2003 (dollars in millions):
Customer
premise equipment includes costs incurred at the customer residence
to
secure new customers, revenue units and additional bandwidth revenues.
It
also includes customer installation costs in accordance with SFAS
51 and
customer premise equipment (e.g., set-top terminals and cable modems,
etc.).
(b)
Scalable
infrastructure includes costs, not related to customer premise equipment
or our network, to secure growth of new customers, revenue units
and
additional bandwidth revenues or provide service enhancements (e.g.,
headend equipment).
(c)
Line
extensions include network costs associated with entering new service
areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment,
make-ready and design engineering).
(d)
Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable
networks,
including betterments.
(e)
Support
capital includes costs associated with the replacement or enhancement
of
non-network assets due to technological and physical obsolescence
(e.g.,
non-network equipment, land, buildings and
vehicles).
62
Description
of Our Outstanding Debt
As
of
December 31, 2005, our actual total debt was approximately $19.4 billion,
as summarized below (dollars in millions):
(a) The
accreted value presented above generally represents the principal amount
of the
notes less the original issue discount at the time of sale plus the accretion
to
the balance sheet date except as follows. The accreted value of the CIH notes
issued in exchange for Charter Holdings notes and the CCH I notes issued
in
exchange for the 8.625% Charter Holdings notes due 2009 are recorded at the
historical book values of the Charter Holdings notes for financial reporting
purposes as opposed to the current accreted value for legal purposes and
notes
indenture purposes (which, for both purposes, is the amount that would become
payable if the debt becomes
63
immediately due). As of December 31, 2005, the accreted value of our debt
for
legal purposes and notes and indentures purposes is $18.8 billion.
(b)
In
general, the obligors have the right to redeem all of the notes
set forth
in the above table (except with respect to the 5.875% convertible
senior
notes due 2009, the 8.25% Charter Holdings notes due 2007, the
10.000% Charter Holdings notes due 2009, the 10.75% Charter Holdings
notes
due 2009 and the 9.625% Charter Holdings notes due 2009) in whole
or part
at their option, beginning at various times prior to their stated
maturity
dates, subject to certain conditions, upon the payment of the outstanding
principal amount (plus a specified redemption premium) and all
accrued and
unpaid interest. The 5.875% convertible senior notes are redeemable
if the
closing price of our Class A common stock exceeds the conversion
price by
certain percentages as described below. For additional information.
See
Note 9 to the accompanying consolidated financial statements contained
in
"Item 8. Financial Statements and Supplementary
Data."
(c)
The
4.75% convertible senior notes and the 5.875% convertible senior
notes are
convertible at the option of the holders into shares of Class A
common stock at a conversion rate, subject to certain adjustments,
of
38.0952 and 413.2231 shares, respectively, per $1,000 principal amount
of
notes, which is equivalent to a price of $26.25 and $2.42 per share,
respectively. Certain anti-dilutive provisions cause adjustments
to occur
automatically upon the occurrence of specified events. Additionally,
the
conversion ratio may be adjusted by us when deemed
appropriate.
(d)
In
January 2006, our subsidiaries, CCH II and CCH II Capital Corp.,
issued
$450 million principal amount of 10.250% senior notes due 2010, the
proceeds of which were used to pay down credit facilities.
(e)
Not
included within total long-term debt is the $49 million CCHC note,
which
is included in note payable-related party on our accompanying consolidated
balance sheets. See Note 10 to the accompanying consolidated financial
statements contained in "Item 8. Financial Statements and Supplementary
Data."
As
of
December 31, 2005 and 2004, our long-term debt totaled approximately $19.4
billion and $19.5 billion, respectively. This debt was comprised of
approximately $5.7 billion and $5.5 billion of credit facility debt, $12.8
billion and $13.0 billion accreted amount of high-yield notes and $863 million
and $990 million accreted amount of convertible senior notes at December 31,2005 and 2004, respectively.
As
of
December 31, 2005 and 2004, the weighted average interest rate on the credit
facility debt was approximately 7.8% and 6.8%, the weighted average interest
rate on our high-yield notes was approximately 10.2% and 9.2%, and the weighted
average interest rate on the convertible senior notes was approximately 6.3%
and
5.7%, respectively, resulting in a blended weighted average interest rate of
9.3% and 8.8%, respectively. The interest rate on approximately 77% and 83%
of
the total principal amount of our debt was effectively fixed, including the
effects of our interest rate hedge agreements as of December 31, 2005 and 2004,
respectively. The fair value of our high-yield notes was $10.4 billion and
$12.2
billion at December 31, 2005 and 2004, respectively. The fair value of our
convertible senior notes was $647 million and $1.1 billion at December 31,2005
and 2004, respectively. The fair value of our credit facilities is $5.7 billion
and $5.5 billion at December 31, 2005 and 2004, respectively. The fair value
of
high-yield and convertible notes is based on quoted market prices, and the
fair
value of the credit facilities is based on dealer quotations.
Charter
Operating Credit Facilities - General
The
Charter Operating credit facilities were amended and restated concurrently
with
the sale of $1.5 billion senior second-lien notes in April 2004, among other
things, to defer maturities and increase availability under these facilities
and
to enable Charter Operating to acquire the interests of the lenders under the
CC
VI Operating, CC VIII Operating and Falcon credit facilities, thereby
consolidating all credit facilities under one amended and restated Charter
Operating credit agreement.
The
Charter Operating credit facilities provide borrowing availability of up to
$6.5
billion as follows:
· two
term
facilities:
(i)
a Term A facility with a total principal amount
of $2.0
billion, of which 12.5% matures in 2007, 30% matures in 2008, 37.5%
matures in 2009 and 20% matures in 2010; and
(ii)
a
Term B facility with a total principal amount of $3.0 billion, which
shall
be repayable in 27 equal quarterly installments aggregating in each
loan
year to 1% of the original amount of the Term B facility, with the
remaining balance due at final maturity in 2011;
and
· a
revolving credit facility, in a total amount of $1.5 billion, with a maturity
date in 2010.
64
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate, as defined,
plus a margin for Eurodollar loans of up to 3.00% for the Term A facility and
revolving credit facility, and up to 3.25% for the Term B facility, and for
base
rate loans of up to 2.00% for the Term A facility and revolving credit facility,
and up to 2.25% for the Term B facility. A quarterly commitment fee of up to
.75% is payable on the average daily unborrowed balance of the revolving credit
facilities.
The
obligations of our subsidiaries under the Charter Operating credit facilities
(the "Obligations") are guaranteed by Charter Operating’s immediate parent
company, CCO Holdings, and the subsidiaries of Charter Operating, except for
immaterial subsidiaries and subsidiaries precluded from guaranteeing by reason
of the provisions of other indebtedness to which they are subject (the
"non-guarantor subsidiaries," primarily Renaissance and its subsidiaries).
The
Obligations are also secured by (i) a lien on all of the assets of Charter
Operating and its subsidiaries (other than assets of the non-guarantor
subsidiaries), to the extent such lien can be perfected under the Uniform
Commercial Code by the filing of a financing statement, and (ii) a pledge by
CCO
Holdings of the equity interests owned by it in Charter Operating or any of
Charter Operating's subsidiaries, as well as intercompany obligations owing
to
it by any of such entities.
Upon
the
Charter Holdings Leverage Ratio (as defined in the indenture governing the
Charter Holdings senior notes and senior discount notes) being under 8.75 to
1.0, the Charter Operating credit facilities require that the 11.875% notes
due
2008 issued by CC V Holdings, LLC be redeemed. Because such Leverage Ratio
was
determined to be under 8.75 to 1.0, CC V Holdings, LLC redeemed such notes
in
March 2005, and CC V Holdings, LLC and its subsidiaries (other than
non-guarantor subsidiaries) became guarantors of the Obligations and have
granted a lien on all of their assets as to which a lien can be perfected under
the Uniform Commercial Code by the filing of a financing statement.
Charter
Operating Credit Facilities — Restrictive Covenants
The
Charter Operating credit facilities contain representations and warranties,
and
affirmative and negative covenants customary for financings of this type. The
financial covenants measure performance against standards set for leverage,
debt
service coverage, and interest coverage, tested as of the end of each quarter.
The maximum allowable leverage ratio is 4.25 to 1.0, the minimum allowable
interest coverage ratio is 1.25 to 1.0 and the minimum allowable debt service
coverage ratio is 1.05 to 1.0. Additionally, the Charter Operating credit
facilities contain provisions requiring mandatory loan prepayments under
specific circumstances, including when significant amounts of assets are sold
and the proceeds are not reinvested in assets useful in the business of the
borrower within a specified period, and upon the incurrence of certain
indebtedness when the ratio of senior first lien debt to operating cash flow
is
greater than 2.0 to 1.0.
The
Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the CCO Holdings senior
notes, the CCH II senior notes, the CCH I senior notes, the CIH senior notes,
the Charter Holdings senior notes and the Charter convertible senior notes,
provided that, among other things, no default has occurred and is continuing
under the Charter Operating credit facilities. The Charter Operating credit
facilities restrict the ability of Charter Operating and its subsidiaries to
make distributions for the purpose of repaying indebtedness of their parent
companies, except for repayments of certain indebtedness which was existing
at
the time the credit facilities were amended and restated, provided that certain
conditions are met, including the satisfaction of a 1.5 to 1.0 interest coverage
ratio test and a minimum available liquidity requirement of $250 million.
Conditions to future borrowings include absence of a default or an event of
default under the Charter Operating credit facilities and the continued accuracy
in all material respects of the representations and warranties, including the
absence since December 31, 2003 of any event, development or circumstance that
has had or could reasonably be expected to have a material adverse effect on
our
business.
The
events of default under the Charter Operating credit facilities include, among
other things:
(i)
the failure to make payments when due or within
the
applicable grace period,
(ii)
the
failure to comply with specified covenants, including but not limited
to a
covenant to deliver audited financial statements with an unqualified
opinion from our independent
auditors,
(iii)
the
failure to pay or the occurrence of events that cause or permit the
acceleration of other indebtedness owing by CCO Holdings, Charter
Operating or Charter Operating’s subsidiaries in amounts in excess of $50
million in aggregate principal amount,
65
(iv)
the
failure to pay or the occurrence of events that result in the acceleration
of other indebtedness owing by certain of CCO Holdings’ direct and
indirect parent companies in amounts in excess of $200 million in
aggregate principal amount,
(v)
Paul
Allen and/or certain of his family members and/or their exclusively
owned
entities (collectively, the "Paul Allen Group") ceasing to have the
power,
directly or indirectly, to vote at least 35% of the ordinary voting
power
of Charter Operating,
(vi)
the
consummation of any transaction resulting in any person or group
(other
than the Paul Allen Group) having power, directly or indirectly,
to vote
more than 35% of the ordinary voting power of Charter Operating,
unless
the Paul Allen Group holds a greater share of ordinary voting power
of
Charter Operating,
(vii)
certain
of Charter Operating’s indirect or direct parent companies having
indebtedness in excess of $500 million aggregate principal amount
which
remains undefeased three months prior to the final maturity of such
indebtedness, and
(viii)
Charter
Operating ceasing to be a wholly-owned direct subsidiary of CCO Holdings,
except in certain very limited circumstances.
Outstanding
Notes
Charter
Communications, Inc. Notes
4.75%
Charter Convertible Notes due 2006
In
May
2001, Charter issued 4.75% convertible senior notes with a total principal
amount at maturity of $633 million. As of December 31, 2005, there was $20
million in total principal amount of these notes outstanding. The 4.75%
convertible notes rank equally with any of our future unsubordinated and
unsecured indebtedness, but are structurally subordinated to all existing and
future indebtedness and other liabilities of our subsidiaries.
The
4.75%
convertible notes are convertible at the option of the holder into shares of
Class A common stock at a conversion rate of 38.0952 shares per $1,000 principal
amount of notes, which is equivalent to a price of $26.25 per share, subject
to
certain adjustments. Specifically, the adjustments include anti-dilutive
provisions, which automatically occur based on the occurrence of specified
events to provide protection rights to holders of the notes. Additionally,
Charter may adjust the conversion ratio under certain circumstances when deemed
appropriate. These notes are redeemable at our option at amounts decreasing
from
101.9% to 100% of the principal amount, plus accrued and unpaid interest
beginning on June 4, 2004, to the date of redemption. Interest
is payable semiannually on December 1 and June 1, beginning December 1, 2001,
until maturity on June 1, 2006.
Upon
a
change of control, subject to certain conditions and restrictions, Charter
may
be required to repurchase the notes, in whole or in part, at 100% of their
principal amount plus accrued interest at the repurchase date.
Charter
5.875% Convertible Senior Notes due 2009
In
November 2004, Charter issued 5.875% convertible senior notes due 2009 with
a
total original principal amount of $862.5 million. The 5.875% convertible senior
notes are unsecured (except with respect to the collateral as described below)
and rank equally with our existing and future unsubordinated and unsecured
indebtedness (except with respect to the collateral described below), but are
structurally subordinated to all existing and future indebtedness and other
liabilities of our subsidiaries. Interest is payable semi-annually in
arrears.
The
5.875% convertible senior notes are convertible at any time at the option of
the
holder into shares of Class A common stock at an initial conversion rate of
413.2231 shares per $1,000 principal amount of notes, which is equivalent to
a
conversion price of approximately $2.42 per share, subject to certain
adjustments. Specifically, the adjustments include anti-dilutive provisions,
which cause adjustments to occur automatically based on the occurrence of
specified events to provide protection rights to holders of the notes. The
conversion rate may also be increased (but not to exceed 462 shares per $1,000
principal amount of notes) upon a specified change of control transaction.
Additionally, Charter may elect to increase the conversion rate under certain
circumstances when deemed appropriate and subject to applicable limitations
of
the NASDAQ stock market. Holders who convert their notes prior to November16,2007 will receive an early conversion make whole amount in respect of their
notes based on a proportional share of the portfolio of pledged securities
described below, with specified adjustments.
No
holder
of notes will be entitled to receive shares of our Class A common stock on
conversion to the extent that receipt of the shares would cause the converting
holder to become, directly or indirectly, a "beneficial holder''
66
(within
the meaning of Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) of more than 4.9% of the outstanding shares of our
Class
A common stock if such conversion would take place prior to November 16, 2008,
or more than 9.9% thereafter.
If
a
holder tenders a note for conversion, we may direct that holder (unless we
have
called those notes for redemption) to a financial institution designated by
us
to conduct a transaction with that institution, on substantially the same terms
that the holder would have received on conversion. But if any such financial
institution does not accept such notes or does not deliver the required
conversion consideration, we remain obligated to convert the notes.
Charter
Holdco used a portion of the proceeds from the sale of the notes to purchase
a
portfolio of U.S. government securities in an amount which we believe will
be
sufficient to make the first six interest payments on the notes. These
government securities were pledged to us as security for a mirror note issued
by
Charter Holdco to Charter and pledged to the trustee under the indenture
governing the notes as security for our obligations thereunder. We expect
to use
such securities to fund the first six interest payments under the notes,
two of
which were funded in 2005. The fair value of the pledged securities was $97
million at December 31, 2005.
Upon
a
change of control and certain other fundamental changes, subject to certain
conditions and restrictions, Charter may be required to repurchase the notes,
in
whole or in part, at 100% of their principal amount plus accrued interest at
the
repurchase date.
We
may
redeem the notes in whole or in part for cash at any time at a redemption price
equal to 100% of the aggregate principal amount plus accrued and unpaid
interest, deferred interest and liquidated damages, 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, if such 30 trading day period begins
prior to November 16, 2007 or 150% of the conversion price, if such 30 trading
period begins thereafter. Holders who convert notes that we have 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 later of November 17, 2007
and
the redemption date through the scheduled maturity date for the notes, plus
any
accrued deferred interest.
CCHC,
LLC Note
In
October 2005, Charter, acting through a Special Committee of Charter’s Board of
Directors, and Mr. Allen, settled a dispute that had arisen between the
parties
with regard to the ownership of CC VIII. As part of that settlement,
CCHC issued
the CCHC note to CII. The CCHC note has a 15-year maturity. The CCHC
note has an
initial accreted value of $48 million accreting at the rate of 14% per
annum
compounded quarterly, except that from and after February 28, 2009, CCHC
may pay
any increase in the accreted value of the CCHC note in cash and the accreted
value of the CCHC note will not increase to the extent such amount is
paid in
cash. The CCHC note is exchangeable at CII’s option, at any time, for Charter
Holdco Class A Common units at a rate equal to the then accreted value,
divided
by $2.00 (the "Exchange Rate"). Customary anti-dilution protections have
been
provided that could cause future changes to the Exchange Rate. Additionally,
the
Charter Holdco Class A Common units received will be exchangeable by
the holder
into Charter common stock in accordance with existing agreements between
CII,
Charter and certain other parties signatory thereto. Beginning February28,2009, if the closing price of Charter common stock is at or above the
Exchange
Rate for a certain period of time as specified in the Exchange Agreement,
Charter Holdco may require the exchange of the CCHC note for Charter
Holdco
Class A Common units at the Exchange Rate. Additionally, CCHC has the
right to
redeem the CCHC note under certain circumstances for cash in an amount
equal to
the then accreted value, such amount, if redeemed prior to February 28,2009,
would also include a make whole up to the accreted value through February28,2009. CCHC must redeem the CCHC note at its maturity for cash in an amount
equal
to the initial stated value plus the accreted return through maturity.
The
accreted value of the CCHC note is $49 million as of December 31, 2005
and is
recorded in Notes Payable - Related Party in the accompanying consolidated
financial statements contained in "Item 8. Financial Statements and
Supplementary Data."
Charter
Communications Holdings, LLC Notes
March
1999 Charter Holdings Notes
The
March
1999 Charter Holdings notes were issued under three separate indentures, each
dated as of March 17, 1999, among Charter Holdings and Charter Capital, as
the
issuers, and BNY Midwest Trust Company, as trustee.
67
Charter
Holdings and Charter Capital exchanged these notes for new notes with
substantially similar terms, except that the new notes are registered under
the
Securities Act.
The
March
1999 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. Cash interest on the March 1999 9.920% Charter
Holdings notes began to accrue on April 1, 2004.
The
March
1999 Charter Holdings notes are senior debt obligations of Charter Holdings
and
Charter Capital. They rank equally with all other current and future
unsubordinated obligations of Charter Holdings and Charter Capital. They are
structurally
subordinated to
the
obligations of Charter Holdings' subsidiaries, including the CIH notes, the
CCH
I notes, CCH II notes, the CCO Holdings notes, the Renaissance notes, the
Charter Operating notes and the Charter Operating credit facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the March 1999
8.250% Charter Holdings notes prior to their maturity date on April 1, 2007.
Charter Holdings and Charter Capital may redeem some or all of the March 1999
8.625% Charter Holdings notes and the March 1999 9.920% Charter Holdings notes
at any time, in each case, at a premium. The optional redemption price declines
to 100% of the principal amount of March 1999 Charter Holdings notes redeemed,
plus accrued and unpaid interest, if any, for redemption on or after April1,2007.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding March 1999 Charter
Holdings notes at 101% of their principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The
indentures governing the March 1999 Charter Holdings notes contain restrictive
covenants that limit certain transactions or activities by Charter Holdings
and
its restricted subsidiaries. Substantially all of Charter Holdings' direct
and
indirect subsidiaries are currently restricted subsidiaries. See " — Summary of
Restrictive Covenants under Charter Holdings High-Yield Notes."
January
2000 Charter Holdings Notes
The
January 2000 Charter Holdings notes were issued under three separate indentures,
each dated as of January 12, 2000, among Charter Holdings and Charter Capital,
as the issuers, and BNY Midwest Trust Company, as trustee. In June 2000, Charter
Holdings and Charter Capital exchanged these notes for new notes with
substantially similar terms, except that the new notes are registered under
the
Securities Act.
The
January 2000 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. Cash interest on the January 2000 11.75% Charter
Holdings notes began to accrue on January 15, 2005.
The
January 2000 Charter Holdings notes are senior debt obligations of Charter
Holdings and Charter Capital. They rank equally with all other current and
future unsubordinated obligations of Charter Holdings and Charter Capital.
They
are structurally subordinated to the obligations of Charter Holdings’
subsidiaries, including the CIH notes, the CCH I notes, the CCH II notes, the
CCO Holdings notes, the Renaissance notes, the Charter Operating notes and
the
Charter Operating credit facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the January
2000
10.00% Charter Holdings notes prior to their maturity on April 1, 2009. Charter
Holdings and Charter Capital may redeem some or all of the January 2000 10.25%
Charter Holdings notes and the January 2000 11.75% Charter Holdings notes at
any
time, in each case, at a premium. The optional redemption price declines to
100%
of the principal amount of the January 2000 Charter Holdings notes redeemed,
plus accrued and unpaid interest, if any, for redemption on or after January15,2008.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2000
Charter Holdings notes at 101% of their total principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The
indentures governing the January 2000 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999 Charter
Holdings notes. See " — Summary of Restrictive Covenants under Charter Holdings
High-Yield Notes."
68
January
2001 Charter Holdings Notes
The
January 2001 Charter Holdings notes were issued under three separate indentures,
each dated as of January 10, 2001, each among Charter Holdings and Charter
Capital, as the issuers, and BNY Midwest Trust Company, as trustee. In March
2001, Charter Holdings and Charter Capital exchanged these notes for new notes
with substantially similar terms, except that the new notes are registered
under
the Securities Act.
The
January 2001 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. Cash interest on the January 2001 13.500% Charter
Holdings notes began to accrue on January 15, 2006.
The
January 2001 Charter Holdings notes are senior debt obligations of Charter
Holdings and Charter Capital. They rank equally with all other current and
future unsubordinated obligations of Charter Holdings and Charter Capital.
They
are structurally
subordinated to
the
obligations of Charter Holdings' subsidiaries, including the CIH notes, the
CCH
I notes, the CCH II notes, the CCO Holdings notes, the Renaissance notes, the
Charter Operating notes and the Charter Operating credit
facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the January
2001
10.750% Charter Holdings notes prior to their maturity date on October 1, 2009.
Charter Holdings and Charter Capital may redeem some or all of the January
2001
11.125% Charter Holdings notes and the January 2001 13.500% Charter Holdings
notes at any time, in each case, at a premium. The optional redemption price
declines to 100% of the principal amount of the January 2001 Charter Holdings
notes redeemed, plus accrued and unpaid interest, if any, for redemption on
or
after January 15, 2009.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2001
Charter Holdings notes at 101% of their total principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The
indentures governing the January 2001 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999 and
January 2000 Charter Holdings notes. See " — Summary of Restrictive Covenants
under Charter Holdings High-Yield Notes."
May
2001 Charter Holdings Notes
The
May
2001 Charter Holdings notes were issued under three separate indentures, each
among Charter Holdings and Charter Capital, as the issuers, and BNY Midwest
Trust Company, as trustee. In September 2001, Charter Holdings and Charter
Capital exchanged substantially all of these notes for new notes with
substantially similar terms, except that the new notes are registered under
the
Securities Act.
The
May
2001 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. Cash interest on the May 2001 11.750% Charter
Holdings notes will not accrue prior to May 15, 2006.
The
May
2001 Charter Holdings notes are senior debt obligations of Charter Holdings
and
Charter Capital. They rank equally with all other current and future
unsubordinated obligations of Charter Holdings and Charter Capital. They are
structurally
subordinated to
the
obligations of Charter Holdings' subsidiaries, including the CIH notes, the
CCH
I notes, the CCH II notes, the CCO Holdings notes, the Renaissance notes, the
Charter Operating notes and the Charter Operating credit
facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the May 2001
9.625% Charter Holdings notes prior to their maturity on November 15, 2009.
On
or after May 15, 2006, Charter Holdings and Charter Capital may redeem some
or
all of the May 2001 10.000% Charter Holdings notes and the May 2001 11.750%
Charter Holdings notes at any time, in each case, at a premium. The optional
redemption price declines to 100% of the principal amount of the May 2001
Charter Holdings notes redeemed, plus accrued and unpaid interest, if any,
for
redemption on or after May 15, 2009.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding May 2001 Charter
Holdings notes at 101% of their total principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
69
The
indentures governing the May 2001 Charter Holdings notes contain substantially
identical events of default, affirmative covenants and negative covenants as
those contained in the indentures governing the March 1999, January 2000 and
January 2001 Charter Holdings notes. See " — Summary of Restrictive Covenants
under Charter Holdings High-Yield Notes."
January
2002 Charter Holdings Notes
The
January 2002 Charter Holdings notes were issued under three separate indentures,
each among Charter Holdings and Charter Capital, as the issuers, and BNY Midwest
Trust Company, as trustee, two of which were supplements to the indentures
for
the May 2001 Charter Holdings notes. In July 2002, Charter Holdings and Charter
Capital exchanged substantially all of these notes for new notes, with
substantially similar terms, except that the new notes are registered under
the
Securities Act.
The
January 2002 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. Cash interest on the January 2002 12.125% Charter
Holdings notes will not accrue prior to January 15, 2007.
The
January 2002 Charter Holdings notes are senior debt obligations of Charter
Holdings and Charter Capital. They rank equally with the current and future
unsecured and unsubordinated debt of Charter Holdings and Charter Capital.
They
are structurally
subordinated to
the
obligations of Charter Holdings' subsidiaries, including the CIH notes, the
CCH
I notes, the CCH II notes, the CCO Holdings notes, the Renaissance notes, the
Charter Operating notes and the Charter Operating credit
facilities.
The
Charter Holdings 12.125% senior discount notes are redeemable at the option
of
the issuers at amounts decreasing from 106.063% to 100% of accreted value
beginning January 15, 2007.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2002
Charter Holdings notes at 101% of their total principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The
indentures governing the January 2002 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999, January
2000, January 2001 and May 2001 Charter Holdings notes. See " — Summary of
Restrictive Covenants under Charter Holdings High-Yield Notes."
Summary
of Restrictive Covenants under Charter Holdings High-Yield
Notes.
The
limitations on incurrence of debt and issuance of preferred stock contained
in
Charter Holdings' indentures permit Charter Holdings and its subsidiaries to
incur additional debt or issue preferred stock, so long as there is no default
under the Charter Holdings indentures. These limitations restrict the incurrence
of debt unless,
after
giving pro forma effect to the incurrence, the Charter Holdings Leverage Ratio
would be below 8.75 to 1.0. In addition, regardless of whether the leverage
ratio could be met, so long as no default exists or would result from the
incurrence or issuance, Charter Holdings and its restricted subsidiaries are
permitted to issue:
·
up
to $3.5 billion of debt under credit
facilities,
·
up
to $75 million of debt incurred to finance the purchase or capital
lease
of new assets,
·
up
to $300 million of additional debt for any
purpose,
·
additional
debt in an amount equal to 200% of proceeds of new cash equity proceeds
received by Charter Holdings and its restricted subsidiaries since
March
1999, the date of our first indenture, and not allocated for restricted
payments or permitted investments, and
·
other
items of indebtedness for specific purposes such as intercompany
debt,
refinancing of existing debt, and interest rate swaps to provide
protection against fluctuation in interest
rates.
70
Indebtedness
under a single facility or agreement may be incurred in part under one of the
categories listed above and in part under another. Accordingly, indebtedness
under our credit facilities is incurred under a combination of the categories
of
permitted indebtedness listed above.
The
restricted subsidiaries of Charter Holdings are generally not permitted to
issue
debt securities contractually subordinated in right of payment to other debt
of
the issuing subsidiary or preferred stock, in either case in any public or
Rule
144A offering.
The
Charter Holdings indentures permit Charter Holdings and its restricted
subsidiaries to incur debt under one category, and later reclassify that debt
into another category. The Charter Operating credit facilities generally impose
more restrictive limitations on incurring new debt than Charter Holdings'
indentures, so our subsidiaries that are subject to the Charter Operating credit
facilities may not be permitted to utilize the full debt incurrence that would
otherwise be available under the Charter Holdings indenture
covenants.
Generally,
under Charter Holdings' high-yield indentures:
·
Charter
Holdings and its restricted subsidiaries are generally permitted
to pay
dividends on equity interests, repurchase interests, or make other
specified restricted payments only if, Charter Holdings can incur
$1.00 of
new debt under the Charter Holdings leverage ratio test which requires
8.75 to 1.0 leverage ratio after giving effect to the transaction
and if
no default exists or would exist as a consequence of such incurrence.
If
those conditions are met, restricted payments in a total amount of
up to
100% of Charter Holding's consolidated EBITDA, as defined, minus
1.2 times
its consolidated interest expense, plus 100% of new cash and non-cash
equity proceeds received by Charter Holdings and not allocated to
the debt
incurrence covenant or to permitted investments, all cumulatively
from
March 1999, the date of the first Charter Holdings indenture, plus
$100
million.
In
addition, Charter Holdings may make distributions or restricted payments, so
long as no default exists or would be caused by transactions:
·
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year,
·
regardless
of the existence of any default, to pay pass-through tax liabilities
in
respect of ownership of equity interests in Charter Holdings or its
restricted subsidiaries, or
·
to
make other specified restricted payments including merger fees up
to 1.25%
of the transaction value, repurchases using concurrent new issuances,
and
certain dividends on existing subsidiary preferred equity
interests.
Charter
Holdings and its restricted subsidiaries may not make investments except
permitted investments if there is a default under the indentures or if, after
giving effect to the transaction, the Charter Holdings Leverage Ratio would
be
above 8.75 to 1.0.
Permitted
investments include:
·
investments
by Charter Holdings in restricted subsidiaries or by restricted
subsidiaries in Charter Holdings,
·
investments
in productive assets (including through equity investments) aggregating
up
to $150 million since March 1999,
·
investments
aggregating up to 100% of new cash equity proceeds received by Charter
Holdings since March 1999 and not allocated to the debt incurrence
or
restricted payments covenant, and
·
other
investments aggregating up to $50 million since March
1999.
Charter
Holdings is not permitted to grant liens on its assets other than specified
permitted liens. Permitted liens include liens securing debt and other
obligations incurred under our subsidiaries' credit facilities, liens securing
the purchase price of new assets, liens securing indebtedness of up to $50
million and other specified liens incurred in the ordinary course of business.
The lien covenant does not restrict liens on assets of subsidiaries of Charter
Holdings.
71
Charter
Holdings and Charter Capital, its co-issuer, are generally not permitted to
sell
all or substantially all of their assets or merge with or into other companies
unless their leverage ratio after any such transaction would be no greater
than
their leverage ratio immediately prior to the transaction, or unless after
giving effect to the transaction, the Charter Holdings Leverage Ratio would
be
below 8.75 to 1.0, no default exists, and the surviving entity is a U.S. entity
that assumes the Charter Holdings notes.
Charter
Holdings and its restricted subsidiaries may generally not otherwise sell assets
or, in the case of restricted subsidiaries, issue equity interests, unless
they
receive consideration at least equal to the fair market value of the assets
or
equity interests, consisting of at least 75% in cash, assumption of liabilities,
securities converted into cash within 60 days or productive assets. Charter
Holdings and its restricted subsidiaries are then required within 365 days
after
any asset sale either to commit to use the net cash proceeds over a specified
threshold to acquire assets, including current assets, used or useful in their
businesses or use the net cash proceeds to repay debt, or to offer to repurchase
the Charter Holdings notes with any remaining proceeds.
Charter
Holdings and its restricted subsidiaries may generally not engage in sale and
leaseback transactions unless, at the time of the transaction, Charter Holdings
could have incurred secured indebtedness in an amount equal to the present
value
of the net rental payments to be made under the lease, and the sale of the
assets and application of proceeds is permitted by the covenant restricting
asset sales.
Charter
Holdings' restricted subsidiaries may generally not enter into restrictions
on
their ability to make dividends or distributions or transfer assets to Charter
Holdings on terms that are materially more restrictive than those governing
their debt, lien, asset sale, lease and similar agreements existing when they
entered into the indentures, unless those restrictions are on customary terms
that will not materially impair Charter Holdings' ability to repay the
high-yield notes.
The
restricted subsidiaries of Charter Holdings are generally not permitted to
guarantee or pledge assets to secure debt of Charter Holdings, unless the
guaranteeing subsidiary issues a guarantee of the notes of comparable priority
and tenor, and waives any rights of reimbursement, indemnity or subrogation
arising from the guarantee transaction for at least one year.
The
indentures also restrict the ability of Charter Holdings and its restricted
subsidiaries to enter into certain transactions with affiliates involving
consideration in excess of $15 million without a determination by the board
of
directors of Charter Holdingsthat
the
transaction is on terms no less favorable than arms length, or transactions
with
affiliates involving over $50 million without receiving an independent opinion
as to the fairness of the transaction addressed to the holders of the Charter
Holdings notes.
CCH
I Holdings, LLC Notes
In
September 2005, CIH and CCH I Holdings Capital Corp. jointly issued $2.5 billion
total principal amount of 9.92% to 13.50% senior accreting notes due 2014 and
2015 in exchange for an aggregate amount of $2.4 billion of Charter Holdings
notes due 2011 and 2012, spread over six series of notes and with varying
interest rates as set forth in the table above under "Description of Our
Outstanding Debt." The notes are guaranteed by Charter Holdings.
The
CIH
notes are senior debt obligations of CIH and CCH I Holdings Capital Corp. They
rank equally with all other current and future unsecured, unsubordinated
obligations of CIH and CCH I Holdings Capital Corp. The CIH notes are
structurally subordinated to all obligations of subsidiaries of CIH, including
the CCH I notes, the CCH II notes, the CCO Holdings notes, the Renaissance
notes, the Charter Operating notes and the Charter Operating credit facilities.
The
CIH
notes may not be redeemed at the option of the issuers until September 30,2007.
On or after such date, the CIH notes may be redeemed in accordance with the
following table.
In
the
event that a specified change of control event happens, CIH and CCH I Holdings
Capital Corp. must offer to repurchase any outstanding notes at a price equal
to
the sum of the accreted value of the notes plus accrued and unpaid interest
plus
a premium that varies over time.
The
indenture governing the CIH notes contains restrictive covenants similar to
those contained in the indenture governing the Charter Holdings notes with
the
following exceptions:
·
The
debt incurrence covenant permits up to $9.75 billion (rather than
$3.5
billion) of debt under credit facilities (less the amount of net
proceeds
of asset sales applied to repay such debt as required by the asset
sale
covenant).
·
CIH
and its restricted subsidiaries are generally permitted to pay dividends
on equity interests, repurchase interests, or make other specified
restricted payments only if, after giving pro forma effect to the
transaction, the CIH Leverage Ratio would be below 8.75 to 1.0 and
if no
default exists or would exist as a consequence of such transaction.
If
those conditions are met, restricted payments are permitted in a
total
amount of up to the sum of (1) the greater of (a) $500 million or
(b) 100%
of CIH’s consolidated EBITDA, as defined, minus 1.2 times its consolidated
interest expense each for the period from September 28, 2005 to the
end of
CIH’s most recently ended full fiscal quarter for which internal financial
statements are available, plus (2) 100% of new cash and non-cash
equity
proceeds received by CIH and not allocated to the debt incurrence
covenant
or to permitted investments, all cumulatively from September 28,2005.
·
Instead
of the $150 million and $50 million permitted investment baskets
described
above, there is a $750 million permitted investment
basket.
CCH
I, LLC Notes
In
September 2005, CCH I and CCH I Capital Corp. jointly issued $3.5 billion total
principal amount of 11% senior secured notes due October 2015 in exchange for
an
aggregate amount of $4.2 billion of certain Charter Holdings notes. The notes
are guaranteed by Charter Holdings and are secured by a pledge of 100% of the
equity interest of CCH I’s wholly owned direct subsidiary, CCH II. Such pledge
is subject to significant limitations as described in the related pledge
agreement. Interest on the CCH I notes accrues at 11% per annum and is payable
semi-annually in arrears on each April 1 and October 1, commencing on April1,2006.
The
CCH I
notes are senior debt obligations of CCH I and CCH I Capital Corp. To the extent
of the value of the collateral, they rank senior to all of CCH I’s future
unsecured senior indebtedness. The CCH I notes are structurally
73
subordinated
to all obligations of subsidiaries of CCH I, including the CCH II notes, CCO
Holdings notes, the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
CCH
I and
CCH I Capital Corp. may, prior to October 1, 2008 in the event of a qualified
equity offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the CCH I notes at a redemption price of 111% of the
principal amount plus accrued and unpaid interest. Aside from this provision,
CCH I and CCH I Capital Corp. may not redeem at their option any of the notes
prior to October 1, 2010. On or after October 1, 2010, CCH I and CCH I Capital
Corp. may redeem, in whole or in part, CCH I notes at the applicable prices
(expressed as percentages of principal amount) listed below, plus accrued and
unpaid interest if redeemed during the twelve month period beginning on October
1 of the years listed below.
Year
Percentage
2010
105.5%
2011
102.75%
2012
101.375%
2013
and thereafter
100.0%
If
a
change of control occurs, each holder of the CCH I notes will have the right
to
require the repurchase of all or any part of that holder’s CCH I notes at 101%
of the principal amount plus accrued and unpaid interest.
The
indenture governing the CCH I notes contains restrictive covenants that limit
certain transactions or activities by CCH I and its restricted subsidiaries,
including the covenants summarized below. Substantially all of CCH I’s direct
and indirect subsidiaries are currently restricted subsidiaries.
The
covenant in the indenture governing the CCH I notes that restricts incurrence
of
debt and issuance of preferred stock permits CCH I and its subsidiaries to
incur
or issue specified amounts of debt or preferred stock, if, after giving pro
forma effect to the incurrence or issuance, CCH I could meet a leverage ratio
(ratio of consolidated debt to four times EBITDA, as defined, from the most
recent fiscal quarter for which internal financial reports are available) of
7.5
to 1.0.
In
addition, regardless of whether the leverage ratio could be met, so long as
no
default exists or would result from the incurrence or issuance, CCH I and its
restricted subsidiaries are permitted to incur or issue:
·
up
to $9.75 billion of debt under credit facilities (less the amount
of net
proceeds of asset sales applied to repay such debt as required by
the
asset sale covenant);
·
up
to $75 million of debt incurred to finance the purchase or capital
lease
of new assets;
·
up
to $300 million of additional debt for any purpose;
and
·
other
items of indebtedness for specific purposes such as intercompany
debt,
refinancing of existing debt, and interest rate swaps to provide
protection against fluctuation in interest
rates.
The
restricted subsidiaries of CCH I are generally not permitted to issue debt
securities contractually subordinated to other debt of the issuing subsidiary
or
preferred stock, in either case in any public offering or private placement.
The
CCH I
indenture generally permits CCH I and its restricted subsidiaries to incur
debt
under one category, and later reclassify that debt into another category. The
Charter Operating credit facilities generally impose more restrictive
limitations on incurring new debt than those in the CCH I indenture, so our
subsidiaries that are subject to credit facilities are not permitted to utilize
the full debt incurrence that would otherwise be available under the CCH I
indenture covenants.
CCH
I and its restricted subsidiaries are permitted to pay dividends
on equity
interests, repurchase interests, or make other specified restricted
payments only if CCH I can incur $1.00 of new debt under the leverage
ratio test, which requires that CCH I meet a 7.5 to 1.0 leverage
ratio
after giving effect to the transaction, and if no default exists
or would
exist as a consequence of such incurrence. If those conditions are
met,
74
restricted payments are permitted in a total amount
of up
to 100% of CCH I’s consolidated EBITDA, as defined, for the period from
September 28, 2005 to the end of CCH I’s most recently ended full fiscal
quarter for which financial statements are available minus 1.3 times
its
consolidated interest expense for such period, plus 100% of new cash
and
appraised non-cash equity proceeds received by CCH I and not allocated
to
certain investments, from and after September 28, 2005, plus $100
million.
In
addition, CCH I and its restricted subsidiaries may make distributions or
restricted payments, so long as no default exists or would be caused by the
transaction:
·
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year;
·
to
pay, regardless of the existence of any default, pass-through tax
liabilities in respect of ownership of equity interests in CCH I
or its
restricted subsidiaries;
·
to
enable certain of its parents to pay interest on certain of their
indebtedness;
·
to
enable certain of its parents to purchase, redeem or refinance certain
indebtedness, so long as CCH I could incur $1.00 of indebtedness
under the
7.5 to 1.0 leverage ratio test referred to above;
or
·
to
make other specified restricted payments including merger fees up
to 1.25%
of the transaction value, repurchases using concurrent new issuances,
and
certain dividends on existing subsidiary preferred equity
interests.
The
indenture governing the CCH I notes restricts CCH I and its restricted
subsidiaries from making investments, except specified permitted investments,
or
creating new unrestricted subsidiaries, if there is a default under the
indenture or if CCH I could not incur $1.00 of new debt under the 7.5 to 1.0
leverage ratio test described above after giving effect to the transaction.
Permitted
investments include:
·
investments
by CCH I and its restricted subsidiaries in CCH I and in other restricted
subsidiaries, or entities that become restricted subsidiaries as
a result
of the investment,
·
investments
aggregating up to 100% of new cash equity proceeds received by CCH
I since
September 28, 2005 to the extent the proceeds have not been allocated
to
the restricted payments covenant described
above,
·
other
investments up to $750 million outstanding at any time,
and
·
certain
specified additional investments, such as investments in customers
and
suppliers in the ordinary course of business and investments received
in
connection with permitted asset
sales.
CCH
I is
not permitted to grant liens on its assets other than specified permitted liens.
Permitted liens include liens securing the purchase price of new assets, liens
securing obligations up to $50 million and other specified liens. The lien
covenant does not restrict liens on assets of subsidiaries of CCH I.
CCH
I and
CCH I Capital Corp., its co-issuer, are generally not permitted to sell all
or
substantially all of their assets or merge with or into other companies unless
their leverage ratio after any such transaction would be no greater than their
leverage ratio immediately prior to the transaction, or unless CCH I and its
subsidiaries could incur $1.00 of new debt under the 7.50 to 1.0 leverage ratio
test described above after giving effect to the transaction, no default exists,
and the surviving entity is a U.S. entity that assumes the CCH I notes.
CCH
I and
its restricted subsidiaries may generally not otherwise sell assets or, in
the
case of restricted subsidiaries, issue equity interests, unless they receive
consideration at least equal to the fair market value of the assets or equity
interests, consisting of at least 75% in cash, assumption of liabilities,
securities converted into cash within 60 days or productive assets. CCH I and
its restricted subsidiaries are then required within 365 days after any asset
sale either to commit to use the net cash proceeds over a specified threshold
to
acquire assets, including current assets, used or useful in their businesses
or
use the net cash proceeds to repay certain debt, or to offer to repurchase
the
CCH I notes with any remaining proceeds.
75
CCH
I and
its restricted subsidiaries may generally not engage in sale and leaseback
transactions unless, at the time of the transaction, CCH I could have incurred
secured indebtedness in an amount equal to the present value of the net rental
payments to be made under the lease, and the sale of the assets and application
of proceeds is permitted by the covenant restricting asset sales.
With
certain exceptions, CCH I’s restricted subsidiaries may generally not enter into
restrictions on their ability to make dividends or distributions or transfer
assets to CCH I.
The
restricted subsidiaries of CCH I are generally not permitted to guarantee or
pledge assets to secure other debt of CCH I, except in respect of credit
facilities unless the guarantying subsidiary issues a guarantee of the CCH
I
notes and waives any rights of reimbursement, indemnity or subrogation arising
from the guarantee transaction for at least one year.
The
indenture also restricts the ability of CCH I and its restricted subsidiaries
to
enter into certain transactions with affiliates involving consideration in
excess of $15 million without a determination by the board of directors that
the
transaction is on terms no less favorable than arms-length, or transactions
with
affiliates involving over $50 million without receiving an independent opinion
as to the fairness of the transaction to the holders of the CCH I notes.
CCH
II, LLC Notes
In
September 2003, CCH II and CCH II Capital Corp. jointly issued approximately
$1.6 billion total principal amount of 10.25% senior notes due 2010 and in
January 2006, they issued an additional $450 million principal amount of these
notes. The CCH II notes are general unsecured obligations of CCH II and CCH
II
Capital Corp. They rank equally with all other current or future unsubordinated
obligations of CCH II and CCH II Capital Corp. The CCH II notes are structurally
subordinated to
all
obligations of subsidiaries of CCH II, including the CCO Holdings notes, the
Renaissance notes, the Charter Operating notes and the Charter Operating credit
facilities.
Interest
on the CCH II notes accrues at 10.25% per annum and is payable semi-annually
in
arrears on each March 15 and September 15, commencing on March 15,2004.
At
any
time prior to September 15, 2006, the issuers of the CCH II notes may redeem
up
to 35% of the total principal amount of the CCH II notes on a pro rata basis
at
a redemption price equal to 110.25% of the principal amount of CCH II notes
redeemed, plus any accrued and unpaid interest.
On
or
after September 15, 2008, the issuers of the CCH II notes may redeem all or
a
part of the notes at a redemption price that declines ratably from the initial
redemption price of 105.125% to a redemption price on or after September 15,2009 of 100.0% of the principal amount of the CCH II notes redeemed, plus,
in
each case, any accrued and unpaid interest.
In
the
event of specified change of control events, CCH II must offer to purchase
the
outstanding CCH II notes from the holders at a purchase price equal to 101%
of
the total principal amount of the notes, plus any accrued and unpaid interest.
The
indenture governing the CCH II notes contains restrictive covenants that limit
certain transactions or activities by CCH II and its restricted subsidiaries,
including the covenants summarized below. Substantially all of CCH II's direct
and indirect subsidiaries are currently restricted subsidiaries.
The
covenant in the indenture governing the CCH II notes that restricts incurrence
of debt and issuance of preferred stock permits CCH II and its subsidiaries
to
incur or issue specified amounts of debt or preferred stock, if, after giving
effect to the incurrence, CCH II could meet a leverage ratio (ratio of
consolidated debt to four times EBITDA from the most recent fiscal quarter
for
which internal financial reports are available) of 5.5 to 1.0.
In
addition, regardless of whether the leverage ratio could be met, so long as
no
default exists or would result from the incurrence or issuance, CCH II and
its
restricted subsidiaries are permitted to incur or issue:
·
up
to $9.75 billion of debt under credit facilities, including debt
under
credit facilities outstanding on the issue date of the CCH II
notes,
76
·
up
to $75 million of debt incurred to finance the purchase or capital
lease
of new assets,
·
up
to $300 million of additional debt for any purpose,
and
·
other
items of indebtedness for specific purposes such as intercompany
debt,
refinancing of existing debt, and interest rate swaps to provide
protection against fluctuation in interest rates.
The
restricted subsidiaries of CCH II are generally not permitted to issue debt
securities contractually subordinated to other debt of the issuing subsidiary
or
preferred stock, in either case in any public or Rule 144A offering.
The
CCH
II indenture permits CCH II and its restricted subsidiaries to incur debt under
one category, and later reclassify that debt into another category. Our and
our
subsidiaries' credit agreements generally impose more restrictive limitations
on
incurring new debt than the CCH II indenture, so we and our subsidiaries that
are subject to credit agreements are not permitted to utilize the full debt
incurrence that would otherwise be available under the CCH II indenture
covenants.
Generally,
under the CCH II indenture, CCH II and its restricted subsidiaries are permitted
to pay dividends on equity interests, repurchase interests, or make other
specified restricted payments only if CCH II can incur $1.00 of new debt under
the leverage ratio test, which requires that CCH II meet a 5.5 to 1.0 leverage
ratio after giving effect to the transaction, and if no default exists or would
exist as a consequence of such incurrence. If those conditions are met,
restricted payments are permitted in a total amount of up to 100% of CCH II's
consolidated EBITDA, as defined, minus 1.3 times its consolidated interest
expense, plus 100% of new cash and non-cash equity proceeds received by CCH
II
and not allocated to the debt incurrence covenant, all cumulatively from the
fiscal quarter commenced July 1, 2003, plus $100 million.
In
addition, CCH II may make distributions or restricted payments, so long as
no
default exists or would be caused by transactions:
·
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year,
·
regardless
of the existence of any default, to pay pass-through tax liabilities
in
respect of ownership of equity interests in CCH II or its restricted
subsidiaries,
·
regardless
of the existence of any default, to pay interest when due on Charter
Holdings notes, CIH notes and CCH I notes,
·
to
purchase, redeem or refinance, so long as CCH II could incur $1.00
of
indebtedness under the 5.5 to 1.0 leverage ratio test referred to
above
and there is no default, Charter Holdings notes, CIH notes, CCH I
notes,
Charter convertible notes, and other direct or indirect parent company
notes,
·
to
make distributions in connection with the private exchanges pursuant
to
which the CCH II notes were issued,
and
·
other
specified restricted payments including merger fees up to 1.25% of
the
transaction value, repurchases using concurrent new issuances, and
certain
dividends on existing subsidiary preferred equity
interests.
The
indenture governing the CCH II notes restricts CCH II and its restricted
subsidiaries from making investments, except specified permitted investments,
or
creating new unrestricted subsidiaries, if there is a default under the
indenture or if CCH II could not incur $1.00 of new debt under the 5.5 to 1.0
leverage ratio test described above after giving effect to the
transaction.
Permitted
investments include:
·
investments
by CCH II and its restricted subsidiaries in CCH II and in other
restricted subsidiaries, or entities that become restricted subsidiaries
as a result of the investment,
·
investments
aggregating up to 100% of new cash equity proceeds received by CCH
II
since September 23, 2003 to the extent the proceeds have not been
allocated to the restricted payments covenant described
above,
77
·
investments
resulting from the private exchanges pursuant to which the CCH II
notes
were issued,
·
other
investments up to $750 million outstanding at any time,
and
·
certain
specified additional investments, such as investments in customers
and
suppliers in the ordinary course of business and investments received
in
connection with permitted asset sales.
CCH
II is
not permitted to grant liens on its assets other than specified permitted liens.
Permitted liens include liens securing debt and other obligations incurred
under
our subsidiaries' credit facilities, liens securing the purchase price of new
assets, and liens securing indebtedness up to $50 million and other specified
liens incurred in the ordinary course of business. The lien covenant does not
restrict liens on assets of subsidiaries of CCH II.
CCO
Holdings, LLC Notes
8
¾%
Senior Notes due 2013
In
November 2003 and August 2005, CCO Holdings and CCO Holdings Capital Corp.
jointly issued $500 million and $300 million, respectively, total principal
amount of 8¾% senior notes due 2013.
Interest
on the CCO Holdings senior notes accrues at 8¾% per year and is payable
semi-annually in arrears on each May 15 and November 15.
At
any
time prior to November 15, 2006, the issuers of the CCO Holdings senior notes
may redeem up to 35% of the total principal amount of the CCO Holdings senior
notes to the extent of public equity proceeds they have received on a pro rata
basis at a redemption price equal to 108.75% of the principal amount of CCO
Holdings senior notes redeemed, plus any accrued and unpaid interest.
On
or
after November 15, 2008, the issuers of the CCO Holdings senior notes may redeem
all or a part of the notes at a redemption price that declines ratably from
the
initial redemption price of 104.375% to a redemption price on or after November15, 2011 of 100.0% of the principal amount of the CCO Holdings senior notes
redeemed, plus, in each case, any accrued and unpaid interest.
Senior
Floating Rate Notes Due 2010
In
December 2004, CCO Holdings and CCO Holdings Capital Corp. jointly issued $550
million total principal amount of senior floating rate notes due 2010.
The
CCO
Holdings senior floating rate notes have an annual interest rate of LIBOR plus
4.125%, which resets and is payable quarterly in arrears on each March 15,
June
15, September 15 and December 15.
At
any
time prior to December 15, 2006, CCO Holdings and CCO Holdings Capital Corp.
may
redeem up to 35% of the notes in an amount not to exceed the amount of proceeds
of one or more public equity offerings at a redemption price equal to 100%
of
the principal amount, plus a premium equal to the interest rate per annum
applicable to the notes on the date notice of redemption is given, plus accrued
and unpaid interest, if any, to the redemption date, provided that at least
65%
of the original aggregate principal amount of the notes issued remains
outstanding after the redemption.
CCO
Holdings and CCO Holdings Capital Corp. may redeem the notes in whole or in
part
at the issuers’ option from December 15, 2006 until December 14, 2007 for 102%
of the principal amount, from December 15, 2007 until December 14, 2008 for
101%
of the principal amount and from and after December 15, 2008, at par, in each
case, plus accrued and unpaid interest.
Additional
terms of the CCO Holdings Senior Notes and Senior Floating Rate
Notes
The
CCO
Holdings notes are general unsecured obligations of CCO Holdings and CCO
Holdings Capital Corp. They rank equally with all other current or future
unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. The
CCO Holdings notes are structurally subordinated to all obligations of
subsidiaries of CCO Holdings, including the Renaissance notes, the Charter
Operating notes and the Charter Operating credit facilities.
78
In
the
event of specified change of control events, CCO Holdings must offer to purchase
the outstanding CCO Holdings senior notes from the holders at a purchase price
equal to 101% of the total principal amount of the notes, plus any accrued
and
unpaid interest.
The
indenture governing the CCO Holdings senior notes contains restrictive covenants
that limit certain transactions or activities by CCO Holdings and its restricted
subsidiaries, including the covenants summarized below. Substantially all of
CCO
Holdings' direct and indirect subsidiaries are currently restricted
subsidiaries.
The
covenant in the indenture governing the CCO Holdings senior notes that restricts
incurrence of debt and issuance of preferred stock permits CCO Holdings and
its
subsidiaries to incur or issue specified amounts of debt or preferred stock,
if,
after giving pro forma effect to the incurrence or issuance, CCO Holdings could
meet a leverage ratio (ratio of consolidated debt to four times EBITDA, as
defined, from the most recent fiscal quarter for which internal financial
reports are available) of 4.5 to 1.0.
In
addition, regardless of whether the leverage ratio could be met, so long as
no
default exists or would result from the incurrence or issuance, CCO Holdings
and
its restricted subsidiaries are permitted to incur or issue:
·
up
to $9.75 billion of debt under credit facilities, including debt
under
credit facilities outstanding on the issue date of the CCO Holdings
senior
notes,
·
up
to $75 million of debt incurred to finance the purchase or capital
lease
of new assets,
·
up
to $300 million of additional debt for any purpose,
and
·
other
items of indebtedness for specific purposes such as intercompany
debt,
refinancing of existing debt, and interest rate swaps to provide
protection against fluctuation in interest
rates.
The
restricted subsidiaries of CCO Holdings are generally not permitted to issue
debt securities contractually subordinated to other debt of the issuing
subsidiary or preferred stock, in either case in any public or Rule 144A
offering.
The
CCO
Holdings indenture permits CCO Holdings and its restricted subsidiaries to
incur
debt under one category, and later reclassify that debt into another category.
The Charter Operating credit facilities generally impose more restrictive
limitations on incurring new debt than CCO Holdings' indenture, so our
subsidiaries that are subject to credit facilities are not permitted to utilize
the full debt incurrence that would otherwise be available under the CCO
Holdings indenture covenants.
CCO
Holdings and its restricted subsidiaries are permitted to pay dividends
on
equity interests, repurchase interests, or make other specified restricted
payments only if CCO Holdings can incur $1.00 of new debt under the
leverage ratio test, which requires that CCO Holdings meet a 4.5
to 1.0
leverage ratio after giving effect to the transaction, and if no
default
exists or would exist as a consequence of such incurrence. If those
conditions are met, restricted payments are permitted in a total
amount of
up to 100% of CCO Holdings' consolidated EBITDA, as defined, minus
1.3
times its consolidated interest expense, plus 100% of new cash and
appraised non-cash equity proceeds received by CCO Holdings and not
allocated to the debt incurrence covenant, all cumulatively from
the
fiscal quarter commenced October 1, 2003, plus $100
million.
In
addition, CCO Holdings may make distributions or restricted payments, so long
as
no default exists or would be caused by the transaction:
·
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year;
·
to
pay, regardless of the existence of any default, pass-through tax
liabilities in respect of ownership of equity interests in Charter
Holdings or its restricted subsidiaries;
79
·
to
pay, regardless of the existence of any default, interest when due
on the
Charter convertible notes, Charter Holdings notes, CIH notes, CCH
I notes
and the CCH II notes;
·
to
purchase, redeem or refinance Charter Holdings notes, CIH notes,
CCH I
notes, CCH II notes, Charter notes, and other direct or indirect
parent
company notes, so long as CCO Holdings could incur $1.00 of indebtedness
under the 4.5 to 1.0 leverage ratio test referred to above and there
is no
default; or
·
to
make other specified restricted payments including merger fees up
to 1.25%
of the transaction value, repurchases using concurrent new issuances,
and
certain dividends on existing subsidiary preferred equity
interests.
The
indenture governing the CCO Holdings senior notes restricts CCO Holdings and
its
restricted subsidiaries from making investments, except specified permitted
investments, or creating new unrestricted subsidiaries, if there is a default
under the indenture or if CCO Holdings could not incur $1.00 of new debt under
the 4.5 to 1.0 leverage ratio test described above after giving effect to the
transaction.
Permitted
investments include:
·
investments
by CCO Holdings and its restricted subsidiaries in CCO Holdings and
in
other restricted subsidiaries, or entities that become restricted
subsidiaries as a result of the
investment,
·
investments
aggregating up to 100% of new cash equity proceeds received by CCO
Holdings since November 10, 2003 to the extent the proceeds have
not been
allocated to the restricted payments covenant described
above,
·
other
investments up to $750 million outstanding at any time, and
·
certain
specified additional investments, such as investments in customers
and
suppliers in the ordinary course of business and investments received
in
connection with permitted asset
sales.
CCO
Holdings is not permitted to grant liens on its assets other than specified
permitted liens. Permitted liens include liens securing debt and other
obligations incurred under our subsidiaries' credit facilities, liens securing
the purchase price of new assets, liens securing indebtedness up to $50 million
and other specified liens incurred in the ordinary course of business. The
lien
covenant does not restrict liens on assets of subsidiaries of CCO
Holdings.
CCO
Holdings and CCO Holdings Capital, its co-issuer, are generally not permitted
to
sell all or substantially all of their assets or merge with or into other
companies unless their leverage ratio after any such transaction would be no
greater than their leverage ratio immediately prior to the transaction, or
unless CCO Holdings and its subsidiaries could incur $1.00 of new debt under
the
4.50 to 1.0 leverage ratio test described above after giving effect to the
transaction, no default exists, and the surviving entity is a U.S. entity that
assumes the CCO Holdings senior notes.
CCO
Holdings and its restricted subsidiaries may generally not otherwise sell assets
or, in the case of restricted subsidiaries, issue equity interests, unless
they
receive consideration at least equal to the fair market value of the assets
or
equity interests, consisting of at least 75% in cash, assumption of liabilities,
securities converted into cash within 60 days or productive assets. CCO Holdings
and its restricted subsidiaries are then required within 365 days after any
asset sale either to commit to use the net cash proceeds over a specified
threshold to acquire assets, including current assets, used or useful in their
businesses or use the net cash proceeds to repay debt, or to offer to repurchase
the CCO Holdings senior notes with any remaining proceeds.
CCO
Holdings and its restricted subsidiaries may generally not engage in sale and
leaseback transactions unless, at the time of the transaction, CCO Holdings
could have incurred secured indebtedness in an amount equal to the present
value
of the net rental payments to be made under the lease, and the sale of the
assets and application of proceeds is permitted by the covenant restricting
asset sales.
CCO
Holdings' restricted subsidiaries may generally not enter into restrictions
on
their ability to make dividends or distributions or transfer assets to CCO
Holdings on terms that are materially more restrictive than those governing
their debt, lien, asset sale, lease and similar agreements existing when they
entered into the indenture, unless those restrictions are on customary terms
that will not materially impair CCO Holdings' ability to repay its
notes.
80
The
restricted subsidiaries of CCO Holdings are generally not permitted to guarantee
or pledge assets to secure debt of CCO Holdings, unless the guarantying
subsidiary issues a guarantee of the notes of comparable priority and tenor,
and
waives any rights of reimbursement, indemnity or subrogation arising from the
guarantee transaction for at least one year.
The
indenture also restricts the ability of CCO Holdings and its restricted
subsidiaries to enter into certain transactions with affiliates involving
consideration in excess of $15 million without a determination by the board
of
directors that the transaction is on terms no less favorable than arms-length,
or transactions with affiliates involving over $50 million without receiving
an
independent opinion as to the fairness of the transaction to the holders of
the
CCO Holdings notes.
Bridge
Loan
In
October 2005, CCO Holdings and CCO Holdings Capital Corp., as guarantor
thereunder, entered into the bridge loan with the Lenders whereby the Lenders
have committed to make loans to CCO Holdings in an aggregate amount of $600
million. In January 2006, upon the issuance of $450 million principal amount
CCH
II notes, the commitment under the bridge loan agreement was reduced to $435
million. CCO Holdings may, subject to certain conditions, including the
satisfaction of certain of the conditions to borrowing under the credit
facilities, draw upon the facility between January 2, 2006 and September 29,2006 and the loans will mature on the sixth anniversary of the first borrowing
under the bridge loan. Each loan will accrue interest at a rate equal to an
adjusted LIBOR rate plus a spread. The spread will initially be 450 basis points
and will increase (a) by an additional 25 basis points at the end of the
six-month period following the date of the first borrowing, (b) by an additional
25 basis points at the end of each of the next two subsequent three month
periods and (c) by 62.5 basis points at the end of each of the next two
subsequent three-month periods.
Beginning
on the first anniversary of the first date that CCO Holdings borrows under
the
bridge loan and at any time thereafter, any Lender will have the option to
receive "exchange notes" (the terms of which are described below, the "Exchange
Notes") in exchange for any loan that has not been repaid by that date. Upon
the
earlier of (x) the date that at least a majority of all loans that have been
outstanding have been exchanged for Exchange Notes and (y) the date that is
18
months after the first date that CCO Holdings borrows under the bridge loan,
the
remainder of loans will be automatically exchanged for Exchange Notes.
As
conditions to each draw, (i) there shall be no default under the bridge loan,
(ii) all the representations and warranties under the bridge loan shall be
true
and correct in all material respects and (iii) all conditions to borrowing
under
the Charter Operating credit facilities (with certain exceptions) shall be
satisfied.
The
aggregate unused commitment will be reduced by 100% of the net proceeds from
certain asset sales, to the extent such net proceeds have not been used to
prepay loans or Exchange Notes. However, asset sales that generate net proceeds
of less than $75 million will not be subject to such commitment reduction
obligation, unless the aggregate net proceeds from such asset sales exceed
$200
million, in which case the aggregate unused commitment will be reduced by the
amount of such excess.
CCO
Holdings will be required to prepay loans (and redeem or offer to repurchase
Exchange Notes, if issued) from the net proceeds from (i) the issuance of equity
or incurrence of debt by Charter and its subsidiaries, with certain exceptions,
and (ii) certain asset sales (to the extent not used for purposes permitted
under the bridge loan).
The
covenants and events of default applicable to CCO Holdings under the bridge
loan
are similar to the covenants and events of default in the indenture for the
senior secured notes of CCH I with various additional limitations.
The
Exchange Notes will mature on the sixth anniversary of the first borrowing
under
the bridge loan. The Exchange Notes will bear interest at a rate equal to the
rate that would have been borne by the loans. The same mandatory redemption
provisions will apply to the Exchange Notes as applied to the loans, except
that
CCO Holdings will be required to make an offer to redeem upon the occurrence
of
a change of control at 101% of principal amount plus accrued and unpaid
interest.
The
Exchange Notes will, if held by a person other than an initial lender or an
affiliate thereof, be (a) non-callable for the first three years after the
first
borrowing date and (b) thereafter, callable at par plus accrued interest plus
a
premium equal to 50% of the coupon in effect on the first anniversary of the
first borrowing date, which premium shall decline to 25% of such coupon in
the
fourth year and to zero thereafter. Otherwise, the Exchange Notes will be
callable at any time at 100% of the amount thereof plus accrued and unpaid
interest.
81
Charter
Communications Operating, LLC Notes
On
April27, 2004, Charter Operating and Charter Communications Operating Capital Corp.
jointly issued $1.1 billion of 8% senior second-lien notes due 2012 and $400
million of 8 3/8% senior second-lien notes due 2014, for total gross proceeds
of
$1.5 billion. In March and June 2005, Charter Operating consummated exchange
transactions with a small number of institutional holders of Charter Holdings
8.25% senior notes due 2007 pursuant to which Charter Operating issued, in
private placement transactions, approximately $333 million principal amount
of
its 8 3/8% senior second-lien notes due 2014 in exchange for approximately
$346
million of the Charter Holdings 8.25% senior notes due 2007. Interest on the
Charter Operating notes is payable semi-annually in arrears on each April 30
and
October 30.
The
Charter Operating notes were sold in a private transaction that was not subject
to the registration requirements of the Securities Act of 1933. The Charter
Operating notes are not expected to have the benefit of any exchange or other
registration rights, except in specified limited circumstances.
On
the
issue date of the Charter Operating notes, because of restrictions contained
in
the Charter Holdings indentures, there were no Charter Operating note
guarantees, even though Charter Operating’s immediate parent, CCO Holdings, and
certain of our subsidiaries were obligors and/or guarantors under the Charter
Operating credit facilities. Upon the occurrence of the guarantee and pledge
date (generally, the fifth business day after the Charter Holdings leverage
ratio was certified to be below 8.75 to 1.0), CCO Holdings and those
subsidiaries of Charter Operating that were then guarantors of, or otherwise
obligors with respect to, indebtedness under the Charter Operating credit
facilities and related obligations were required to guarantee the Charter
Operating notes. The note guarantee of each such guarantor is:
·
a
senior obligation of such
guarantor;
·
structurally
senior to the outstanding CCO Holdings notes (except in the case
of CCO
Holdings’ note guarantee, which is structurally pari
passu with
such senior notes), the outstanding CCH II notes, the outstanding
CCH I
notes, the outstanding CIH notes, the outstanding Charter Holdings
notes
and the outstanding Charter convertible senior notes (but subject
to
provisions in the Charter Operating indenture that permit interest
and,
subject to meeting the 4.25 to 1.0 leverage ratio test, principal
payments
to be made thereon); and
·
senior
in right of payment to any future subordinated indebtedness of such
guarantor.
As
a
result of the above leverage ratio test being met, CCO Holdings and certain
of
its subsidiaries provided the additional guarantees described above during
the
first quarter of 2005.
All
the
subsidiaries of Charter Operating (except CCO NR Sub, LLC, and certain other
subsidiaries that are not deemed material and are designated as nonrecourse
subsidiaries under the Charter Operating credit facilities) are restricted
subsidiaries of Charter Operating under the Charter Operating notes.
Unrestricted subsidiaries generally will not be subject to the restrictive
covenants in the Charter Operating indenture.
In
the
event of specified change of control events, Charter Operating must offer to
purchase the Charter Operating notes at a purchase price equal to 101% of the
total principal amount of the Charter Operating notes repurchased plus any
accrued and unpaid interest thereon.
The
limitations on incurrence of debt contained in the indenture governing the
Charter Operating notes permit Charter Operating and its restricted subsidiaries
that are guarantors of the Charter Operating notes to incur additional debt
or
issue shares of preferred stock if, after giving pro forma effect to the
incurrence, Charter Operating could meet a leverage ratio test (ratio of
consolidated debt to four times EBITDA, as defined, from the most recent fiscal
quarter for which internal financial reports are available) of 4.25 to 1.0.
In
addition, regardless of whether the leverage ratio test could be met, so long
as
no default exists or would result from the incurrence or issuance, Charter
Operating and its restricted subsidiaries are permitted to incur or issue:
·
up
to $6.5 billion of debt under credit facilities (but such incurrence
is
permitted only by Charter Operating and its restricted subsidiaries
that
are guarantors of the Charter Operating notes, so long as there are
such
guarantors), including debt under credit facilities outstanding on
the
issue date of the Charter Operating
notes;
82
·
up
to $75 million of debt incurred to finance the purchase or capital
lease
of assets;
·
up
to $300 million of additional debt for any purpose;
and
·
other
items of indebtedness for specific purposes such as refinancing of
existing debt and interest rate swaps to provide protection against
fluctuation in interest rates and, subject to meeting the leverage
ratio
test, debt existing at the time of acquisition of a restricted
subsidiary.
The
indenture governing the Charter Operating notes permits Charter Operating to
incur debt under one of the categories above, and later reclassify the debt
into
a different category. The Charter Operating credit facilities generally impose
more restrictive limitations on incurring new debt than the Charter Operating
indenture, so our subsidiaries that are subject to the Charter Operating credit
facilities are not permitted to utilize the full debt incurrence that would
otherwise be available under the Charter Operating indenture covenants.
Generally,
under Charter Operating’s indenture Charter Operating and its restricted
subsidiaries are permitted to pay dividends on equity interests, repurchase
interests, or make other specified restricted payments only if Charter Operating
could incur $1.00 of new debt under the leverage ratio test, which requires
that
Charter Operating meet a 4.25 to 1.0 leverage ratio after giving effect to
the
transaction, and if no default exists or would exist as a consequence of such
incurrence. If those conditions are met, restricted payments are permitted
in a
total amount of up to 100% of Charter Operating’s consolidated EBITDA, as
defined, minus 1.3 times its consolidated interest expense, plus 100% of new
cash and appraised non-cash equity proceeds received by Charter Operating and
not allocated to the debt incurrence covenant, all cumulatively from the fiscal
quarter commenced April 1, 2004, plus $100 million.
In
addition, Charter Operating may make distributions or restricted payments,
so
long as no default exists or would be caused by the transaction:
·
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year;
·
regardless
of the existence of any default, to pay pass-through tax liabilities
in
respect of ownership of equity interests in Charter Operating or
its
restricted subsidiaries;
·
to
pay, regardless of the existence of any default, interest when due
on the
Charter convertible notes, Charter Holdings notes, the CIH notes,
the CCH
I notes, the CCH II notes and the CCO Holdings
notes;
·
to
purchase, redeem or refinance the Charter Holdings notes, the CIH
notes,
the CCH I notes, the CCH II notes, the CCO Holdings notes, the Charter
convertible notes, and other direct or indirect parent company notes,
so
long as Charter Operating could incur $1.00 of indebtedness under
the 4.25
to 1.0 leverage ratio test referred to above and there is no default,
or
·
to
make other specified restricted payments including merger fees up
to 1.25%
of the transaction value, repurchases using concurrent new issuances,
and
certain dividends on existing subsidiary preferred equity
interests.
The
indenture governing the Charter Operating notes restricts Charter Operating
and
its restricted subsidiaries from making investments, except specified permitted
investments, or creating new unrestricted subsidiaries, if there is a default
under the indenture or if Charter Operating could not incur $1.00 of new debt
under the 4.25 to 1.0 leverage ratio test described above after giving effect
to
the transaction.
Permitted
investments include:
·
investments
by Charter Operating and its restricted subsidiaries in Charter Operating
and in other restricted subsidiaries, or entities that become restricted
subsidiaries as a result of the
investment,
·
investments
aggregating up to 100% of new cash equity proceeds received by Charter
Operating since April 27, 2004 to the extent the proceeds have not
been
allocated to the restricted payments covenant described
above,
·
other
investments up to $750 million outstanding at any time,
and
·
certain
specified additional investments, such as investments in customers
and
suppliers in the ordinary course of business and investments received
in
connection with permitted asset
sales.
Charter
Operating and its restricted subsidiaries are not permitted to grant liens
senior to the liens securing the Charter Operating notes, other than permitted
liens, on their assets to secure indebtedness or other obligations, if, after
giving effect to such incurrence, the senior secured leverage ratio (generally,
the ratio of obligations secured by first priority liens to four times EBITDA,
as defined, from the most recent fiscal quarter for which internal financial
reports are available) would exceed 3.75 to 1.0. Permitted liens include liens
securing indebtedness and other
83
obligations
under permitted credit facilities, liens securing the purchase price of new
assets, liens securing indebtedness of up to $50 million and other specified
liens incurred in the ordinary course of business.
Charter
Operating and Charter Communications Operating Capital Corp., its co-issuer,
are
generally not permitted to sell all or substantially all of their assets or
merge with or into other companies unless their leverage ratio after any such
transaction would be no greater than their leverage ratio immediately prior
to
the transaction, or unless Charter Operating and its subsidiaries could incur
$1.00 of new debt under the 4.25 to 1.0 leverage ratio test described above
after giving effect to the transaction, no default exists, and the surviving
entity is a U.S. entity that assumes the Charter Operating notes.
Charter
Operating and its restricted subsidiaries generally may not otherwise sell
assets or, in the case of restricted subsidiaries, issue equity interests,
unless they receive consideration at least equal to the fair market value of
the
assets or equity interests, consisting of at least 75% in cash, assumption
of
liabilities, securities converted into cash within 60 days or productive assets.
Charter Operating and its restricted subsidiaries are then required within
365
days after any asset sale either to commit to use the net cash proceeds over
a
specified threshold to acquire assets, including current assets, used or useful
in their businesses or use the net cash proceeds to repay debt, or to offer
to
repurchase the Charter Operating notes with any remaining proceeds.
Charter
Operating and its restricted subsidiaries may generally not engage in sale
and
leaseback transactions unless, at the time of the transaction, Charter Operating
could have incurred secured indebtedness in an amount equal to the present
value
of the net rental payments to be made under the lease, and the sale of the
assets and application of proceeds is permitted by the covenant restricting
asset sales.
Charter
Operating’s restricted subsidiaries may generally not enter into restrictions on
their ability to make dividends or distributions or transfer assets to Charter
Operating on terms that are materially more restrictive than those governing
their debt, lien, asset sale, lease and similar agreements existing when Charter
Operating entered into the indenture governing the Charter Operating senior
second-lien notes unless those restrictions are on customary terms that will
not
materially impair Charter Operating’s ability to repay the Charter Operating
notes.
The
restricted subsidiaries of Charter Operating are generally not permitted to
guarantee or pledge assets to secure debt of Charter Operating, unless the
guarantying subsidiary issues a guarantee of the notes of comparable priority
and tenor, and waives any rights of reimbursement, indemnity or subrogation
arising from the guarantee transaction for at least one year.
The
indenture also restricts the ability of Charter Operating and its restricted
subsidiaries to enter into certain transactions with affiliates involving
consideration in excess of $15 million without a determination by the board
of
directors that the transaction is on terms no less favorable than arms-length,
or transactions with affiliates involving over $50 million without receiving
an
independent opinion as to the fairness of the transaction to the holders of
the
Charter Operating notes.
Charter
Operating and its restricted subsidiaries are generally not permitted to
transfer equity interests in restricted subsidiaries unless the transfer is
of
all of the equity interests in the restricted subsidiary or the restricted
subsidiary remains a restricted subsidiary and net proceeds of the equity sale
are applied in accordance with the asset sales covenant.
Until
the
guarantee and pledge date, the Charter Operating notes are secured by a
second-priority lien on all of Charter Operating’s assets that secure the
obligations of Charter Operating under the Charter Operating credit facility
and
specified related obligations. The collateral secures the obligations of Charter
Operating with respect to the 8% senior second-lien notes due 2012 and the
8
3/8% senior second-lien notes due 2014 on a ratable basis. The collateral
consists of substantially all of Charter Operating’s assets in which security
interests may be perfected under the Uniform Commercial Code by filing a
financing statement (including capital stock and intercompany obligations),
including, but not limited to:
·
all
of the capital stock of all of Charter Operating’s direct subsidiaries,
including, but not limited to, CCO NR Holdings, LLC;
and
·
all
intercompany obligations owing to Charter Operating including, but
not
limited to, intercompany notes from CC VI Operating, CC VIII Operating
and
Falcon, which notes are supported by the same guarantees and collateral
that supported these subsidiaries’ credit facilities prior to the
amendment and restatement of the Charter Operating credit
facilities.
84
Since
the
occurrence of the guarantee and pledge date, the collateral for the Charter
Operating notes consists of all of Charter Operating’s and its subsidiaries’
assets that secure the obligations of Charter Operating or any subsidiary of
Charter Operating with respect to the Charter Operating credit facilities and
the related obligations. The collateral currently consists of the capital stock
of Charter Operating held by CCO Holdings, all of the intercompany obligations
owing to CCO Holdings by Charter Operating or any subsidiary of Charter
Operating, and substantially all of Charter Operating’s and the guarantors’
assets (other than the assets of CCO Holdings) in which security interests
may
be perfected under the Uniform Commercial Code by filing a financing statement
(including capital stock and intercompany obligations), including, but not
limited to:
·
with
certain exceptions, all capital stock (limited in the case of capital
stock of foreign subsidiaries, if any, to 66% of the capital stock
of
first tier foreign Subsidiaries) held by Charter Operating or any
guarantor; and
·
with
certain exceptions, all intercompany obligations owing to Charter
Operating or any guarantor.
In
March
2005, CC V Holdings, LLC redeemed in full the notes outstanding under the CC
V
indenture. Following that redemption CC V Holdings, LLC and its subsidiaries
guaranteed the Charter Operating credit facilities and the related obligations
and secured those guarantees with first-priority liens, and guaranteed the
notes
and secured the Charter Operating senior second lien notes with second-priority
liens, on substantially all of their assets in which security interests may
be
perfected under the Uniform Commercial Code by filing a financing statement
(including capital stock and intercompany obligations).
In
addition, if Charter Operating or its subsidiaries exercise any option to redeem
in full the notes outstanding under the Renaissance indenture, then, provided
that the Leverage Condition remains satisfied, the Renaissance entities will
be
required to provide corresponding guarantees of the Charter Operating credit
facilities and related obligations and note guarantees and to secure the Charter
Operating notes and the Charter Operating credit facilities and related
obligations with corresponding liens.
In
the
event that additional liens are granted by Charter Operating or its subsidiaries
to secure obligations under the Charter Operating credit facilities or the
related obligations, second priority liens on the same assets will be granted
to
secure the Charter Operating notes, which liens will be subject to the
provisions of an intercreditor agreement (to which none of Charter Operating
or
its affiliates are parties). Notwithstanding the foregoing sentence, no such
second priority liens need be provided if the time such lien would otherwise
be
granted is not during a guarantee and pledge availability period (when the
Leverage Condition is satisfied), but such second priority liens will be
required to be provided in accordance with the foregoing sentence on or prior
to
the fifth business day of the commencement of the next succeeding guarantee
and
pledge availability period.
Renaissance
Media Notes
The
10%
senior discount notes due 2008 were issued by Renaissance Media (Louisiana)
LLC,
Renaissance Media (Tennessee) LLC and Renaissance Media Holdings Capital
Corporation, with Renaissance Media Group LLC as guarantor and the United States
Trust Company of New York as trustee. Renaissance Media Group LLC, which is
the
direct or indirect parent company of these issuers, is a subsidiary of Charter
Operating. The Renaissance 10% notes and the Renaissance guarantee are
unsecured, unsubordinated debt of the issuers and the guarantor, respectively.
In October 1998, the issuers of the Renaissance notes exchanged $163 million
of
the original issued and outstanding Renaissance notes for an equivalent value
of
new Renaissance notes. The form and terms of the new Renaissance notes are
the
same in all material respects as the form and terms of the original Renaissance
notes except that the issuance of the new Renaissance notes was registered
under
the Securities Act.
Interest
on the Renaissance notes is payable semi-annually in arrears in cash at a rate
of 10% per year. The Renaissance notes are redeemable at the option of the
issuers thereof, in whole or in part, initially at 105% of their principal
amount at maturity, plus accrued interest, declining to 100% of the principal
amount at maturity, plus accrued interest, on or after April 15, 2006.
Our
acquisition of Renaissance triggered change of control provisions of the
Renaissance notes that required us to offer to purchase the Renaissance notes
at
a purchase price equal to 101% of their accreted value on the date of the
purchase, plus accrued interest, if any. In May 1999, we made an offer to
repurchase the Renaissance notes, and holders of Renaissance notes representing
30% of the total principal amount outstanding at maturity tendered their
Renaissance notes for repurchase.
85
The
limitations on incurrence of debt contained in the indenture governing the
Renaissance notes permit Renaissance Media Group and its restricted subsidiaries
to incur additional debt, so long as they are not in default under the
indenture:
·
if,
after giving effect to the incurrence, Renaissance Media Group could
meet
a leverage ratio (ratio of consolidated debt to four times consolidated
EBITDA, as defined, from the most recent quarter) of 6.75 to 1.0,
and,
regardless of whether the leverage ratio could be
met,
·
up
to the greater of $200 million or 4.5 times Renaissance Media Group's
consolidated annualized EBITDA, as
defined,
·
up
to an amount equal to 5% of Renaissance Media Group's consolidated
total
assets to finance the purchase of new
assets,
·
up
to two times the sum of (a) the net cash proceeds of new equity issuances
and capital contributions, and (b) 80% of the fair market value of
property received by Renaissance Media Group or an issuer as a capital
contribution, in each case received after the issue date of the
Renaissance notes and not allocated to make restricted payments,
and
·
other
items of indebtedness for specific purposes such as intercompany
debt,
refinancing of existing debt and interest rate swaps to provide protection
against fluctuation in interest
rates.
The
indenture governing the Renaissance notes permits us to incur debt under one
of
the categories above, and reclassify the debt into a different
category.
Under
the
indenture governing the Renaissance notes, Renaissance Media Group and its
restricted subsidiaries are permitted to pay dividends on equity interests,
repurchase interests, make restricted investments, or make other specified
restricted payments only if Renaissance Media Group could incur $1.00 of
additional debt under the debt incurrence test, which requires that Renaissance
Media Group meet the 6.75 to 1.0 leverage ratio after giving effect to the
transaction of the indebtedness covenant and that no default exists or would
occur as a consequence thereof. If those conditions are met, Renaissance Media
Group and its restricted subsidiaries are permitted to make restricted payments
in a total amount not to exceed the result of 100% of Renaissance Media Group's
consolidated EBITDA, as defined, minus 130% of its consolidated interest
expense, plus 100% of new cash equity proceeds received by Renaissance Media
Group and not allocated to the indebtedness covenant, plus returns on certain
investments, all cumulatively from June 1998. Renaissance Media Group and its
restricted subsidiaries may make permitted investments up to $2 million in
related businesses and other specified permitted investments, restricted
payments up to $10 million, dividends up to 6% each year of the net cash
proceeds of public equity offerings, and other specified restricted payments
without meeting the foregoing test.
Renaissance
Media Group and its restricted subsidiaries are not permitted to grant liens
on
their assets other than specified permitted liens, unless corresponding liens
are granted to secure the Renaissance notes. Permitted liens include liens
securing debt permitted to be incurred under credit facilities, liens securing
debt incurred under the incurrence of indebtedness test, in amounts up to the
greater of $200 million or 4.5 times Renaissance Media Group's consolidated
EBITDA, as defined, liens as deposits for acquisitions up to 10% of the
estimated purchase price, liens securing permitted financings of new assets,
liens securing debt permitted to be incurred by restricted subsidiaries, and
specified liens incurred in the ordinary course of business.
Renaissance
Media Group and the issuers of the Renaissance notes are generally not permitted
to sell or otherwise dispose of all or substantially all of their assets or
merge with or into other companies unless their consolidated net worth after
any
such transaction would be equal to or greater than their consolidated net worth
immediately prior to the transaction, or unless Renaissance Media Group could
incur $1.00 of additional debt under the debt incurrence test, which would
require them to meet a leverage ratio of 6.75 to 1.00 after giving effect to
the
transaction.
Renaissance
Media Group and its subsidiaries may generally not otherwise sell assets or,
in
the case of subsidiaries, equity interests, unless they receive consideration
at
least equal to the fair market value of the assets, consisting of at least
75%
cash, temporary cash investments or assumption of debt. Charter Holdings and
its
restricted subsidiaries are then required within 12 months after any asset
sale
either to commit to use the net cash proceeds over a specified
86
threshold
either to acquire assets used in their own or related businesses or use the
net
cash proceeds to repay debt, or to offer to repurchase the Renaissance notes
with any remaining proceeds.
Renaissance
Media Group and its restricted subsidiaries may generally not engage in sale
and
leaseback transactions unless the lease term does not exceed three years or
the
proceeds are applied in accordance with the covenant limiting asset sales.
Renaissance
Media Group's restricted subsidiaries may generally not enter into restrictions
on their abilities to make dividends or distributions or transfer assets to
Renaissance Media Group except those not more restrictive than is customary
in
comparable financings.
The
restricted subsidiaries of Renaissance Media Group are not permitted to
guarantee or pledge assets to secure debt of the Renaissance Media Group or
its
restricted subsidiaries, unless the guarantying subsidiary issues a guarantee
of
the Renaissance notes of comparable priority and tenor, and waives any rights
of
reimbursement, indemnity or subrogation arising from the guarantee
transaction.
Renaissance
Media Group and its restricted subsidiaries are generally not permitted to
issue
or sell equity interests in restricted subsidiaries, except sales of common
stock of restricted subsidiaries so long as the proceeds of the sale are applied
in accordance with the asset sale covenant, and issuances as a result of which
the restricted subsidiary is no longer a restricted subsidiary and any remaining
investment in that subsidiary is permitted by the covenant limiting restricted
payments.
The
indenture governing the Renaissance notes also restricts the ability of
Renaissance Media Group and its restricted subsidiaries to enter into certain
transactions with affiliates involving consideration in excess of $2 million
without a determination by the disinterested members of the board of directors
that the transaction is on terms no less favorable than arms length, or
transactions with affiliates involving over $4 million with affiliates without
receiving an independent opinion as to the fairness of the transaction to
Renaissance Media Group.
All
of
these covenants are subject to additional specified exceptions. In general,
the
covenants of our subsidiaries' credit agreements are more restrictive than
those
of our indentures.
Cross-Defaults
Our
indentures and those of certain of our subsidiaries include various events
of
default, including cross-default provisions. Under these provisions, a failure
by any of the issuers or any of their restricted subsidiaries to pay at the
final maturity thereof the principal amount of other indebtedness having a
principal amount of $100 million or more (or any other default under any such
indebtedness resulting in its acceleration) would result in an event of default
under the indenture governing the applicable notes. The
Renaissance indenture contains a similar cross-default provision with a $10
million threshold that applies to the issuers of the Renaissance notes and
their
restricted subsidiaries. As
a
result, an event of default related to the failure to repay principal at
maturity or the acceleration of the indebtedness under the Charter Holdings
notes, CIH notes, CCH I notes, CCH II notes, CCO Holdings notes, Charter
Operating notes, the Charter Operating credit facilities or the Renaissance
notes could cause cross-defaults under our subsidiaries’ indentures.
Related
Party Transactions
See
"Item 13. Certain Relationships and Related Transactions — Business
Relationships" for information regarding related party transactions and
transactions with other parties with whom we or our related parties may have
a
relationship that enables the parties to negotiate terms of material
transactions that may not be available from other, more clearly independent
parties, on an arms length basis.
Interest
Rate Risk
We
use
interest rate risk management derivative instruments, such as interest rate
swap
agreements and interest rate collar agreements (collectively referred to herein
as interest rate agreements) as required under the terms of the credit
facilities of our subsidiaries. Our policy is to manage interest costs using
a
mix of fixed and variable rate debt. Using interest rate swap agreements, we
agree to exchange, at specified intervals through 2007, the difference between
fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. Interest rate collar agreements are used to limit
our
exposure to, and to derive benefits from, interest rate fluctuations
87
on
variable rate debt to within a certain range of rates. Interest rate risk
management agreements are not held or issued for speculative or trading
purposes.
At
December 31, 2005 and 2004, we had outstanding $1.8 billion and
$2.7 billion and $20 million and $20 million, respectively, in
notional amounts of interest rate swaps and collars, respectively. The notional
amounts of interest rate instruments do not represent amounts exchanged by
the
parties and, thus, are not a measure of our exposure to credit loss. See
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk," for
further information regarding the fair values and contract terms of our interest
rate agreements.
Recently
Issued Accounting Standards
In
November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
153, Exchanges
of Non-monetary Assets — An Amendment of APB No. 29.
This
statement eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for exchange
transactions that do not have commercial substance — that is, transactions that
are not expected to result in significant changes in the cash flows of the
reporting entity. We adopted this pronouncement effective April 1, 2005. The
exchange transaction discussed in Note 3 to the accompanying consolidated
financial statements contained in "Item 8. Financial Statements and
Supplementary Data", was accounted for under this standard.
In
December 2004, the FASB issued the revised SFAS No. 123, Share-Based
Payment,
which
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for (a) equity instruments of that
company or (b) liabilities that are based on the fair value of the company’s
equity instruments or that may be settled by the issuance of such equity
instruments. This statement will be effective for us beginning January 1, 2006.
Because we adopted the fair value recognition provisions of SFAS No. 123 on
January 1, 2003, we do not expect this revised standard to have a material
impact on our financial statements.
In
March
2005, the FASB issued FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations.
This
interpretation clarifies that the term "conditional asset retirement obligation"
as used in FASB Statement No. 143, Accounting
for Asset Retirement Obligations, refers
to
a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. This pronouncement is effective for
fiscal years ending after December 15, 2005. The adoption of this interpretation
did not have a material impact on our financial statements.
We
do not
believe that any other recently issued, but not yet effective accounting
pronouncements, if adopted, would have a material effect on our accompanying
financial statements.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk.
Interest
Rate Risk
We
are
exposed to various market risks, including fluctuations in interest rates.
We
use interest rate risk management derivative instruments, such as interest
rate
swap agreements and interest rate collar agreements (collectively referred
to
herein as interest rate agreements) as required under the terms of the credit
facilities of our subsidiaries. Our policy is to manage interest costs using
a
mix of fixed and variable rate debt. Using interest rate swap agreements, we
agree to exchange, at specified intervals through 2007, the difference between
fixed and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. Interest rate collar agreements are used to limit
our
exposure to, and to derive benefits from, interest rate fluctuations on variable
rate debt to within a certain range of rates. Interest rate risk management
agreements are not held or issued for speculative or trading purposes.
As
of
December 31, 2005 and 2004, our long-term debt totaled approximately $19.4
billion and $19.5 billion, respectively. This debt was comprised of
approximately $5.7 billion and $5.5 billion of credit facilities debt, $12.8
billion and $13.0 billion accreted amount of high-yield notes and $863 million
and $990 million accreted amount of convertible senior notes, respectively.
As
of
December 31, 2005 and 2004, the weighted average interest rate on the credit
facility debt was approximately 7.8% and 6.8%, the weighted average interest
rate on the high-yield notes was approximately 10.2% and 9.2%, and the weighted
average interest rate on the convertible senior notes was approximately 6.3%
and
5.7%, respectively, resulting in a blended weighted average interest rate of
9.3% and 8.8%, respectively. The interest rate on approximately 77% and 83%
of
the total principal amount of our debt was effectively fixed, including the
effects of
88
our
interest rate hedge agreements as of December 31, 2005 and 2004, respectively.
The fair value of our high-yield notes was $10.4 billion and $12.2 billion
at
December 31, 2005 and 2004, respectively. The fair value of our convertible
senior notes was $647 million and $1.1 billion at December 31, 2005 and 2004,
respectively. The fair value of our credit facilities is $5.7 billion and $5.5
billion at December 31, 2005 and 2004, respectively. The fair value of
high-yield and convertible notes is based on quoted market prices, and the
fair
value of the credit facilities is based on dealer quotations.
We
do not
hold or issue derivative instruments for trading purposes. We do, 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. We have formally
documented, designated and assessed the effectiveness of transactions that
receive hedge accounting. For the years ended December 31, 2005, 2004 and 2003,
net gain (loss) on derivative instruments and hedging activities includes gains
of $3 million, $4 million and $8 million, respectively, which represent cash
flow hedge ineffectiveness on interest rate hedge agreements arising from
differences between the critical terms of the agreements and the related hedged
obligations. Changes in the fair value of interest rate agreements designated
as
hedging instruments of the variability of cash flows associated with
floating-rate debt obligations that meet the effectiveness criteria of SFAS
No.
133 are reported in accumulated other comprehensive loss. For the years ended
December 31, 2005, 2004 and 2003, a gain of $16 million, $42 million and $48
million, respectively, related to derivative instruments designated as cash
flow
hedges, was recorded in accumulated other comprehensive loss and minority
interest. The amounts are subsequently reclassified into interest expense as
a
yield adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do
not
meet the effectiveness criteria specified by SFAS No. 133. However, management
believes such instruments are closely correlated with the respective debt,
thus
managing associated risk. Interest rate derivative instruments not designated
as
hedges are marked to fair value, with the impact recorded as gain (loss) on
derivative instruments and hedging activities in our statements of operations.
For the years ended December 31, 2005, 2004 and 2003, net gain (loss) on
derivative instruments and hedging activities includes gains of $47 million,
$65
million and $57 million, respectively, for interest rate derivative instruments
not designated as hedges.
The
table
set forth below summarizes the fair values and contract terms of financial
instruments subject to interest rate risk maintained by us as of December 31,2005 (dollars in millions):
The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of our exposure to credit loss.
The
amounts exchanged are determined by reference to the notional amount and the
other terms of the contracts. The estimated fair value approximates the costs
(proceeds) to settle the outstanding contracts. Interest rates on variable
debt
are estimated using the average implied forward London Interbank Offering Rate
(LIBOR) rates for the year of maturity based on the yield curve in effect
at December 31, 2005.
At
December 31, 2005 and 2004, we had outstanding $1.8 billion and $2.7 billion
and
$20 million and $20 million, respectively, in notional amounts of interest
rate swaps and collars, respectively. The notional amounts of interest rate
instruments do not represent amounts exchanged by the parties and, thus, are
not
a measure of exposure to credit
89
loss.
The
amounts exchanged are determined by reference to the notional amount and the
other terms of the contracts.
Our
consolidated financial statements, the related notes thereto, and the reports
of
independent auditors are included in this annual report beginning on page F-1.
Item 9.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
As
of the
end of the period covered by this report, management, including our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of
the design and operation of our disclosure controls and procedures with respect
to the information generated for use in this annual report. The evaluation
was
based in part upon reports and affidavits provided by a number of executives.
Based upon, and as of the date of that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures were effective to provide reasonable assurances that information
required to be disclosed in the reports we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the
time periods specified in the Commission’s rules and forms.
There
was
no change in our internal control over financial reporting during 2005 that
has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving
the
desired control objectives and management necessarily was required to apply
its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon the above evaluation, Charter’s management believes that
its controls provide such reasonable assurances.
Management’s
Report on Internal Control Over Financial Reporting
Charter’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our internal control system was
designed to provide reasonable assurance to Charter’s management and board of
directors regarding the preparation and fair presentation of published financial
statements.
Charter’s
management has assessed the effectiveness of our internal control over financial
reporting as of December 31, 2005. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control —
Integrated Framework.
Based
on
management’s assessment utilizing these criteria we believe that, as of December31, 2005, our internal control over financial reporting was
effective.
Our
independent auditors, KPMG, LLP have audited management’s assessment of our
internal control over financial reporting as stated in their report on page
F-3.
Robert
A.
Quigley, Executive Vice President and Chief Marketing Officer, and Charter
executed an offer letter dated as of November 22, 2005 pursuant to which Charter
agreed to pay him a signing bonus of $200,000 deferred until January 2006;
grant
options to purchase 145,800 shares of Class A common stock under our 2001 Stock
Incentive Plan; 83,700 performance shares under our 2001 Stock Incentive Plan;
and 50,000 shares of restricted stock which will vest over a three year period.
For a description of Mr. Quigley’s employment agreement, see "Item 10. Directors
and Executive Officers of Registrant - Employment Arrangements and Related
Agreements."
The
persons listed below are directors of Charter.
Director
Position(s)
Paul
G. Allen
Chairman
of the board of directors
W.
Lance Conn
Director
Nathaniel
A. Davis
Director
Jonathan
L. Dolgen
Director
Robert
P. May
Director
David
C. Merritt
Director
Marc
B. Nathanson
Director
Jo
Allen Patton
Director
Neil
Smit
Director,
President and Chief Executive Officer
John
H. Tory
Director
Larry
W. Wangberg
Director
The
following sets forth certain biographical information with respect to the
directors listed above.
Paul
G. Allen, 53,
has
been Chairman of Charter’s board of directors since July 1999, and Chairman of
the board of directors of CII (a predecessor to, and currently an affiliate
of,
Charter) since December 1998. Mr. Allen, co-founded Microsoft Corporation with
Bill Gates in 1976 and remained the company’s chief technologist until he left
Microsoft Corporation in 1983. Mr. Allen is the founder and chairman of Vulcan
Inc., a multibillion dollar investment portfolio that includes large stakes
in
DreamWorks Animation SKG, Digeo, Oxygen Media, real estate and more than 40
other technology, media and content companies. In 2004, Mr. Allen funded
SpaceShipOne, the first privately-funded effort to successfully put a civilian
in suborbital space and winner of the Ansari X-Prize competition. Mr. Allen
also
owns the Seattle Seahawks NFL and Portland Trail Blazers NBA franchises. In
addition, Mr. Allen is a director of Vulcan Programming Inc., Vulcan Ventures,
Inc., Vulcan Inc., Vulcan Cable III Inc., numerous privately held companies
and,
until its sale in May 2004 to an unrelated third party, TechTV
L.L.C.
W.
Lance Conn, 37,
was
elected to the board of directors of Charter in September 2004. Since July
2004,
Mr. Conn has served as Executive Vice President, Investment Management for
Vulcan Inc., the investment and project management company that oversees a
diverse multi-billion dollar portfolio of investments by Paul G. Allen. Prior
to
joining Vulcan Inc., Mr. Conn was employed by America Online, Inc., an
interactive online services company, from March 1996 to May 2003. From 1997
to
2000, Mr. Conn served in various senior business development roles at America
Online. In 2000, Mr. Conn began supervising all of America Online’s European
investments, alliances and business initiatives. In 2002, he became Senior
Vice
President of America Online U.S. where he led a company-wide effort to
restructure and optimize America Online’s operations. From September 1994 until
February 1996, Mr. Conn was an attorney with the Shaw Pittman law firm in
Washington, D.C. Mr. Conn holds a J.D. degree from the University of Virginia,
a
M.A. degree in history from the University of Mississippi and an A.B. degree
in
history from Princeton University.
Nathaniel
A. Davis, 52,
was
elected to the board of directors of Charter on August 23, 2005. Since June
2003, Mr. Davis has been Managing Director and owner of RANND Advisory Group,
a
technology Consulting Group, which advises venture capital, telecom and other
technology related firms. From January 2000 through May of 2003, he was
President and Chief Operating Officer of XO Communication, Inc. XO
Communications filed a petition to reorganize under Chapter 11 of the Bankruptcy
Code in June 2002 and completed its restructuring and emerged from Chapter
11 in
January 2003. From October 1998 to December 1999 he was Executive Vice
President, Network and Technical Services of Nextel Communications, Inc. Prior
to that, he worked for MCI Communications from 1982 until 1998 in a number
of
positions, including as Chief Financial Officer of MCIT from November 1996
until
October 1998. Prior to that, Mr. Davis served in a variety of roles that include
Senior Vice President of Network Operations, Chief Operating Officer of
MCImetro, Sr. Vice President of Finance, Vice President of Systems Development.
Mr. Davis holds a B.S. degree from Stevens Institute of Technology, an M.S.
degree from Moore School of Engineering and an M.B.A. degree from the Wharton
School at the University of Pennsylvania.
91
He
is a
member of the boards of XM Satellite Radio Holdings, Inc. and of Mutual of
America Capital Management Corporation.
Jonathan
L. Dolgen, 60,
was
elected to the board of directors of Charter in October 2004. Since July 2004,
Mr. Dolgen has also been a Senior Advisor to Viacom Inc. ("Old Viacom"), a
worldwide entertainment and media company, where he provided advisory services
to the Chief Executive Officer of Old Viacom, or others designated by him,
on an
as requested basis. Effective December 31, 2005, Old Viacom was separated into
two publicly traded companies, Viacom Inc. ("New Viacom") and CBS Corporation.
Since the separation of Old Viacom, Mr. Dolgen provides advisory services to
the
Chief Executive Officer of New Viacom, or others designated by him, on an as
requested bases. Since July 2004, Mr. Dolgen has been a private investor and
since September 2004, Mr. Dolgen has been a principal of Wood River Ventures,
LLC, a private start-up entity that seeks investment and other opportunities
primarily in the media sector. Mr. Dolgen is also a member of the board of
directors of Expedia, Inc. From April 1994 to July 2004, Mr. Dolgen served
as
Chairman and Chief Executive Officer of the Viacom Entertainment Group, a unit
of Old Viacom, where he oversaw various operations of Old Viacom’s businesses,
which during 2003 and 2004 primarily included the operations engaged in motion
picture production and distribution, television production and distribution,
regional theme parks, theatrical exhibition and publishing. As a result of
the
separation of Old Viacom, Old Viacom’s motion picture production and
distribution and theatrical exhibition business became part of New Viacom’s
businesses, and the remainder of Old Viacom’s businesses overseen by Mr. Dolgen
remained with CBS Corporation. Mr. Dolgen began his career in the entertainment
industry in 1976, and until joining the Viacom Entertainment Group, served
in
executive positions at Columbia Pictures Industries, Inc., Twentieth Century
Fox
and Fox, Inc., and Sony Pictures Entertainment. Mr. Dolgen holds a B.S. degree
from Cornell University and a J.D. degree from New York University.
Robert
P. May, 56,
was
elected to Charter’s board of directors in October 2004 and was Charter’s
Interim President and Chief Executive Officer from January until August 2005.
Mr. May was named Chief Executive Officer and a director of Calpine Corporation,
a power company, in December 2005. Calpine filed for Chapter 11 bankruptcy
reorganization in December 2005. He served on the board of directors of
HealthSouth Corporation, a national provider of healthcare services, from
October 2002 until October 2005, and was its Chairman from July 2004 until
October 2005. Mr. May also served as HealthSouth Corporation’s Interim Chief
Executive Officer from March 2003 until May 2004, and as Interim President
of
its Outpatient and Diagnostic Division from August 2003 to January 2004. Since
March 2001, Mr. May has been a private investor and principal of RPM Systems,
which provides strategic business consulting services. From March 1999 to March
2001, Mr. May served on the board of directors and was Chief Executive of PNV
Inc., a national telecommunications company. Prior to his employment at PNV
Inc., Mr. May was Chief Operating Officer and a member of the board of directors
of Cablevision Systems Corporation from October 1996 to February 1998, and
from
1973 to 1993 he held several senior executive positions with Federal Express
Corporation, including President, Business Logistics Services. Mr. May was
educated at Curry College and Boston College and attended Harvard Business
School’s Program for Management Development. He is a member of Deutsche Bank of
Americas Advisory Board.
David
C. Merritt, 51,
was
elected to the board of directors of Charter in July 2003, and was also
appointed as Chairman of Charter’s Audit Committee at that time. Since October
2003, Mr. Merritt has been a Managing Director of Salem Partners, LLC, an
investment banking firm. He was a Managing Director in the Entertainment Media
Advisory Group at Gerard Klauer Mattison & Co., Inc., a company that
provided financial advisory services to the entertainment and media industries
from January 2001 through April 2003. From July 1999 to November 2000, he served
as Chief Financial Officer of CKE Associates, Ltd., a privately held company
with interests in talent management, film production, television production,
music and news media. He also served as a director of Laser-Pacific Media
Corporation from January 2001 until October 2003 and served as Chairman of
its
audit committee. In December 2003, he became a director of Outdoor Channel
Holdings, Inc and serves as Chairman of its audit committee. Mr. Merritt joined
KPMG in 1975 and served in a variety of capacities during his years with the
firm, including national partner in charge of the media and entertainment
practice and before joining CKE Associates, Mr. Merritt was an audit and
consulting partner of KPMG for 14 years. In February 2006, Mr. Merritt became
a
director of Calpine Corporation. Mr. Merritt holds a B.S. degree in business
and
accounting from California State University — Northridge.
Marc
B. Nathanson, 60,
has
been a director of Charter since January 2000 and serves as Vice Chairman of
Charter’s board of directors, a non-executive position. Mr. Nathanson is the
Chairman of Mapleton Investments LLC, an investment vehicle formed in 1999.
He
also founded and served as Chairman and Chief Executive Officer of Falcon
Holding Group, Inc., a cable operator, and its predecessors, from 1975 until
1999. He served as Chairman and Chief Executive Officer of Enstar Communications
Corporation, a cable operator, from 1988 until November 1999. Prior to 1975,
Mr.
Nathanson held executive positions with Teleprompter Corporation, Warner Cable
and
92
Cypress
Communications Corporation. In 1995, he was appointed by the President of the
United States to the Broadcasting Board of Governors, and from 1998 through
September 2002, served as its Chairman. Mr. Nathanson holds a B.A. in Mass
Communications from the University of Denver and a M.A. in political science
from University of California/Santa Barbara.
Jo
Allen Patton, 48,
has
been a director of Charter since April 2004. Ms. Patton joined Vulcan Inc.
as
Vice President in 1993, and since that time she has served as an officer and
director of many affiliates of Mr. Allen, including her current position as
President and Chief Executive Officer of Vulcan Inc. since July 2001. Ms. Patton
is also President of Vulcan Productions, an independent feature film and
documentary production company, Vice Chair of First & Goal, Inc., which
developed and operated the Seattle Seahawks NFL stadium, and serves as Executive
Director of the six Paul G. Allen Foundations. Ms. Patton is a co-founder of
the
Experience Music Project museum, as well as the Science Fiction Museum and
Hall
of Fame. Ms. Patton is the sister of Mr. Allen.
Neil
Smit,
47, was
elected a director and President and Chief Executive Officer of Charter on
August 22, 2005. He had previously worked at Time Warner, Inc. since 2000,
most
recently serving as the President of Time Warner’s America Online Access
Business. He also served at America Online ("AOL") as Executive Vice President,
Member Development, Senior Vice President of AOL’s product and programming team,
Chief Operating Officer of AOL Local, Chief Operating Officer of MapQuest.
Prior
to that he was a Regional President with Nabisco and was with Pillsbury in
a
number of management positions. Mr. Smit has a B.S. degree from Duke University
and a M.S. degree with a focus in international business from Tufts University’s
Fletcher School of Law and Diplomacy.
John
H. Tory, 51,
has
been a director of Charter since December 2001. Mr. Tory served as the Chief
Executive Officer of Rogers Cable Inc., Canada’s largest broadband cable
operator, from 1999 until 2003. From 1995 to 1999, Mr. Tory was President and
Chief Executive Officer of Rogers Media Inc., a broadcasting and publishing
company. Prior to joining Rogers, Mr. Tory was a Managing Partner and member
of
the executive committee at Tory Tory DesLauriers & Binnington, one of
Canada’s largest law firms. Mr. Tory serves on the board of directors of Rogers
Telecommunications Limited and Cara Operations Limited and is Chairman of Cara
Operations’ Audit Committee. Mr. Tory was educated at University of Toronto
Schools, Trinity College (University of Toronto) and Osgoode Hall Law School.
Effective September 18, 2004, Mr. Tory was elected Leader of the Ontario
Progressive Conservative Party. On March 17, 2005, he was elected a Member
of
the Provincial Parliament and on March 29, 2005, became the Leader of Her
Majesty’s Loyal Opposition. On June 29, 2005, Mr. Tory formally notified Charter
that he intends to resign from the board of directors. The date for his
departure has not yet been determined, but he has indicated that he will
continue to serve on Charter’s board, as well as the audit committee, at least
until a replacement director is named.
Larry
W. Wangberg, 63,
has
been a director of Charter since January 2002. Since July 2002, Mr. Wangberg
has
been an independent business consultant. From August 1997 to May 2004, Mr.
Wangberg was a director of TechTV L.L.C., a cable television network controlled
by Paul Allen. He also served as its Chairman and Chief Executive Officer from
August 1997 through July 2002. In May 2004, TechTV L.L.C. was sold to an
unrelated party. Prior to joining TechTV L.L.C., Mr. Wangberg was Chairman
and
Chief Executive Officer of StarSight Telecast Inc., an interactive navigation
and program guide company which later merged with Gemstar International, from
1994 to 1997. Mr. Wangberg was Chairman and Chief Executive Officer of Times
Mirror Cable Television and Senior Vice President of its corporate parent,
Times
Mirror Co., from 1983 to 1994. He currently serves on the boards of Autodesk
Inc. and ADC Telecommunications, Inc. Mr. Wangberg holds a B.S. degree in
mechanical engineering and a M.S. degree in industrial engineering, both from
the University of Minnesota.
Board
of Directors and Committees of the Board of Directors
Charter's
board of directors meets regularly throughout the year on a set schedule. The
board may also hold special meetings and act by written consent from time to
time if necessary. Meetings of the independent members of the board occur on
the
same day as regularly scheduled meetings of the full board. Management is not
present at these meetings.
The
board
of directors delegates authority to act with respect to certain matters to
board
committees whose members are appointed by the board. As of December 31, 2005
the
following were the committees of Charter's board of directors: Audit Committee,
Financing Committee, Compensation Committee, Executive Committee, Strategic
Planning Committee, and a Special Committee for matters related to the CC VIII
put dispute.
The
Audit
Committee, which has a written charter approved by the board, consists of
Nathaniel Davis, John Tory and David Merritt, all of whom are believed to be
independent in accordance with the applicable corporate
93
governance
listing standards of the NASDAQ National Market. Charter's board of directors
has determined that, in its judgment, David Merritt is an audit committee
financial expert within the meaning of the applicable federal
regulations.
Mr.
Charles Lillis resigned from Charter’s board of directors, effective March 28,2005, and prior to that time, Mr. Lillis was one of three independent members
of
the Audit Committee. On August 23, 2005, Nathaniel Davis, who was deemed
independent by the board of directors in accordance with the applicable
corporate governance listing standards of the NASDAQ National Market, was
elected to the Audit Committee.
On
June29, 2005, Mr. Tory formally notified Charter that he intends to resign from
its
board of directors and the board committees on which he serves. The date for
Mr.
Tory’s departure has not yet been determined, but he has indicated that he will
continue to serve on Charter’s board and its committees at least until a
replacement director is named.
Director
Compensation
Each
non-employee member of the board receives an annual retainer of $40,000 in
cash
plus restricted stock, vesting one year after the date of grant, with a value
on
the date of grant of $50,000. In addition, the Audit Committee chair receives
$25,000 per year, and the chair of each other committee receives $10,000 per
year. Prior to February 22, 2005, all committee members also received $1,000
for
attendance at each committee meeting. Beginning on February 22, 2005 each
director also received $1,000 for telephonic attendance at each meeting of
the
full board and $2,000 for in-person attendance. Each
director of Charter is entitled to reimbursement for costs incurred in
connection with attendance at board and committee meetings. Vulcan has informed
us that, in accordance with its internal policy, Mr. Conn turns over to Vulcan
all cash compensation he receives for his participation on Charter's board
of
directors or committees thereof.
Directors
who were employees did not receive additional compensation in 2004 or 2005.
Messrs. Vogel and Smit, who were our President and Chief Executive Officer
in
2005, were the only directors who were also employees during 2005. Mr. May,
who
was our Interim President and Chief Executive Officer from January 2005 until
August 2005, was not an employee. However, he received fees and a bonus pursuant
to an agreement. See "Employment Arrangements."
Our
Bylaws provide that all directors are entitled to indemnification to the maximum
extent permitted by law from and against any claims, damages, liabilities,
losses, costs or expenses incurred in connection with or arising out of the
performance by them of their duties for us or our subsidiaries.
Executive
Officers
The
following persons are executive officers of Charter Communications, Inc.:
Executive
Officers
Position
Paul
G. Allen
Chairman
of the Board of Directors
Neil
Smit
President
and Chief Executive Officer
Michael
J. Lovett
Executive
Vice President and Chief Operating Officer
Jeffrey
T. Fisher
Executive
Vice President and Chief Financial Officer
Grier
C. Raclin
Executive
Vice President, General Counsel and Corporate Secretary
Wayne
H. Davis
Executive
Vice President and Chief Technical Officer
Robert
A. Quigley
Executive
Vice President and Chief Marketing Officer
Sue
Ann R. Hamilton
Executive
Vice President, Programming
Lynne
F. Ramsey
Senior
Vice President, Human Resources
Paul
E. Martin
Senior
Vice President, Principal Accounting Officer and Corporate
Controller
Information
regarding our executive officers who do not serve as directors is set forth
below.
Michael
J. Lovett,
44,
Executive Vice President and Chief Operating Officer. Mr. Lovett was promoted
to
his current position in April 2005. Prior to that he served as Executive
Vice
President, Operations and Customer Care from September 2004 through March
2005,
and as Senior Vice President, Midwest Division Operations and as Senior Vice
President of Operations Support, since joining Charter in August 2003 until
September 2004. Mr. Lovett was Chief Operating Officer of Voyant Technologies,
Inc., a voice conferencing hardware/software solutions
94
provider,
from December 2001 to August 2003. From November 2000 to December 2001, he
was
Executive Vice President of Operations for OneSecure, Inc., a startup company
delivering management/monitoring of firewalls and virtual private networks.
Prior to that, Mr. Lovett was Regional Vice President at AT&T from June 1999
to November 2000 where he was responsible for operations. Mr. Lovett was
Senior
Vice President at Jones Intercable from October 1989 to June 1999 where he
was
responsible for operations in nine states. Mr. Lovett began his career in
cable
television at Centel Corporation where he held a number of positions. Mr.
Lovett
serves on the Board of Directors for Conversant Communications and Digeo,
Inc.
Jeffrey
T. Fisher, 43,
Executive Vice President and Chief Financial Officer. Mr. Fisher was appointed
to the position of Executive Vice President and Chief Financial Officer,
effective February 6, 2006. Prior to joining Charter, Mr. Fisher was employed
by
Delta Airlines, Inc. from 1998 to 2006 in a number of positions including
Senior
Vice President - Restructuring from September 2005 until January 2006, President
and General Manager of Delta Connection, Inc. from January to September 2005,
Chief Financial Officer of Delta Connection from 2001 until January 2005,
Vice
President of Finance, Marketing and Sales Controller of Delta Airlines in
2001
and Vice President of Financial Planning and Analysis of Delta Airlines from
2000 to 2001. Delta Airlines filed a petition under Chapter 11 of the Bankruptcy
Code on September 14, 2005. Mr. Fisher received a B.B.M. degree from Embry
Riddle University and a M.B.A. degree in International Finance from University
of Texas in Arlington, Texas.
Grier
C. Raclin, 53,
Executive Vice President, General Counsel and Corporate Secretary. Mr. Raclin
joined Charter in his current position in October 2005. Prior to joining
Charter, Mr. Raclin had served as the Chief Legal Officer and Corporate
Secretary of Savvis Communications Corporation since January 2003. Prior
to
joining Savvis, Mr. Raclin served as Executive Vice President, Chief
Administrative Officer, General Counsel and Corporate Secretary from 2000
to
2002 and as Senior Vice President of Corporate Affairs, General Counsel and
Corporate Secretary from 1997 to 2000 of Global TeleSystems Inc. ("GTS").
In
2001, GTS filed, in pre-arranged proceedings, a petition for
"surseance"(moratorium), offering a composition, in The Netherlands and a
petition under Chapter 11 of the United States Bankruptcy Code, both in
connection with the sale of the company to KPNQwest. Prior to joining GTS,
Mr.
Raclin was Vice-Chairman and a Managing Partner of Gardner, Carton and Douglas
in Washington, D.C. Mr. Raclin earned a J.D. degree from Northwestern University
Law School, where he served on the Editorial Board of the Northwestern
University Law School Law Review, attended business school at the University
of
Chicago Executive Program and earned a B.S. degree from Northwestern University,
where he was a member of Phi Beta Kappa.
Wayne
H. Davis,
52,
Executive Vice President and Chief Technical Officer. Prior to his current
position, Mr. Davis served as Senior Vice President, Engineering and Technical
Operations, and as Assistant to the President/Vice President of Management
Services since July 2002 and prior to that, he was Vice President of
Engineering/Operations for Charter’s National Region from December 2001. Before
joining Charter, Mr. Davis held the position of Vice President of Engineering
for Comcast Corporation, Inc. Prior to that, he held various engineering
positions including Vice President of Engineering for Jones Intercable Inc.
He
began his career in the cable industry in 1980. He attended the State University
of New York at Albany. Mr. Davis serves as a technical advisory board member
of
Net2Phone, Inc., and as a board member of @Security Broadband Corp., a company
in which Charter owns an equity investment interest. Mr. Davis is also a
member
of the Society of Cable Telecommunications Engineers.
Robert
A. Quigley,
62,
Executive Vice President and Chief Marketing Officer.
Mr.
Quigley joined Charter in his current position in December 2005. Prior to
joining Charter, Mr. Quigley was President and CEO at Quigley Consulting
Group,
LLC, a private consulting group, from April 2005 to December 2005. From March
2004 to March 2005, he was Executive Vice President of Sales and Marketing
at
Cardean
Education Group (formerly UNext com LLC), a private online education company.
From February 2000 to March 2004, Mr. Quigley was Executive Vice President
of
America Online and Chief Operating Officer of its Consumer Marketing division.
Prior to America Online, he was owner, President and CEO of Wordsquare
Publishing Co. from July 1994 to February 2000. Mr. Quigley is a graduate
of
Wesleyan University with a B.A. degree in history and is a member of the
Direct
Marketing Association Board of Directors.
Sue
Ann R. Hamilton,
45,
Executive Vice President, Programming. Ms. Hamilton joined Charter as Senior
Vice President of Programming in March 2003 and was promoted to her current
position in April 2005. From March 1999 to November 2002, Ms. Hamilton served
as
Vice President of Programming for AT&T Broadband, L.L.C. Prior to that, from
October 1993 to March 1999, Ms. Hamilton held numerous management positions
at
AT&T Broadband, L.L.C. and Tele-Communications, Inc. (TCI), which was
acquired by AT&T Broadband, L.L.C. in 1999. Prior to her cable television
career with TCI, she was a partner with Kirkland & Ellis representing
domestic
95
and
international clients in complex commercial transactions and securities matters.
A magna cum laude graduate of Carleton College in Northfield, Minnesota,
Ms.
Hamilton received a J.D. degree from Stanford Law School, where she was
Associate Managing Editor of the Stanford
Law Review and
Editor of the Stanford
Journal of International Law.
Lynne
F. Ramsey,
48,
Senior Vice President, Human Resources. Ms. Ramsey joined Charter’s Human
Resources group in March 2001 and served as Corporate Vice President, Human
Resources. She was promoted to her current position in July 2004. Before
joining
Charter, Ms. Ramsey was Executive Vice President of Human Resources for
Broadband Infrastructure Group from March 2000 through November 2000. From
1994
to 1999, Ms. Ramsey served as Senior Vice President of Human Resources for
Firstar Bank, previously Mercantile Bank of St. Louis. She served as Vice
President of Human Resources for United Postal Savings from 1982 through
1994,
when it was acquired by Mercantile Bank of St. Louis. Ms. Ramsey
received a bachelor’s degree in Education from Maryville College and a master’s
degree in Human Resources Management from Washington University.
Paul
E. Martin,
45,
Senior Vice President, Principal Accounting Officer and Corporate Controller.
Mr. Martin has been employed by Charter since March 2000, when he joined
Charter
as Vice President and Corporate Controller. In April 2002, Mr. Martin was
promoted to Senior Vice President, Principal Accounting Officer and Corporate
Controller and in August 2004 was named Interim co-Chief Financial Officer
and
in April 2005 was named Interim Chief Financial Officer and ceased being
Interim
Chief Financial Officer on February 6, 2006, upon the appointment of Jeffrey
Fisher as the new Chief Financial Officer. Prior to joining us in March 2000,
Mr. Martin was Vice President and Controller for Operations and Logistics
for
Fort James Corporation, a manufacturer of paper products. From 1995 to February
1999, Mr. Martin was Chief Financial Officer of Rawlings Sporting Goods Company,
Inc. Mr. Martin received a B.S. degree with honors in accounting from the
University of Missouri — St. Louis.
Compensation
Committee Interlocks and Insider Participation
At
the
beginning of 2005, Mr. Lillis and Mr. Merritt served as the Option Plan
Committee which administered the 1999 Charter Communications Option Plan and
the
Charter Communications, Inc. 2001 Stock Incentive Plan and the Compensation
Committee consisted of Messrs. Allen, Lillis and Nathanson. The Option Plan
Committee and the Compensation Committee merged in February 2005 and the
committee then consisted of Messrs. Allen, Merritt and Nathanson. Mr. May joined
the committee in August 2005. The Compensation Committee is currently comprised
of Messrs. Allen, May, Merritt and Nathanson.
No
member
of the Compensation Committee or the Option Plan Committee was an officer or
employee of Charter or any of its subsidiaries during 2005, except for
Mr. Allen, who served as a non-employee chairman of the Compensation
Committee and Mr. May who served in a non-employee capacity as Interim President
and Chief Executive Officer from January 2005 until August 2005. Mr. May joined
the Compensation Committee in August 2005 after his service as Interim President
and Chief Executive Officer. Also, Mr. Nathanson was an officer of certain
subsidiaries of Charter prior to their acquisition by Charter in 1999 and held
the title of Vice Chairman of Charter’s board of directors, a non-executive,
non-salaried position in 2005. Mr. Allen is the 100% owner and a director
of Vulcan Inc. and certain of its affiliates, which employs Mr. Conn and Ms.
Patton as executive officers. Mr. Allen also was a director of and
indirectly owned 98% of TechTV, of which Mr. Wangberg, one of our directors,
was
a director until the sale of TechTV to an unrelated third party in May 2004.
Transactions between Charter and members of the Compensation Committee are
more
fully described in "— Director Compensation" and in "Item 13. Certain
Relationships and Related Transactions — Other Miscellaneous Relationships."
During
2005, (1) none of our executive officers served on the compensation committee
of
any other company that has an executive officer currently serving on the board
of directors, Compensation Committee or Option Plan Committee and (2) none
of
our executive officers served as a director of another entity, one of whose
executive officers served on the Compensation Committee or Option Plan
Committee, except for Carl Vogel who served as a director of Digeo, Inc., an
entity of which Paul Allen is a director and by virtue of his position as
Chairman of the board of directors of Digeo, Inc. is also a non-employee
executive officer. Mr. Lovett was appointed a director of Digeo, Inc. in
December 2005
Section 16
of the Exchange Act requires our directors and certain of our officers, and
persons who own more than 10% of our common stock, to file initial reports
of
ownership and reports of changes in ownership with the SEC. Such persons are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file. Based
96
solely
on
our review of the copies of such forms furnished to us and written
representations from these officers and directors, we believe that all
Section 16(a) filing requirements were met in 2005.
Code
of Ethics
Charter
has adopted a Code of Conduct that constitutes a Code of Ethics within the
meaning of federal securities regulations for our employees, including all
executive officers, and established a hotline and website for reporting alleged
violations of the code of conduct, established procedures for processing
complaints and implemented educational programs to inform our employees
regarding the Code of Conduct. The Code of Conduct is posted on Charter’s
website at www.charter.com.
The
following table sets forth information as of December 31, 2005 regarding the
compensation to those executive officers listed below for services rendered
for
the fiscal years ended December 31, 2003, 2004 and 2005. These officers consist
of three individuals who served as Chief Executive Officer, and each of the
other four most highly compensated executive officers as of December 31,2005.
Annual
Compensation
Long-Term
Compensation
Award
Year
Other
Restricted
Securities
All
Other
Ended
Annual
Stock
Underlying
Compensation
Name
and Principal Position
Dec.
31
Salary
($)
Bonus
($)
Compensation
($)
Awards
($)
Options
(#)
($)(1)
Neil
Smit (2)
2005
415,385
1,200,000
(9)
—
3,278,500
(21)
3,333,333
23,236
(28)
President
and Chief
2004
—
—
—
—
—
—
Executive
Officer
2003
—
—
—
—
—
—
Robert
P. May (3)
2005
—
838,900
(10)
1,360,239
(16)
180,000
(22)
—
—
Former
Interim President and
2004
—
—
10,000
(16)
50,000
(22)
—
—
Chief
Executive Officer
2003
—
—
—
—
—
—
Carl
E. Vogel (4)
2005
115,385
—
1,428
(17)
—
—
1,697,451
(29)
Former
President and Chief
2004
1,038,462
500,000
(11)
38,977
(17)
4,729,400
(23)
580,000
3,239
Executive
Officer
2003
1,000,000
150,000
(12)
40,345
(17)
—
750,000
3,239
Michael
J. Lovett (5)
2005
516,153
377,200
14,898
(18)
265,980
(24)
216,000
59,013
(30)
Executive
Vice President and
2004
291,346
241,888
7,797
(18)
355,710
(24)
172,000
6,994
Chief
Operating Officer
2003
81,731
60,000
2,400
(18)
—
100,000
1,592
Paul
E. Martin (6)
2005
350,950
299,017
(13)
—
52,650
(25)
83,700
7,047
Senior
Vice President,
2004
193,173
25,000
(13)
—
269,100
(25)
77,500
6,530
Principal
Accounting Office
2003
167,308
14,000
—
—
—
4,048
and
Corporate Controller
Wayne
H. Davis (7)
2005
409,615
184,500
—
108,810
(26)
145,800
3,527
Executive
Vice President and
2004
269,231
61,370
(14)
—
435,635
(26)
135,000
2,278
Chief
Technical Officer
2003
212,885
47,500
581
(19)
—
225,000
436
Sue
Ann R. Hamilton (8)
2005
362,700
152,438
—
107,838
(27)
145,000
6,351
Executive
Vice President -
2004
346,000
13,045
—
245,575
(27)
90,000
3,996
Programming
2003
225,000
231,250
(15)
4,444
(20)
—
200,000
1,710
__________
(1)
Except
as noted in Notes 28 through 30 below respectively, these amounts
consist
of matching contributions under our 401(k) plan, premiums for supplemental
life insurance available to executives, and long-term disability
available
to executives.
(2)
Mr.
Smit joined Charter in August 2005 in his current
position.
(3)
Mr.
May served as Interim President and Chief Executive Officer from
January
2005 through August 2005.
(4)
Mr. Vogel
resigned from all of his positions with Charter and its subsidiaries
in
January 2005.
97
(5)
Mr. Lovett
joined Charter in August 2003 and was promoted to his current
position in April 2005.
(6)
Mr.
Martin joined Charter in March 2000. He served as Charter’s Interim Chief
Financial Officer from August 2004 until
February 6, 2006, upon appointment of Jeffrey Fisher as the new Chief
Financial Officer.
(7)
Mr.
Davis joined Charter in December 2001 and was promoted to his current
position in June 2004.
(8)
Ms.
Hamilton joined Charter in March 2003 and was promoted to her current
position in April 2005.
(9)
Pursuant
to his employment agreement, Mr. Smit received a $1,200,000 bonus
for
2005.
(10)
This
bonus was paid pursuant to Mr. May’s Executive Services Agreement. See
"Employment Arrangements."
(11)
Mr. Vogel’s
2004 bonus was a mid-year discretionary bonus.
(12)
Mr. Vogel’s
2003 bonus was determined in accordance with the terms of his employment
agreement.
(13)
Includes
(i) for 2005, a bonus of $50,000 for his services as Interim Co-Chief
Financial Officer and a discretionary bonus of $50,000 and (ii) for
2004,
a SOX implementation bonus of $25,000.
(14)
Mr.
Davis’ 2004 bonus included a $50,000 discretionary
bonus.
(15)
Ms.
Hamilton’s 2003 bonus included a $150,000 signing
bonus.
(16)
Includes
(i) for 2005, $1,177,885 as compensation for services as Interim
President
and Chief Executive Officer pursuant to his Executive Services Agreement
(see "Employment Arrangements"), $67,000 as compensation for services
as a
director on Charter’s Board of Directors, $15,717 attributed to personal
use of the corporate airplane and $99,637 for reimbursement for
transportation and living expenses pursuant to his Executive Services
Agreement, and (ii) for 2004, compensation for services as a director
on
Charter’s Board of Directors.
(17)
Includes
(i) for 2005, $1,428 attributed to personal use of the corporate
airplane,
(ii) for 2004, $28,977 attributed to personal use of the corporate
airplane and $10,000 for tax advisory services, and (iii) for 2003,
$30,345 attributed to personal use of the corporate airplane and
$10,000
for tax advisory services.
(18)
Includes
(i) for 2005, $7,698 attributed to personal use of the corporate
airplane
and $7,200 for automobile allowance, (ii) for 2004, $597 attributed
to
personal use of the corporate airplane and $7,200 for automobile
allowance
and (iii) for 2003, $2,400 for automobile allowance.
(19)
Amount
attributed to personal use of the corporate airplane.
(20)
Amount
attributed to personal use of the corporate airplane.
(21)
Pursuant
to his employment agreement, Mr. Smit received 1,250,000 restricted
shares
in August 2005, which will vest on the first anniversary of the grant
date
and 1,562,500 restricted shares in August 2005, which will vest over
three
years in equal one-third installments. See "Employment Arrangements."
At
December 31, 2005, the value of all of the named officer’s unvested
restricted stock holdings was $3,431,250, based on a per share market
value (closing sale price) of $1.22 for our Class A common stock on
December 31, 2005.
(22)
Includes
(i) for 2005, 100,000 restricted shares granted in April 2005 under
our
2001 Stock Incentive Plan for Mr. May’s services as Interim President and
Chief Executive Officer that vested upon his termination in that
position
in August 2005 and 40,650 restricted shares granted in October 2005
under
our 2001 Stock Incentive Plan for Mr. May’s annual director grant which
vests on the first anniversary of the grant date. At December 31,2005,
the value of all of the named officer’s unvested restricted stock holdings
was $49,593, based on a per share market value (closing sale price)
of
$1.22 for our Class A common stock on December 31, 2005, and (ii) for
2004, 19,685 restricted shares granted in October 2004 under our
2001
Stock Incentive Plan for Mr. May’s annual director grant, which vested on
its first anniversary of the grant date in October
2005.
(23)
Includes
340,000 performance shares granted in January 2004 under our
Long-Term Incentive Program that
98
were
to vest on the third anniversary of the
grant date only if Charter meets certain performance criteria. Also
includes 680,000 restricted shares issued in exchange for stock options
held by the named officer pursuant to the February 2004 option
exchange program described below, one half of which constituted
performance shares which were to vest on the third anniversary of
the
grant date only if Charter meets certain performance criteria, and
the
other half of which were to vest over three years in equal one-third
installments. Under the terms of the separation agreement described
below
in "Employment Arrangements," his options and remaining restricted
stock
vested until December 31, 2005, and all vested options are
exercisable until sixty (60) days thereafter. All performance shares
were forfeited upon termination of employment. All remaining unvested
restricted stock and stock options were cancelled on December 31,2005.
Therefore, at December 31, 2005, the value of all of the named officer’s
unvested restricted stock holdings was $0, based on a per share market
value (closing sale price) of $1.22 for our Class A common stock on
December 31, 2005.
(24)
Includes
(i) for 2005, 129,600 performance shares granted in April 2005 under
our
Long-Term Incentive Program which will vest on the third anniversary
of
the grant date only if Charter meets certain performance criteria
and
75,000 restricted shares granted in April 2005 under our 2001 Stock
Incentive Plan that will vest on the third anniversary of the grant
date,
and (ii) for 2004, 88,000 performance shares granted under our Long-Term
Incentive Program that will vest on the third anniversary of the
grant
date only if Charter meets certain performance criteria. At December31,2005, the value of all of the named officer’s unvested restricted stock
holdings (including performance shares) was $356,972, based on a
per share
market value (closing sale price) of $1.22 for our Class A common
stock on December 31, 2005.
(25)
Includes
(i) for 2005, 40,500 performance shares granted under our Long-Term
Incentive Program that will vest on the third anniversary of the
grant
date only if Charter meets certain performance criteria, and (ii)
for
2004, 37,500 performance shares granted in January 2004 under our
Long-Term Incentive Program which will vest on the third anniversary
of
the grant date only if Charter meets certain performance criteria
and
17,214 restricted shares issued in exchange for stock options held
by the
named officer pursuant to the February 2004 option exchange program
described below, one half of which constituted performance shares
which
will vest on the third anniversary of the grant date only if Charter
meets
certain performance criteria, and the other half of which will vest
over
three years in equal one-third installments. At December 31, 2005,
the
value of all of the named officer’s unvested restricted stock holdings
(including performance shares) was $112,661, based on a per share
market
value (closing sale price) of $1.22 for our Class A common stock on
December 31, 2005.
(26)
Includes
(i) for 2005, 83,700 performance shares granted under our Long-Term
Incentive Program that will vest on the third anniversary of the
grant
date only if Charter meets certain performance criteria, and (ii)
for
2004, 77,500 performance shares granted in January 2004 under our
Long-Term Incentive Program which will vest on the third anniversary
of
the grant date only if Charter meets certain performance criteria
and
8,000 restricted shares issued in exchange for stock options held
by the
named officer pursuant to the February 2004 option exchange program
described below, one half of which constituted performance shares
which
will vest on the third anniversary of the grant date only if Charter
meets
certain performance criteria, and the other half of which will vest
over
three years in equal one-third installments. At December 31, 2005,
the
value of all of the named officer’s unvested restricted stock holdings
(including performance shares) was $204,797, based on a per share
market
value (closing sale price) of $1.22 for our Class A common stock on
December 31, 2005.
(27)
These
restricted shares consist of 83,700 and 47,500 performance shares
granted
in 2005 and 2004, respectively, under our Long-Term Incentive Program
that
will vest on the third anniversary of the grant date only if Charter
meets
certain performance criteria. At December 31, 2005, the value of
all of
the named officer’s unvested restricted stock holdings (including
performance shares) was $160,064 based on a per share market value
(closing sale price) of $1.22 for our Class A common stock on
December 31, 2005.
(28)
In
addition to items in Note 1 above, includes $19,697 attributed to
reimbursement for taxes (on a "grossed up" basis) paid in respect
of prior
reimbursements for relocation expenses.
(29)
In
addition to items in Note 1 above, includes accrued vacation at time
of
termination and severance payments pursuant to Mr. Vogel’s separation
agreement. (see "Employment Arrangements.")
(30)
In
addition to items in Note 1 above, includes $51,223 attributed to
reimbursement for taxes (on a "grossed up" basis) paid in respect
of prior
reimbursements for relocation
expenses.
99
2005
Option Grants
The
following table shows individual grants of options made to individuals named
in
the Summary Compensation Table during 2005. All such grants were made under
the
2001 Stock Incentive Plan and the exercise price was based upon the fair market
value of Charter’s Class A common stock on the respective grant
dates.
Number
of
%
of
Securities
Total
Potential
Realizable Value at
Underlying
Options
Assumed
Annual Rate of
Options
Granted
to
Exercise
Stock
Price Appreciation
Granted
Employees
Price
Expiration
For
Option Term (2)
Name
(#)(1)
in
2005
($/Sh)
Date
5%
($)
10%
($)
Neil
Smit
3,333,333
30.83
%
$
1.18
8/22/2015
$
2,465,267
$
6,247,470
Robert
P. May
—
—
—
—
—
—
Carl
E. Vogel
—
—
—
—
—
—
Michael
J. Lovett
216,000
2.00
%
1.30
4/26/2015
175,914
445,802
Paul
E. Martin
83,700
0.77
%
1.30
4/26/2015
68,430
173,415
Wayne
H. Davis
145,800
1.35
%
1.30
4/26/2015
118,742
300,916
Sue
Ann R. Hamilton
97,200
0.90
%
1.53
3/25/2015
93,221
236,240
47,800
0.44
%
1.27
10/18/2015
38,208
96,826
(1)
Options
are transferable under limited conditions, primarily to accommodate
estate
planning purposes. These options generally vest in four equal installments
commencing on the first anniversary following the grant
date.
(2)
This
column shows the hypothetical gains on the options granted based
on
assumed annual compound price appreciation of 5% and 10% over the
full
ten-year term of the options. The assumed rates of 5% and 10% appreciation
are mandated by the SEC and do not represent our estimate or projection
of
future prices.
2005
Aggregated Option Exercises and Option Value
The
following table sets forth, for the individuals named in the Summary
Compensation Table, (i) information concerning options exercised during 2005,
(ii) the number of shares of our Class A common stock underlying unexercised
options at year-end 2005, and (iii) the value of unexercised "in-the-money''
options (i.e., the positive spread between the exercise price of outstanding
options and the market value of our Class A common stock) on December 31,2005.
Options
granted prior to 2001 and under the 1999 Charter Communications Option
Plan, when vested, are exercisable for membership units of Charter
Holdco
which are immediately exchanged on a one-for-one basis for shares
of our
Class A common stock upon exercise of the option. Options granted
under
the 2001 Stock Incentive Plan and after 2000 are exercisable for
shares of
our Class A common stock.
(2)
Based
on a per share market value (closing price) of $1.22 as of December31,2005 for our Class A common stock.
100
(3)
Mr.
Vogel’s employment terminated on January 17, 2005. Under the terms of the
separation agreement, his options will continue to vest until December31,2005, and all vested options are exercisable until sixty (60) days
thereafter.
Long
- Term Incentive Plans - Awards in Last Fiscal Year
Estimated
Future Payouts Under
Non-Stock
Price-Based Plans
Name
Number
of
Shares,
Units or Other
Rights (#)
Performance
or
Other
Period Until Maturation
or Payout
Threshold
(#)
Target
(#)
Maximum
(#)
Neil
Smit
-
n/a
-
-
-
Robert
P. May
-
n/a
-
-
-
Carl
E. Vogel
-
n/a
-
-
-
Michael
J. Lovett
129,600
1
year performance cycle
90,720
129,600
259,200
3
year vesting
Paul
E. Martin
40,500
1
year performance cycle
28,350
40,500
81,000
3
year vesting
Wayne
H. Davis
83,700
1
year performance cycle
58,590
83,700
167,400
3
year vesting
Sue
Ann R. Hamilton
83,700
1
year performance cycle
58,590
83,700
167,400
3
year vesting
Option/Stock
Incentive Plans
The
Plans. We
have
granted stock options, restricted stock and other incentive compensation under
two plans — the 1999 Charter Communications Option Plan and the 2001 Stock
Incentive Plan. The 1999 Charter Communications Option Plan provided for the
grant of options to purchase membership units in Charter Holdco to current
and
prospective employees and consultants of Charter Holdco and its affiliates
and
to our current and prospective non-employee directors. Membership units received
upon exercise of any options are immediately exchanged for shares of Charter
Class A common stock on a one-for-one basis.
The
2001
Stock Incentive Plan provides 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 (not to exceed 20,000,000 shares) as each term is defined in the 2001
Stock Incentive Plan. Employees, officers, consultants and directors of Charter
and its subsidiaries and affiliates are eligible to receive grants under the
2001 Stock Incentive Plan. Generally, options expire 10 years from the
grant date. Unless sooner terminated by our board of directors, the 2001 Stock
Incentive Plan will terminate on February 12, 2011, and no option or award
can be granted thereafter.
Together,
the plans allow for the issuance of up to a total of 90,000,000 shares of our
Class A common stock (or units exchangeable for our Class A common stock).
Any
shares covered by options that are terminated under the 1999 Charter
Communications Option Plan will be transferred to the 2001 Stock Incentive
Plan,
and no new options will be granted under the 1999 Charter Communications Option
Plan. At December 31, 2005, 1,317,520 shares had been issued under the plans
upon exercise of options, 825,725 had been issued upon vesting of restricted
stock granted under the plans, and 4,252,570 shares were subject to future
vesting under restricted stock agreements. Of the remaining 83,604,185 shares
covered by the plans, as of December 31, 2005, 29,126,744 were subject to
outstanding options (34% of which were vested), and there were 11,719,032
performance shares granted under Charter's Long-Term Incentive Program as of
December 31, 2005, to vest on the third anniversary of the date of grant
conditional upon Charter's performance against certain financial targets
approved by Charter's board of directors at the time of the award. As of
December 31, 2005, 42,758,409 shares remained available for future grants under
the plans. As of December 31, 2005, there were 5,341 participants in the
plans.
The
plans
authorize the repricing of options, which could include reducing the exercise
price per share of any outstanding option, permitting the cancellation,
forfeiture or tender of outstanding options in exchange for other awards or
for
new options with a lower exercise price per share, or repricing or replacing
any
outstanding options by any other method.
101
Long-Term
Incentive Plan. In
January 2004, the Compensation Committee of our board of directors approved
our
Long-Term Incentive Program, or LTIP, which is a program administered under
the
2001 Stock Incentive Plan. Under the LTIP, employees of Charter and its
subsidiaries whose pay classifications exceeda
certain
level are eligible to receive stock options, and more senior level employees
were eligible to receive stock options and performance shares. The stock options
vest 25% on each of the first four anniversaries of the date of grant. The
performance shares vest on the third anniversary of the date of grant shares
at
the end of a three-year performance cycle and shares of Class A common stock
are
issued, conditional upon our performance against financial performance measures
established by our management and approved by the board of directors or
Compensation Committee as of the time of the award. We granted 3.2 million
performance shares in 2005 under this program except that the 2005 performance
share grants are based on a one-year performance cycle. We recognized expense
of
$1 million in the first three quarters of 2005. However, in the fourth quarter
of 2005, we reversed the entire $1 million of expense based on our assessment
of
the probability of achieving the financial performance measures established
by
management and required to be met for the performance shares to vest. In
February 2006, the Compensation Committee approved a modification to the
financial performance measures required to be met for the performance shares
to
vest after which management believes that approximately 2.5 million of the
performance shares are likely to vest. As such, expense of approximately $3
will
be amortized over the remaining two year service period.
The
2001
Stock Incentive Plan must be administered by, and grants and awards to eligible
individuals must be approved by our board of directors or a committee thereof
consisting solely of nonemployee directors as defined in Section 16b-3 under
the
Securities Exchange Act of 1934, as amended. The board of directors or such
committee determines the terms of each stock option grant, restricted stock
grant or other award at the time of grant, including the exercise price to
be
paid for the shares, the vesting schedule for each option, the price, if any,
to
be paid by the grantee for the restricted stock, the restrictions placed on
the
shares, and the time or times when the restrictions will lapse. The board of
directors or such committee also has the power to accelerate the vesting of
any
grant or extend the term thereof.
Upon
a
change of control of Charter, the board of directors or the administering
committee can shorten the exercise period of any option, have the survivor
or
successor entity assume the options with appropriate adjustments, or cancel
options and pay out in cash. If an optionee’s or grantee’s employment is
terminated without "cause" or for "good reason" following a "change in control"
(as those terms are defined in the plans), unless otherwise provided in an
agreement, with respect to such optionee’s or grantee’s awards under the plans,
all outstanding options will become immediately and fully exercisable, all
outstanding stock appreciation rights will become immediately and fully
exercisable, the restrictions on the outstanding restricted stock will lapse,
and all of the outstanding performance shares will vest and the restrictions
on
all of the outstanding performance shares will lapse as if all performance
objectives had been satisfied at the maximum level.
February
2004 Option Exchange. In
January 2004, we offered employees of Charter and its subsidiaries the right
to
exchange all stock options (vested and unvested) under the 1999 Charter
Communications Option Plan and 2001 Stock Incentive Plan that had an exercise
price over $10 per share for shares of restricted Charter Class A common stock
or, in some instances, cash. Based
on
a sliding exchange ratio, which varied depending on the exercise price of an
employee’s outstanding options, if an employee would have received more than 400
shares of restricted stock in exchange for tendered options, we issued to that
employee shares of restricted stock in the exchange. If, based on the exchange
ratios, an employee would have received 400 or fewer shares of restricted stock
in exchange for tendered options, we instead paid to the employee cash in an
amount equal to the number of shares the employee would have received multiplied
by $5.00. The
offer
applied to options to purchase a total of 22,929,573 shares of Class A common
stock, or approximately 48% of our 47,882,365 total options (vested and
unvested) issued and outstanding as of December 31, 2003. Participation by
employees was voluntary. Non-employee members of the board of directors of
Charter or any of its subsidiaries were not eligible to participate in the
exchange offer.
In
the
closing of the exchange offer on February 20, 2004, we accepted for cancellation
eligible options to purchase approximately 18,137,664 shares of our Class A
common stock. In exchange, we granted approximately 1,966,686 shares of
restricted stock, including 460,777 performance shares to eligible employees
of
the rank of senior vice president and above, and paid a total cash amount of
approximately $4 million (which amount includes applicable withholding taxes)
to
those employees who received cash rather than shares of restricted stock. The
restricted stock was granted on February 25, 2004. Employees tendered
approximately 79% of the options eligible to be exchanged under the program.
102
The
cost
of the stock option exchange program was approximately $10 million, with a
2004
cash compensation expense of approximately $4 million and a non-cash
compensation expense of approximately $6 million to be expensed ratably over
the
three-year vesting period of the restricted stock issued in the
exchange.
The
participation of the Named Executive Officers in this exchange offer is
reflected in the following table:
Name
Date
Number
of
Securities
Underlying
Options
Exchanged
Market
Price of
Stock
at Time
of
Exchange
($)
Exercise
Price
at
Time of
Exchange
($)
New
Exercise
Price
($)
Length
of Original
Option
Term
Remaining
at
Date
of Exchange
Carl
E. Vogel
2/25/04
3,400,000
$4.37
$13.68
(1)
7
years 7 months
Former
President and Chief Executive Officer
Paul
E. Martin
2/25/04
15,000
4.37
23.09
(2)
7
years 0 months
Senior
Vice
50,000
4.37
11.99
7
years 7 months
President,
Principal
40,000
4.37
15.03
6
years 3 months
Accounting
Officer and Corporate Controller
Wayne
H. Davis
2/25/04
40,000
4.37
23.09
(3)
7
years 0 months
Executive
Vice
40,000
4.37
12.27
7
years 11 months
President
and Chief Technical Officer
(1)
On
February 25, 2004, in exchange for 3,400,000 options tendered, 340,000
performance shares were granted with a three year performance cycle
and
three year vesting along with 340,000 restricted stock units with
one-third of the shares vesting on each of the first three anniversaries
of the grant date. On the grant date, the price of our common stock
was
$4.37.
(2)
On
February 25, 2004, in exchange for 105,000 options tendered, 8,607
performance shares were granted with a three year performance cycle
and
three year vesting along with 8,607 restricted stock units with one-third
of the shares vesting on each of the first three anniversaries of
the
grant date. On the grant date, the price of our common stock was
$4.37.
(3)
On
February 25, 2004, in exchange for 80,000 options tendered, 4,000
performance shares were granted with a three year performance cycle
and
three year vesting along with 4,000 restricted stock units with one-third
of the shares vesting on each of the first three anniversaries of
the
grant date. On the grant date, the price of our common stock was
$4.37.
2005
Executive Cash Award Plan
In
June
2005, Charter adopted the 2005 Executive Cash Award Plan to provide additional
incentive to, and retain the services of, certain officers of Charter and its
subsidiaries, to achieve the highest level of individual performance and
contribute to the success of Charter. Eligible participants are employees of
Charter or any of its subsidiaries who have been recommended by the CEO and
designated and approved as Plan participants by the Compensation Committee
of
Charter’s board of directors. At the time the Plan was adopted, the interim CEO
recommended and the Compensation Committee designated and approved as Plan
participants the permanent President and Chief Executive Officer position,
Executive Vice President positions and selected Senior Vice President
positions.
The
Plan
provides that each participant be granted an award which represents an
opportunity to receive cash payments in accordance with the Plan. An award
will
be credited in book entry format to a participant’s account in an amount equal
to 100% of a participant’s base salary on the date of Plan approval in 2005 and
20% of participant’s base salary in each year 2006 through 2009, based on that
participant’s base salary as of May 1 of the applicable year. The Plan awards
will vest at the rate of 50% of the plan award balance at the end of 2007 and
100% of the plan award balance at the end of 2009. Participants will be entitled
to receive payment of the vested portion of the
103
award
if
the participant remains employed by Charter continuously from the date of the
participant’s initial participation through the end of the calendar year in
which his or her award becomes vested, subject to payment of pro-rated award
balances to a participant who terminates due to death or disability or in the
event Charter elects to terminate the Plan.
A
participant’s eligibility for, and right to receive, any payment under the Plan
(except in the case of intervening death) is conditioned upon the participant
first executing and delivering to Charter an agreement releasing and giving
up
all claims that participant may have against Charter and related parties arising
out of or based upon any facts or conduct occurring prior to the payment date,
and containing additional restrictions on post-employment use of confidential
information, non-competition and nonsolicitation and recruitment of customers
and employees.
Employment
Arrangementsand
Related Agreements
Charter
and Neil Smit entered into an agreement as of August 9, 2005 whereby Mr. Smit
will serve as Charter’s President and Chief Executive Officer (the "Employment
Agreement") for a term expiring on December 31, 2008, and Charter may extend
the
agreement for an additional two years by giving Mr. Smit written notice of
its
intent to extend not less than six months prior to the expiration of the
contract (Mr. Smit has the right to reject the extension within a certain time
period as set forth defined in the contract). Under the Employment Agreement,
Mr. Smit will receive a $1,200,000 base salary per year, through the third
anniversary of the agreement, and thereafter $1,440,000 per year for the
remainder of the Employment Agreement. Mr. Smit shall be eligible to receive
a
performance-based target bonus of 125% of annualized salary, with a maximum
bonus of 200% of annualized salary, as determined by the Compensation Committee
of Charter’s Board of Directors. However, for 2005 only, he will receive a
minimum bonus of $1,200,000, provided that he is employed by Charter on December31, 2005. Under Charter’s Long-Term Incentive Plan he will receive options to
purchase 3,333,333 shares of Class A common stock, exercisable for 10 years,
with annual vesting of one-third of the grant in each of the three years from
the employment date; a performance share award for a maximum of 4,123,720 shares
of Class A common stock, to be earned during a three-year performance cycle
starting January 2006; and a restricted stock award of 1,562,500 shares of
Class
A common stock, with annual vesting over three years following employment date.
In addition, Mr. Smit will receive another restricted stock award for 1,250,000
shares of Class A common stock vesting on the first anniversary of employment
date.
Mr.
Smit
will receive full reimbursement for his relocation expenses and employee
benefits consistent with those made generally available to other senior
executives. In the event that Mr. Smit is terminated by Charter without "cause"
or for "good reason termination," as those terms are defined in the Employment
Agreement, he will receive the greater of two times base salary or salary
through the remainder to the term of the Employment Agreement; a pro rata bonus
for the year of termination; full vesting of options and restricted shares;
vesting of performance stock if targets are achieved; and a lump sum payment
equal to twelve months of COBRA payments. The Employment Agreement contains
non-compete provisions from six months to two years, depending on the type
of
termination. Charter will gross up federal taxes in the event that Mr. Smit
is
subject to any additional tax under Section 409A of the Internal Revenue
Code.
Charter
entered into an agreement with Mr. May, effective January 17, 2005, whereby
Mr.
May served as Charter's Interim President and Chief Executive Officer (the
"May
Executive Services Agreement''). Under the May Executive Services Agreement,
Mr.
May received a $1,250,000 base fee per year. Mr. May continued to receive the
compensation and reimbursement of expenses to which he was entitled in his
capacity as a member of Charter’s board of directors Mr. May’s employment
agreement provided that Charter would provide equity incentives commensurate
with his position and responsibilities, as determined by Charter’s board of
directors. Accordingly, Mr. May was granted 100,000 shares of restricted stock
under Charter’s 2001 Stock Incentive Plan. The 100,000 restricted shares vested
on the date on which Mr. May’s interim service as President and Chief Executive
Officer terminated, August 22, 2005. Mr. May served as an independent contractor
and was not entitled to any vacation or eligible to participate in any employee
benefit programs of Charter. Charter reimbursed Mr. May for reasonable
transportation costs from Mr. May’s residence in Florida or other locations to
Charter’s offices and provided temporary living quarters or reimbursed expenses
related thereto. The May Executive Services Agreement was terminated effective
December 31, 2005 and upon termination of the Agreement, Mr. May was eligible
for a bonus payment. On January 5, 2006, Charter paid him a bonus of $750,000,
with the possibility that such bonus would be increased by an additional
percentage. In February 2006, Charter’s Compensation Committee approved an
additional bonus of approximately $88,900 for Mr. May.
On
April1, 2005, Charter entered into an employment agreement with Mr. Lovett, pursuant
to which he will be employed as Charter’s Executive Vice President and Chief
Operating Officer for a term commencing April 1, 2005
104
and
expiring on April 1, 2008. The contract will be reviewed every 18 months
thereafter and may be extended pursuant to such reviews. Under the agreement,
Mr. Lovett will receive an annual base salary of $575,000 and will be eligible
to receive an annual bonus targeted at 80% of his base salary under our senior
management bonus plan. Charter agreed to provide Mr. Lovett with equity
incentives commensurate with his position and responsibilities, as determined
by
Charter’s board of directors in its discretion. Accordingly, Mr. Lovett has been
granted 75,000 shares of restricted stock under Charter’s 2001 Stock Incentive
Plan. The 75,000 restricted shares will vest one third on each of the first
three anniversaries of the date of grant (unless there is an earlier termination
event for Cause, as defined in Charter’s 2001 Stock Incentive Plan). If his
employment is terminated without cause or if he terminates his employment due
to
a change in control or for good reason (as defined in the agreement), Charter
will pay Mr. Lovett an amount equal to the aggregate base salary due to Mr.
Lovett during the remainder of the term, within fifteen days of termination.
In
addition, if Charter terminates his employment without cause, Mr. Lovett will
be
entitled to receive a pro rated bonus for the fiscal year in which he is
terminated based upon financial results through the month of termination. Mr.
Lovett’s agreement includes a covenant not to compete for the balance of the
term and for two years thereafter. The agreement further provides that Mr.
Lovett is entitled to receive certain relocation expenses and to participate
in
any benefit plan generally afforded to, and to receive vacation and sick pay
on
such terms as are offered to, Charter’s other senior executive
officers.
As
of
January 20, 2006, Charter entered into an employment agreement with Mr. Fisher,
Executive Vice President and Chief Executive Officer (the "Employment
Agreement"). The Employment Agreement provides that Mr. Fisher will serve in
an
executive capacity as its Executive Vice President at a salary of $500,000,
to
perform such executive, managerial and administrative duties as are assigned
or
delegated by President and/or Chief Executive Officer, including but not limited
to serving as Chief Financial Officer. The term of the Employment Agreement
is
two years from the effective date. Under the Employment Agreement, Mr. Fisher
will receive a signing bonus of $100,000 and he shall be eligible to receive
a
performance-based target bonus of up to 70% of salary and to participate in
the
Long-Term Incentive Plan and to receive such other employee benefits as are
available to other senior executives. Mr. Fisher will participate in the 2005
Executive Cash Award Plan commencing in 2006 and, in addition, Charter will
provide the same additional benefit to Mr. Fisher that he would have been
entitled to receive under the Cash Award Plan if he had participated in the
Plan
at the time of the inception of the Plan in 2005. He will also receive a grant
of 50,000 restricted shares of Charter's Class A common stock, vesting in equal
installments over a three-year period from employment date; an award of options
to purchase 1,000,000 shares of Charter's Class A common stock under terms
of
the Stock Incentive Plan on the effective date of the Employment Agreement;
and
in the first quarter of 2006, an award of additional options to purchase 145,800
shares of Charter's Class A common stock under the stock incentive plan. Those
options shall vest in equal installments over a four-year time period from
the
grant date. In addition, in the first quarter of 2006, he will receive 83,700
performance shares under the Stock Incentive Plan and will be eligible to earn
these shares over a three-year performance cycle from January 2006 to December
2008.
Mr.
Fisher will receive relocation assistance pursuant to Charter's executive
homeowner relocation plan and the costs for temporary housing. In the
event that Mr. Fisher is terminated by Charter without "cause'' or for "good
reason,'' as those terms are defined in the Employment Agreement, Mr. Fisher
will receive his salary for the remainder of the term of the agreement or twelve
months' salary, whichever is greater; a pro rata bonus for the year of
termination; a lump sum payment equal to payments due under COBRA for the
greater of twelve months or the number of full months remaining in the term
of
the agreement; and the vesting of options and restricted stock for as long
as
severance payments are made. The Employment Agreement contains a one-year
non-compete provision (or until the end of the term of the agreement, if longer)
and a two-year non-solicitation clause.
On
September 7, 2005, Charter entered into an employment agreement with Mr. Davis,
Executive Vice President and Chief Technical Officer. The agreement provides
that Mr. Davis shall be employed in an executive capacity to perform such duties
as are assigned or delegated by the President and Chief Executive Officer or
the
designee thereof, at a salary of $450,000. The term of this agreement is two
years from the date of the agreement. Mr. Davis shall be eligible to participate
in Charter’s Long-Term Incentive Plan, Stock Option Plan and to receive such
employee benefits as are available to other senior executives. In the event
that
he is terminated by Charter without "cause" or for "good reason," as those
terms
are defined in the agreement, he will receive his salary for the remainder
of
the term of the agreement or twelve months’ salary, whichever is greater; a pro
rata bonus for the year of termination; a lump sum payment equal to payments
due
under COBRA for the greater of twelve months or the number of full months
remaining in the term of the agreement; and the vesting of options and
restricted stock for as long as severance payments are made. The agreement
contains one-year, non-compete provisions (or until the end of the term of
the
agreement, if longer) in a Competitive Business, as such term is defined in
the
agreements, and two-year non-solicitation clauses.
105
Effective
January 9, 2006, Charter entered into a retention agreement with Mr. Martin,
Senior Vice President, Principal Accounting Officer and Corporate Controller,
in
which Mr. Martin agreed to remain as Interim Chief Financial Officer until
at
least March 31, 2006 or such time as Charter reassigns or terminates his
employment, whichever occurs first ("Termination Date"). On the Termination
Date, Charter will pay Mr. Martin a special retention bonus in a lump sum of
$116,200. This special retention bonus is in addition to any amounts due to
Mr.
Martin under the 2005 Executive Bonus Plan and to any other severance amounts,
set forth below. Mr. Martin will not participate in any executive incentive
or
bonus plan for 2006 unless otherwise agreed to by the parties. In addition,
pursuant to this agreement, Charter will treat (a) any termination of Mr.
Martin's employment by Charter without Cause, and other than due to Death or
Disability, as such terms are defined in his previously-executed Employment
Agreement, after January 1, 2006, and (b) any termination by Mr. Martin of
his
employment for any reason after April 1, 2006 (including voluntary resignation),
as if his employment terminated without Cause and Charter will pay as severance
to Mr. Martin an amount calculated pursuant to his Employment Agreement on
the
basis of his base salary as Controller and without regard to any additional
compensation he had been receiving as Interim Chief Financial Officer. He will
also receive three months of outplacement assistance at a level and from a
provider selected by Charter in its sole discretion.
On
September 2, 2005, Charter entered into an employment agreement with Mr. Martin.
The agreement provides that Mr. Martin shall be employed in an executive
capacity to perform such duties as are assigned or delegated by the President
and Chief Executive Officer or the designee thereof, at a salary of $240,625.
The term of this agreement is two years from the date of the agreement. Mr.
Martin shall be eligible to participate in Charter’s Long-Term Incentive Plan,
Stock Option Plan and to receive such employee benefits as are available to
other senior executives. In the event that he is terminated by Charter without
"cause" or for "good reason," as those terms are defined in the agreement,
he
will receive his salary for the remainder of the term of the agreement or twelve
months’ salary, whichever is greater; a pro rata bonus for the year of
termination; a lump sum payment equal to payments due under COBRA for the
greater of twelve months or the number of full months remaining in the term
of
the agreement; and the vesting of options and restricted stock for as long
as
severance payments are made. The agreement contains one-year, non-compete
provisions (or until the end of the term of the agreement, if longer) in a
Competitive Business, as such term is defined in the agreements, and two-year
non-solicitation clauses.
Effective
April 15, 2005, Charter also entered into an agreement governing the terms
of
the service of Mr. Martin as Interim Chief Financial Officer. Under the terms
of
the agreement, Mr. Martin will receive approximately $13,700 each month for
his
service in the capacity of Interim Chief Financial Officer until a permanent
Chief Financial Officer is employed. Under the agreement, Mr. Martin will also
be eligible to receive an additional bonus opportunity of up to approximately
$13,600 per month served as Interim Chief Financial Officer, payable in
accordance with Charter’s 2005 Executive Bonus Plan. The amounts payable to Mr.
Martin under the agreement are in addition to all other amounts Mr. Martin
receives for his services in his capacity as Senior Vice President, Principal
Accounting Officer and Corporate Controller. In addition, Mr. Martin received
an
additional special bonus of $50,000 for his service as Interim co-Chief
Financial Officer prior to April 15, 2005. This amount is in addition to the
bonus agreed upon in 2004 for his service in that capacity through March 31,2005.
On
October 31, 2005, Charter entered into an employment agreement with Ms.
Hamilton, Executive Vice President, Programming. The agreement provides that
Ms.
Hamilton shall be employed in an executive capacity to perform such duties
as
are assigned or delegated by the President and Chief Executive Officer or the
designee thereof, at a salary of $371,800. The term of this agreement is two
years from the date of the agreement. She shall be eligible to participate
in
Charter’s incentive bonus plan that applies to senior executives, Stock Option
Plan and to receive such employee benefits as are available to other senior
executives. In the event that Ms. Hamilton is terminated by Charter without
"cause" or for "good reason," as those terms are defined in the employment
agreement, Hamilton will receive her salary for the remainder of the term of
the
agreement or twelve months’ salary, whichever is greater; a pro rata bonus for
the year of termination; a lump sum payment equal to payments due under COBRA
for the greater of twelve months or the number of full months remaining in
the
term of the agreement; and the vesting of options and restricted stock for
as
long as severance payments are made. The employment agreement contains a
one-year non-compete provision (or until the end of the term of the agreement,
if longer) in a Competitive Business, as such term is defined in the agreements,
and two-year non-solicitation clauses.
On
November 14, 2005, Charter executed an employment agreement with Mr. Raclin,
effective as of October 10, 2005. The agreement provides that Mr. Raclin shall
be employed in an executive capacity as Executive Vice President and General
Counsel with management responsibility for Charter’s legal affairs, governmental
affairs, compliance and regulatory functions and to perform such other legal,
executive, managerial and administrative duties as are assigned or delegated
by
the Chief Executive Officer or the equivalent position, at a salary of $425,000,
to be reviewed on an annual basis. The agreement also provides for a one time
signing bonus of $200,000, the grant
106
of
50,000
restricted shares of Charter Class A common stock, an option to purchase 100,000
shares of Charter common stock under the 2001 Stock Incentive Plan, an option
to
purchase 145,800 shares of Charter common stock under the Long-Term Incentive
portion of the 2001 Stock Incentive Plan, and 62,775 performance shares under
the 2001 Stock Incentive Plan. He shall be eligible to participate in the
incentive bonus plan, the 2005 Executive Cash Award Plan and to receive such
other employee benefits as are available to other senior executives. The term
of
this agreement is two years from the effective date of the agreement. In the
event that Mr. Raclin is terminated by Charter without "cause" or by Mr. Raclin
for "good reason," as those terms are defined in the employment agreement,
Mr.
Raclin will receive (a) if such termination occurs before the first scheduled
payout of the executive cash award plan (unless that failure is due to his
failure to execute the required related agreement) or at any time within one
year after a change of control as defined in the agreement, two (2) times his
salary or (b) if such termination occurs at any other time, his salary for
the
remainder of the term of the agreement or twelve months’ salary, whichever is
greater; a pro rata bonus for the year of termination; a lump sum payment equal
to payments due under COBRA for the greater of twelve months or the number
of
full months remaining in the term of the agreement; and the vesting of options
and restricted stock for as long as severance payments are made. The employment
agreement contains a one-year non-compete provision (or until the end of the
term of the agreement, if longer) in a Competitive Business, as such term is
defined in the agreement, and a two-year non-solicitation clause. Mr. Raclin
is
entitled to relocation assistance pursuant to Charter’s executive homeowner
relocation plan and the costs for temporary housing until he consummates the
purchase of a home in the St. Louis area or August 16, 2006, whichever occurs
first.
On
December 9, 2005, Charter executed an employment agreement with Mr. Quigley.
The
agreement provides that Mr. Quigley shall be employed in an executive capacity
to perform such executive, managerial and administrative duties as are assigned
or delegated by the President and Chief Executive Officer or the designee
thereof, at a salary of $450,000. He shall be eligible to participate in the
incentive bonus plan, stock option plan and to receive such other employee
benefits as are available to other senior executives. The term of this agreement
is two years from the effective date of the agreement. In the event that Mr.
Quigley is terminated by Charter without "cause'' or by Mr. Quigley for "good
reason,'' as those terms are defined in the employment agreement, Mr. Quigley
will receive his salary for the remainder of the term of the agreement or twelve
months' salary, whichever is greater; a pro rata bonus for the year of
termination; a lump sum payment equal to payments due under COBRA for the
greater of twelve months or the number of full months remaining in the term
of
the agreement; and the vesting of options and restricted stock for as long
as
severance payments are made. The employment agreement contains a one-year
non-compete provision (or until the end of the term of the agreement, if longer)
in a Competitive Business, as such term is defined in the agreements, and
two-year non-solicitation clauses. In addition, at the time of his employment,
Charter agreed to pay him a signing bonus of $200,000 deferred until January
2006; grant options to purchase 145,800 shares of Class A common stock under
our
2001 Stock Incentive Plan; 83,700 performance shares under our 2001 Stock
Incentive Plan; and 50,000 shares of restricted stock which will vest over
a
three year period.
Until
his
resignation in January 2005, Mr. Vogel was employed as President and Chief
Executive Officer, earning a base annual salary of $1,000,000 and was eligible
to receive an annual bonus of up to $500,000, a portion of which was based
on
personal performance goals and a portion of which was based on company
performance measured against criteria established by the board of directors
of
Charter with Mr. Vogel. Pursuant to his employment agreement, Mr. Vogel was
granted 3,400,000 options to purchase Class A common stock and 50,000 shares
of
restricted stock under our 2001 Stock Incentive Plan. In the February 2004
option exchange, Mr. Vogel exchanged his 3,400,000 options for 340,000 shares
of
restricted stock and 340,000 performance shares. Mr. Vogel's initial 50,000
restricted shares vested 25% on the grant date, with the remainder vesting
in 36
equal monthly installments beginning December 2002. The 340,000 shares of
restricted stock were to vest over a three-year period, with one-third of the
shares vesting on each of the first three anniversaries of the grant date.
The
340,000 performance shares were to vest at the end of a three-year period if
certain financial criteria were met. Mr. Vogel's agreement provided that, if
Mr.
Vogel is terminated without cause or if Mr. Vogel terminated the agreement
for
good reason, he is entitled to his aggregate base salary due during the
remainder of the term and full prorated benefits and bonus for the year in
which
termination occurs. Mr. Vogel's agreement included a covenant not to compete
for
the balance of the initial term or any renewal term, but no more than one year
in the event of termination without cause or by Mr. Vogel with good reason.
Mr.
Vogel's agreement entitled him to participate in any disability insurance,
pensions or other benefit plans afforded to employees generally or to our
executives, including our LTIP. We agreed to reimburse Mr. Vogel annually for
the cost of term life insurance in the amount of $5 million, although he
declined this reimbursement in 2003, 2004 and 2005. Mr. Vogel was entitled
to
reimbursement of fees and dues for his membership in a country club of his
choice, which he declined in 2003, 2004 and 2005, and reimbursement for up
to
$10,000 per year for tax, legal and financial planning services. His agreement
also provided for a car and associated expenses for Mr. Vogel's use. Mr. Vogel's
agreement provided for automatic one-year renewals and also provided that we
would cause him to be elected to our board of directors without any additional
compensation.
107
In
February 2005, Charter entered into an agreement with Mr. Vogel setting forth
the terms of his resignation. Under the terms of the agreement, Mr. Vogel
received in February 2005 all accrued and unpaid base salary and vacation pay
through the date of resignation and a lump sum payment equal to the remainder
of
his base salary during 2005 (totaling $953,425). In addition, he received a
lump
sum cash payment of approximately $358,000 in January 2006, which represented
the agreed upon payment of $500,000 reduced to the extent of compensation
attributable to certain competitive activities.
Mr.
Vogel
continued to receive certain health benefits during 2005 and will receive COBRA
premiums for such health insurance coverage for 18 months thereafter. All of
his
outstanding stock options, as well as his restricted stock granted in 2004
(excluding 340,000 shares of restricted stock granted as "performance units",
which were automatically forfeited), continued to vest through December 31,2005. In addition, one-half of the remaining unvested portion of his 2001
restricted stock grant vested upon the effectiveness of the agreement and the
other half was forfeited. Mr. Vogel has 60 days after December 31, 2005 to
exercise any outstanding vested stock options. Under the agreement, Mr. Vogel
waived any further right to any bonus or incentive plan participation and
provided certain releases of claims against Charter and its subsidiaries from
any claims arising out of or based upon any facts occurring prior to the date
of
the agreement, but Charter will continue to provide Mr. Vogel certain
indemnification rights and to include Mr. Vogel in its director and officer
liability insurance for a period of six years. Charter and its subsidiaries
also
agreed to provide releases of certain claims against Mr. Vogel with certain
exceptions reserved. Mr. Vogel has also agreed, with limited exceptions that
he
will continue to be bound by the covenant not to compete, confidentiality and
non-disparagement provisions contained in his 2001 employment agreement.
In
addition to the indemnification provisions which apply to all employees under
our bylaws, Mr. Vogel’s agreement provides that we will indemnify and hold him
harmless to the maximum extent permitted by law from and against any claims,
damages, liabilities, losses, costs or expenses in connection with or arising
out of the performance by him of his duties. The above agreement also contains
confidentiality and non-solicitation provisions.
We
have
established separation guidelines which generally apply to all employees in
situations where management determines that an employee is entitled to severance
benefits. Severance benefits are granted solely in management’s discretion and
are not an employee entitlement or guaranteed benefit. The guidelines provide
that persons employed at the level of Senior Vice President may be eligible
to
receive between six and fifteen months of severance benefits. Currently, all
Executive Vice Presidents have employment agreements with Charter which provide
for specific separation arrangements ranging from the payment of twelve to
twenty-four months of severance benefits. Separation benefits are contingent
upon the signing of a separation agreement containing certain provisions
including a release of all claims against us. Severance amounts paid under
these
guidelines are distinct and separate from any one-time, special or enhanced
severance programs that may be approved by us from time to time.
Our
senior executives are eligible to receive bonuses according to our 2005
Executive Bonus Plan. Under this plan, our executive officers and certain other
management and professional employees are eligible to receive an annual bonus.
Each participating employee would receive his or her target bonus if Charter
(or
such employee’s division) meets specified performance measures for revenues,
operating cash flow, un-levered free cash flow and customer
satisfaction.
Limitation
of Directors' Liability and Indemnification Matters
Our
certificate of incorporation limits the liability of directors to the maximum
extent permitted by Delaware law. The Delaware General Corporation Law provides
that a corporation may eliminate or limit the personal liability of a director
for monetary damages for breach of fiduciary duty as a director, except for
liability for:
(1)
any
breach of the director's duty of loyalty to the corporation and its
shareholders;
(2)
acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law;
(3)
unlawful payments of dividends or unlawful stock purchases or redemptions;
or
(4)
any
transaction from which the director derived an improper personal
benefit.
108
Our
bylaws provide that we will indemnify all persons whom we may indemnify pursuant
thereto to the fullest extent permitted by law.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the SEC,
such
indemnification is against public policy as expressed in the Securities Act
and
is therefore unenforceable.
We
have
reimbursed certain of our current and former directors, officers and employees
in connection with their defense in certain legal actions. See "Item 13. Certain
Relationships and Related Transactions — Other Miscellaneous Relationships —
Indemnification Advances.''
The
following table sets forth certain information regarding beneficial ownership
of
Charter’s Class A common stock as of January 31, 2006 by:
·
each
person currently serving as a director of
Charter;
·
the
current chief executive officer and individuals named in the
Summary
Compensation Table;
·
all
persons currently serving as directors and officers of Charter,
as a
group; and
·
each
person known by us to own beneficially 5% or more of our outstanding
Class A common stock as of January 31,2006.
With
respect to the percentage of voting power set forth in the following table:
·
each
holder of Class A common stock is entitled to one vote per share;
and
·
each
holder of Class B common stock is entitled to (i) ten votes per share
of Class B common stock held by such holder and its affiliates and
(ii) ten votes per share of Class B Common Stock for which membership
units in Charter Holdco held by such holder and its affiliates are
exchangeable.
The
50,000 shares of Class B common stock owned by Mr. Allen represents
100% of the outstanding Class B common stock.
Class
A
Unvested
Shares
Class
B
Number
of
Restricted
Receivable
Shares
Class
A
Class
A
on
Exercise
Issuable
Shares
Shares
of
Vested
Number
of
upon
%
of
(Voting
and
(Voting
Options
or Other
Class
B
Exchange
or
%
of
Voting
Name
and Address of
Investment
Power
Only)
Convertible
Shares
Conversion
of
Equity
Power
Beneficial
Owner
Power)(1)
(2)
Securities
(3)
Owned
Units
(4)
(4)(5)
(5)(6)
Paul
G. Allen (7)
29,126,463
39,063
10,000
50,000
364,082,692
50.40
%
90.46
%
Charter
Investment, Inc. (8)
247,769,519
37.31
%
*
Vulcan
Cable III Inc. (9)
116,313,173
21.84
%
*
Neil
Smit
2,812,500
*
*
Robert
P. May
119,685
40,650
*
*
W.
Lance Conn
19,231
32,072
*
*
Nathaniel
A. Davis
43,215
*
*
Jonathan
L. Dolgen
19,685
40,650
*
*
David
C. Merritt
25,705
39,063
*
*
Marc
B. Nathanson
425,705
39,063
50,000
*
*
Jo
Allen Patton
10,977
40,323
*
*
John
H. Tory
30,005
39,063
40,000
*
*
Larry
W. Wangberg
28,705
39,063
40,000
*
*
Michael
J. Lovett
7,500
75,000
112,375
*
*
Wayne
H. Davis
2,667
1,333
210,000
*
*
Sue
Ann Hamilton
169,300
*
*
Paul
E. Martin
11,738
2,869
162,500
*
*
109
All
current directors and executive officers as a group (19 persons)
29,830,033
3,384,910
874,100
50,000
364,082,692
50.97
%
90.56
%
Carl
E. Vogel (10)
113,334
1,120,000
*
*
Steelhead
Partners (11)
30,284,630
7.28
%
*
J-K
Navigator Fund, L.P. (11)
22,067,209
5.30
%
*
James
Michael Johnston (11)
30,284,630
7.28
%
*
Brian
Katz Klein (11)
30,284,630
7.28
%
*
FMR
Corp.(12)
52,487,788
12.61
%
1.38
%
Fidelity
Management & Research Company (12)
31,231,402
14,289,255
10.57
%
1.19
%
Edward
C. Johnson 3d (12)
52,487,788
12.61
%
1.38
%
Standard
Pacific Capital LLC (13)
21,804,756
5.24
%
*
Kingdon
Capital Management, LLC (14)
24,236,312
5.82
%
*
Wellington
Management Company, LLP (15)
21,985,377
5.28
%
*
__________
* Less
than
1%.
(1)
Includes
shares for which the named person has sole voting and investment
power; or
shared voting and investment power with a spouse. Does not include
shares
that may be acquired through exercise of options.
(2)
Includes
unvested shares of restricted stock issued under the Charter
Communications, Inc. 2001 Stock Incentive Plan (including those issued
in
the February 2004 option exchange for those eligible employees who
elected
to participate), as to which the applicable director or employee
has sole
voting power but not investment power. Excludes certain performance
units
granted under the Charter 2001 Stock Incentive Plan with respect
to which
shares will not be issued until the third anniversary of the grant
date
and then only if Charter meets certain performance criteria (and
which
consequently do not provide the holder with any voting
rights).
(3)
Includes
shares of Class A common stock issuable (a) upon exercise of
options that have vested or will vest on or before April 1, 2006
under the
1999 Charter Communications Option Plan and the 2001 Stock Incentive
Plan
or (b) upon conversion of other convertible
securities.
(4)
Beneficial
ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. The beneficial owners at January 31, 2006 of Class B
common stock, Charter Holdco membership units and convertible senior
notes
of Charter are deemed to be beneficial owners of an equal number
of shares
of Class A common stock because such holdings are either convertible
into Class A shares (in the case of Class B shares and
convertible senior notes) or exchangeable (directly or indirectly)
for
Class A shares (in the case of the membership units) on a one-for-one
basis. Unless otherwise noted, the named holders have sole investment
and
voting power with respect to the shares listed as beneficially owned.
As a
result of the settlement of the CC VIII dispute, Mr. Allen received
an
accreting note exchangeable as of January 31, 2006 for 24,950,661
Charter
Holdco units. See "Certain Relationships and Related Transactions
-
Transactions Arising Out of Our Organizational Structure and Mr.
Allen’s
Investment in Charter Communications, Inc. and Its Subsidiaries -
Equity
Put Rights - CC VIII."
(5)
The
calculation of this percentage assumes for each person
that:
•
416,201,081 shares
of Class A common stock are issued and outstanding as of January 31,2006;
•
50,000 shares
of Class B common stock held by Mr. Allen have been converted
into shares of Class A common stock;
•
the
acquisition by such person of all shares of Class A common stock that
such person or affiliates of such person has the right to acquire
upon
exchange of membership units in subsidiaries or conversion of
Series A Convertible Redeemable Preferred Stock or 5.875% or
4.75% convertible senior notes;
•
the
acquisition by such person of all shares that may be acquired upon
exercise of options to purchase shares or exchangeable membership
units
that have vested or will vest by April 1,2006; and
•
that
none of the other listed persons or entities has received any shares
of
Class A common stock that are issuable to any of such persons
pursuant to the exercise of options or otherwise.
A
person is deemed to have the right to acquire shares of Class A
common stock with respect to options vested under the 1999 Charter
Communications Option Plan. When vested, these options are exercisable
for
membership units of Charter Holdco, which are immediately exchanged
on a
one-for-one basis for shares of Class A common stock. A person is
also deemed to have the right to
acquire shares of Class A common stock issuable upon the exercise of
vested options under the 2001 Stock Incentive
Plan.
(6)
The
calculation of this percentage assumes that Mr. Allen’s equity
interests are retained in the form that maximizes voting power (i.e.,
the
50,000 shares of Class B common stock held by Mr. Allen
have not been converted into shares of Class A common stock; that the
membership units of Charter Holdco owned by each of Vulcan Cable III
Inc. and Charter Investment, Inc. have not been exchanged for shares
of
Class A common stock).
(7)
The
total listed includes:
•
247,769,519
membership units in Charter Holdco held by Charter Investment,
Inc.; and
•
116,313,173
membership units in Charter Holdco held by Vulcan Cable III
Inc.
The
listed total includes 24,950,661 shares of Class A common stock issuable
as of January 31, 2006 upon exchange of units of Charter Holdco,
which are
issuable to Charter Investment, Inc. (which is owned by Mr. Allen)
as a
consequence of the settlement
110
of
the CC VIII dispute. See "Certain
Relationships and Related Transactions - Transactions Arising Out
of Our
Organizational Structure and Mr. Allen’s Investment in Charter
Communications, Inc. and Its Subsidiaries - Equity Put Rights - CC
VIII."
The address of this person is: 505 Fifth Avenue South, Suite 900,
Seattle, WA98104.
(8)
Includes
247,769,519 membership units in Charter Holdco, which are exchangeable
for
shares of Class B common stock on a one-for-one basis, which are
convertible to shares of Class A common stock on a one-for-one basis.
The address of this person is: Charter Plaza, 12405 Powerscourt Drive,
St. Louis, MO63131.
(9)
Includes
116,313,173 membership units in Charter Holdco, which are exchangeable
for
shares of Class B common stock on a one-for-one basis, which are
convertible to shares of Class A common stock on a one-for-one basis.
The address of this person is: 505 Fifth Avenue South, Suite 900,
Seattle, WA98104.
(10)
Mr. Vogel
terminated his employment effective on January 17, 2005. His stock
options and restricted stock shown in this table continued to vest
until
December 31, 2005, and his options will be exercisable for another
60 days thereafter.
(11)
The
equity ownership reported in this table is based upon the holder’s
Form 13G/A filed with the SEC February 10, 2006. The business address
of the reporting person is: 1301 First Avenue, Suite 201,
Seattle, WA98101. Steelhead Partners, LLC acts as general partner
of J-K
Navigator Fund, L.P., and J. Michael Johnston and Brian K. Klein act
as the member-managers of Steelhead Partners, LLC. Accordingly, shares
shown as beneficially held by Steelhead Partners, LLC, Mr. Johnston
and Mr. Klein include shares beneficially held by J-K Navigator Fund,
L.P.
(12)
The
equity ownership reported in this table is based on the holder’s
Schedule 13G/A filed with the SEC on February 14, 2006. The address
of the person is: 82 Devonshire Street, Boston, Massachusetts02109.
Fidelity Management & Research Company is a wholly-owned
subsidiary of FMR Corp. and is the beneficial owner of
46,192,873 shares as a result of acting as investment adviser to
various investment companies and includes: 31,231,402 shares
resulting from the assumed conversion of 5.875% senior notes. Fidelity
Management Trust Company, a wholly-owned subsidiary of FMR Corp.
and is a
beneficial owner of 3,066,115 shares as a result of acting as investment
adviser to various investment companies and includes: 3,066,115 shares
resulting from the assumed conversion of 5.875% senior notes. Fidelity
International Limited ("FIL") provides investment advisory and management
services to non-U.S. investment companies and certain institutional
investors and is a beneficial owner of 3,228,800 shares. FIL is a
separate
and independent corporate entity from FMR Corp. Edward C. Johnson
3d,
Chairman of FMR Corp. and FIL owns shares of FIL voting stock with
the
right to cast approximately 38% of the total votes of FIL voting
stock.
Edward
C. Johnson 3d, chairman of FMR Corp., and FMR Corp. each has
sole power to dispose of 52,487,788 shares.
(13)
The
equity ownership reported in this table is based upon holder’s
Schedule 13G filed with the SEC November 9, 2005. The address of the
reporting person is: 101 California Street, 36th
Floor, San Francisco, CA94111.
(14)
The
equity ownership reported in this table is based upon holder’s
Schedule 13G filed with the SEC January 25, 2006. The address of the
reporting person is: 152 West 57th
Street, 50th
Floor, New York, NY10019.
(15)
The
equity ownership reported in this table is based upon holder’s
Schedule 13G filed with the SEC February 14, 2006. The address of the
reporting person is: 75 State Street, Boston, MA02109. Wellington
Management Company, LLC, in its capacity as investment adviser, may
be
deemed to beneficially own 21,985,377 shares of the Issuer which
are held
of record by clients of Wellington Management Company,
LLC.
Securities
authorized for issuance under equity compensation plans
The
following information is provided as of December 31, 2005 with respect to equity
compensation plans:
Number
of Securities
Number
of Securities
to
be Issued Upon
Weighted
Average
Remaining
Available
Exercise
of Outstanding
Exercise
Price of
for
Future Issuance
Options,
Warrants
Outstanding
Options,
Under
Equity
Plan
Category
and
Rights
Warrants
and Rights
Compensation
Plans
Equity
compensation plans approved
by
security holders
29,126,744
(1)
$
4.47
42,758,409
Equity
compensation plans not
approved
by security holders
289,268
(2)
$
3.91
--
TOTAL
29,416,012
$
4.46
42,758,409
_________
(1)
This
total does not include 4,252,570 shares issued pursuant to restricted
stock grants made under our 2001 Stock Incentive Plan, which were
subject
to vesting based on continued employment or 11,258,256 performance
shares
issued under our LTIP plan, which are subject to vesting based on
continued employment and Charter’s achievement of certain performance
criteria.
(2)
Includes
shares of Class A common stock to be issued upon exercise of options
granted pursuant to an individual compensation agreement with a
consultant.
111
Item 13.
Certain
Relationships and Related Transactions.
The
following sets forth certain transactions in which we are involved and in which
the directors, executive officers and affiliates of Charter have or may have
a
material interest. The transactions fall generally into three broad categories:
·
Transactions
in which Mr. Allen has an interest that arise directly out of
Mr. Allen’s investment in Charter and Charter
Holdco.
A
large number of the transactions described below arise out of
Mr. Allen’s direct and indirect (through CII, or the Vulcan entities,
each of which Mr. Allen controls) investment in Charter and its
subsidiaries, as well as commitments made as consideration for the
investments themselves.
·
Transactions
with third party providers of products, services and content in which
Mr. Allen has or had a material interest.
Mr. Allen has had numerous investments in the areas of technology and
media. We have a number of commercial relationships with third parties
in
which Mr. Allen has or had an
interest.
·
Other
Miscellaneous Transactions.
We
have a limited number of transactions in which certain of the officers,
directors and principal shareholders of Charter and its subsidiaries,
other than Mr. Allen, have an
interest.
A
number
of our debt instruments and those of our subsidiaries require delivery of
fairness opinions for transactions with Mr. Allen or his affiliates involving
more than $50 million. Such fairness opinions have been obtained whenever
required. All of our transactions with Mr. Allen or his affiliates have been
considered for approval either by the board of directors of Charter or a
committee of the board of directors. All of our transactions with Mr. Allen
or
his affiliates have been deemed by the board of directors or a committee of
the
board of directors to be in our best interest. Related party transactions are
approved by our Audit Committee or another independent body of the board of
directors in compliance with the listing requirements applicable to NASDAQ
National Market listed companies. Except where noted below, we do not believe
that these transactions present any unusual risks for us that would not be
present in any similar commercial transaction.
The
chart
below summarizes certain information with respect to these transactions.
Additional information regarding these transactions is provided following the
chart.
Interested
Transaction
Related
Party
Description
of Transaction
Intercompany
Management
Arrangements
Paul
G. Allen
Subsidiaries
of Charter Holdco paid Charter approximately $128 million for
management services rendered in 2005.
Mutual
Services Agreement
Paul
G. Allen
Charter
paid Charter Holdco $89 million for services rendered in
2005.
Previous
Management Agreement
Paul
G. Allen
No
fees were paid in 2005, although total management fees accrued and
payable
to CII, exclusive of interest, were approximately $14 million at
December31, 2005.
Channel
Access Agreement
Paul
G. Allen
W.
Lance Conn
Jo
Allen Patton
At
Vulcan Ventures’ request, we will provide Vulcan Ventures with exclusive
rights for carriage on eight of our digital cable channels as partial
consideration for a 1999 capital contribution of approximately $1.3
billion.
Equity
Put Rights
Paul
G. Allen
Certain
sellers of cable systems that we acquired were granted, or previously
had
the right, as described below, to put to Paul Allen equity in Charter
and
CC VIII, LLC issued to such sellers in connection with such
acquisitions.
Mirror
Securities
Paul
G. Allen
W.
Lance Conn
To
comply with the organizational documents of Charter and Charter Holdco,
Charter Holdco issued certain
112
Jo
Allen Patton
mirror
securities to
Charter, redeemed certain other mirror securities, and paid interest
and
dividends on outstanding mirror notes and preferred units.
TechTV
Carriage Agreement
Paul
G. Allen
W.
Lance Conn
Jo
Allen Patton
Larry
W. Wangberg
We
recorded approximately $1 million from TechTV under the affiliation
agreement in 2005 related to launch incentives as a reduction of
programming expense.
Oxygen
Media Corporation
Carriage
Agreement
Paul
G. Allen
W.
Lance Conn
Jo
Allen Patton
We
paid Oxygen Media approximately $9 million under a carriage agreement
in
exchange for programming in 2005. We recorded approximately $0.1
million
in 2005 from Oxygen Media related to launch incentives as a reduction
of
programming expense. We received 1 million shares of Oxygen Preferred
Stock with a liquidation preference of $33.10 per share in March
2005. We
recognized approximately $2 million as a reduction of programming
expense
in 2005, in recognition of the guaranteed value of the
investment.
Portland
Trail Blazers
Carriage
Agreement
Paul
G. Allen
We
paid approximately $116,500 for rights to carry the cable broadcast
of
certain Trail Blazers basketball games in 2005.
Digeo,
Inc. Broadband Carriage Agreement
Paul
G. Allen
Carl
E. Vogel
Jo
Allen Patton
W.
Lance Conn
Michael
J. Lovett
We
paid Digeo approximately $3 million for customized development of the
i-channels and the local content tool kit in 2005. We entered into
a
license agreement in 2004 for the Digeo software that runs DVR units
purchased from a third party. Charter paid approximately $1 million
in
license and maintenance fees in 2005. We paid approximately $10 million
in
capital purchases in 2005.
Payment
for relative’s services
Carl
E. Vogel
During
all of 2005, Mr. Vogel's brother-in-law was an employee of Charter
Holdco
and was paid a salary commensurate with his position in the engineering
department.
Radio
advertising
Marc
B. Nathanson
We
believe that, through a third party advertising agency, we have paid
approximately $67,600 in 2005 to Mapleton Communications, an affiliate
of
Mapleton Investments, LLC.
Indemnification
Advances
Current
and former directors and current and former officers named in certain
legal proceedings
Charter
reimbursed certain of its current and former directors and executive
officers a total of approximately $16,200 for costs incurred in connection
with litigation matters in 2005.
The
following sets forth additional information regarding the transactions
summarized above.
Transactions
Arising Out of Our Organizational Structure and Mr. Allen’s Investment in
Charter Communications, Inc. and Its Subsidiaries
As
noted
above, a number of our related party transactions arise out of Mr. Allen’s
investment in Charter and its subsidiaries. Some of these transactions are
with
CII and Vulcan Ventures (both owned 100% by Mr. Allen), Charter (controlled
by Mr. Allen) and Charter Holdco (approximately 55% owned by us and
45% owned by other affiliates of Mr. Allen). See "Item 1.
Business - Organizational Chart" for more information regarding the ownership
by
Mr. Allen and certain of his affiliates.
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Intercompany
Management Arrangements
Charter
is a party to management arrangements with Charter Holdco and certain of its
subsidiaries. Under these agreements, Charter provides management services
for
the cable systems owned or operated by its subsidiaries. These management
agreements provide for reimbursement to Charter for all costs and expenses
incurred by it for activities relating to the ownership and operation of the
managed cable systems, including corporate overhead, administration and salary
expense.
The
total
amount paid by Charter Holdco and all of its subsidiaries is limited to the
amount necessary to reimburse Charter for all of its expenses, costs, losses,
liabilities and damages paid or incurred by it in connection with the
performance of its services under the various management agreements and in
connection with its corporate overhead, administration, salary expense and
similar items. The expenses subject to reimbursement include fees Charter is
obligated to pay under the mutual services agreement with CII. Payment of
management fees by Charter’s operating subsidiaries is subject to certain
restrictions under the credit facilities and indentures of such subsidiaries
and
the indentures governing the Charter Holdings public debt. If any portion of
the
management fee due and payable is not paid, it is deferred by Charter and
accrued as a liability of such subsidiaries. Any deferred amount of the
management fee will bear interest at the rate of 10% per year, compounded
annually, from the date it was due and payable until the date it is paid. For
the year ended December 31, 2005, the subsidiaries of Charter Holdings paid
a total of $128 million in management fees to Charter.
Mutual
Services Agreement
Charter,
Charter Holdco and CII are parties to a mutual services agreement whereby each
party shall provide rights and services to the other parties as may be
reasonably requested for the management of the entities involved and their
subsidiaries, including the cable systems owned by their subsidiaries all on
a
cost-reimbursement basis. The officers and employees of each party are available
to the other parties to provide these rights and services, and all expenses
and
costs incurred in providing these rights and services are paid by Charter.
Each
of the parties will indemnify and hold harmless the other parties and their
directors, officers and employees from and against any and all claims that
may
be made against any of them in connection with the mutual services agreement
except due to its or their gross negligence or willful misconduct. The mutual
services agreement expires on November 12, 2009, and may be terminated at
any time by any party upon thirty days’ written notice to the other. For the
year ended December 31, 2005, Charter paid approximately $89 million
to Charter Holdco for services rendered pursuant to the mutual services
agreement. All such amounts are reimbursable to Charter pursuant to a management
arrangement with our subsidiaries. See "— Intercompany Management Arrangements."
The accounts and balances related to these services eliminate in consolidation.
CII no longer provides services pursuant to this agreement.
Previous
Management Agreement with Charter Investment, Inc.
Prior
to
November 12, 1999, CII provided management and consulting services to our
operating subsidiaries for a fee equal to 3.5% of the gross revenues of the
systems then owned, plus reimbursement of expenses. The balance of management
fees payable under the previous management agreement was accrued with payment
at
the discretion of CII, with interest payable on unpaid amounts. For the year
ended December 31, 2005, Charter’s subsidiaries did not pay any fees to CII to
reduce management fees payable. As of December 31, 2005, total management fees
payable by our subsidiaries to CII were approximately $14 million, exclusive
of
any interest that may be charged and are included in deferred management fees
-
related party on the consolidated balance sheets contained in "Item 8.
Financial
Statements and Supplementary Data."
Charter
Communications Holding Company, LLC Limited Liability Agreement —
Taxes
The
limited liability company agreement of Charter Holdco contains special
provisions regarding the allocation of tax losses and profits among its members
— Vulcan Cable III Inc., CII and us. In some situations, these provisions may
cause us to pay more tax than would otherwise be due if Charter Holdco had
allocated profits and losses among its members based generally on the number
of
common membership units. See "Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Critical Accounting Policies
and Estimates — Income Taxes."
Vulcan
Ventures Channel Access Agreement
Vulcan
Ventures, an entity controlled by Mr. Allen, Charter, CII and Charter
Holdco are parties to an agreement dated September 21, 1999 granting to
Vulcan Ventures the right to use up to eight of our digital cable channels
as
114
partial
consideration for a prior capital contribution of $1.325 billion.
Specifically, at Vulcan Ventures’ request, we will provide Vulcan Ventures with
exclusive rights for carriage of up to eight digital cable television
programming services or channels on each of the digital cable systems with
local
and to the extent available, national control of the digital product owned,
operated, controlled or managed by Charter or its subsidiaries now or in the
future of 550 megahertz or more. If the system offers digital services but
has
less than 550 megahertz of capacity, then the programming services will be
equitably reduced. Upon request of Vulcan Ventures, we will attempt to reach
a
comprehensive programming agreement pursuant to which it will pay the
programmer, if possible, a fee per digital video customer. If such fee
arrangement is not achieved, then we and the programmer shall enter into a
standard programming agreement. The initial term of the channel access agreement
was 10 years, and the term extends by one additional year (such that the
remaining term continues to be 10 years) on each anniversary date of the
agreement unless either party provides the other with notice to the contrary
at
least 60 days prior to such anniversary date. To date, Vulcan Ventures has
not requested to use any of these channels. However, in the future it is
possible that Vulcan Ventures could require us to carry programming that is
less
profitable to us than the programming that we would otherwise carry and our
results would suffer accordingly.
Equity
Put Rights
CC
VIII. As
part
of the acquisition of the cable systems owned by Bresnan Communications Company
Limited Partnership in February 2000, CC VIII, Charter’s indirect limited
liability company subsidiary, issued, after adjustments, 24,273,943 Class A
preferred membership units (collectively, the "CC VIII interest") with a
value and an initial capital account of approximately $630 million to certain
sellers affiliated with AT&T Broadband, subsequently owned by Comcast
Corporation (the "Comcast sellers"). Mr. Allen granted the Comcast
sellers the right to sell to him the CC VIII interest for approximately
$630 million plus 4.5% interest annually from February 2000 (the "Comcast
put right"). In April 2002, the Comcast sellers exercised the Comcast put right
in full, and this transaction was consummated on June 6, 2003. Accordingly,
Mr. Allen, indirectly through a company controlled by him, CII, became the
holder of the CC VIII interest. In
the
event of a liquidation of CC VIII, Mr. Allen would be entitled to a priority
distribution with respect to a 2% priority return (which will continue to
accrete). Any remaining distributions in liquidation would be distributed to
CC
V Holdings, LLC and Mr. Allen in proportion to CC V Holdings, LLC's capital
account and Mr. Allen's capital account (which will equal the initial capital
account of the Comcast sellers of approximately $630 million, increased or
decreased by Mr. Allen's pro rata share of CC VIII’s profits or losses (as
computed for capital account purposes) after June 6, 2003).
An
issue
arose as to whether the documentation for the Bresnan transaction was correct
and complete with regard to the ultimate ownership of the CC VIII interest
following consummation of the Comcast put right. Thereafter, the board of
directors of Charter formed a Special Committee (comprised of Messrs.
Merritt, Tory and Wangberg) to investigate the matter and take any other
appropriate action on behalf of Charter with respect to this matter. After
conducting an investigation of the relevant facts and circumstances, the Special
Committee determined that a "scrivener’s error" had occurred in February 2000 in
connection with the preparation of the last-minute revisions to the Bresnan
transaction documents and that, as a result, Charter should seek the reformation
of the Charter Holdco limited liability company agreement, or alternative
relief, in order to restore and ensure the obligation that the CC VIII interest
be automatically exchanged for Charter Holdco units. The Special Committee
further determined that, as part of such contract reformation or alternative
relief, Mr. Allen should be required to contribute the CC VIII
interest to Charter Holdco in exchange for 24,273,943 Charter Holdco membership
units. The Special Committee also recommended to the board of directors of
Charter that, to the extent the contract reformation is achieved, the board
of
directors should consider whether the CC VIII interest should ultimately be
held by Charter Holdco or Charter Holdings or another entity owned directly
or
indirectly by them.
Mr. Allen
disagreed with the Special Committee’s determinations described above and so
notified the Special Committee. Mr. Allen contended that the transaction was
accurately reflected in the transaction documentation and contemporaneous and
subsequent company public disclosures. The Special Committee and Mr. Allen
determined to utilize the Delaware Court of Chancery’s program for mediation of
complex business disputes in an effort to resolve the CC VIII interest dispute.
As
of
October 31, 2005, Mr. Allen, the Special Committee, Charter, Charter Holdco
and
certain of their affiliates, agreed to settle the dispute, and execute certain
permanent and irrevocable releases pursuant to the Settlement Agreement and
Mutual Release agreement dated October 31, 2005 (the "Settlement"). Pursuant
to
the Settlement, CII has retained 30% of its CC VIII interest (the "Remaining
Interests"). The Remaining Interests are subject to certain drag along, tag
along and transfer restrictions as detailed in the revised CC VIII Limited
Liability Company Agreement. CII transferred the other 70% of the CC VIII
interest directly and indirectly, through Charter Holdco, to a newly formed
entity, CCHC (a direct subsidiary of Charter Holdco and the direct parent of
Charter Holdings). Of
115
that
other 70% of the CC VIII preferred interests, 7.4% has been transferred by
CII
to CCHC for a subordinated exchangeable note with an initial accreted value
of
$48 million, accreting at 14%, compounded quarterly, with a 15-year maturity
(the "CCHC note"). The remaining 62.6% has been transferred by CII to Charter
Holdco, in accordance with the terms of the settlement for no additional
monetary consideration. Charter Holdco contributed the 62.6% interest to CCHC.
As
part
of the Settlement, CC VIII issued approximately 49 million additional Class
B
units to CC V in consideration for prior capital contributions to CC VIII by
CC
V, with respect to transactions that were unrelated to the dispute in connection
with CII’s membership units in CC VIII. As a result, Mr. Allen’s pro rata share
of the profits and losses of CC VIII attributable to the Remaining Interests
is
approximately 5.6%.
The
CCHC
note is exchangeable, at CII’s option, at any time, for Charter Holdco Class A
Common units at a rate equal to the then accreted value, divided by $2.00 (the
"Exchange Rate"). Customary anti-dilution protections have been provided that
could cause future changes to the Exchange Rate. Additionally, the Charter
Holdco Class A Common units received will be exchangeable by the holder into
Charter common stock in accordance with existing agreements between CII, Charter
and certain other parties signatory thereto. Beginning February28, 2009, if the closing price of Charter common stock is at or above the
Exchange Rate for a certain period of time as specified in the Exchange
Agreement, Charter Holdco may require the exchange of the CCHC note for Charter
Holdco Class A Common units at the Exchange Rate.
CCHC
has
the right to redeem the CCHC note under certain circumstances, for cash in
an
amount equal to the then accreted value, such amount, if redeemed prior to
February28, 2009, would also include a make whole up to the accreted value
through February28, 2009. CCHC must redeem the CCHC note at its maturity for cash in an
amount equal to the initial stated value plus the accreted return through
maturity.
The
Board
of Directors has determined that the transferred CC VIII interests remain at
CCHC.
Mirror
Securities
Charter
is a holding company and its principal assets are its equity interest in Charter
Holdco and certain mirror notes payable by Charter Holdco to Charter and mirror
preferred units held by Charter, which have the same principal amount and terms
as those of Charter's convertible senior notes and Charter’s outstanding
preferred stock. In 2005, Charter Holdco paid to Charter $64 million related
to
interest on the mirror notes. In connection with our November 2004 sale of
the
$862.5 million principal amount of 5.875% convertible senior notes due 2009,
Charter Holdco issued to us mirror notes in identical principal amount in
exchange for the proceeds from our offering. Charter Holdco then purchased
and
pledged certain U.S. government securities to us as security for the mirror
notes (which were in turn repledged by us to the trustee for the benefit of
holders of our 5.875% convertible senior notes and which we expect to use to
fund the first six interest payments on the notes), and agreed to lend common
units to us, the terms of which will, to the extent practicable, mirror the
terms of the shares. Charter Holdco also redeemed the remaining $588 million
principal amount of the mirror notes in respect of our 5.75% convertible senior
notes due 2005 concurrently with our December 23, 2004 redemption of our 5.75%
convertible senior notes. In
addition, in December 2004, Charter Holdco entered into a share lending
agreement with Charter in which it agreed to lend common units to Charter that
would mirror the anticipated loan of Class A common shares by Charter to
Citigroup Global Markets pursuant to a share lending agreement. The members
of
Charter Holdco (including the entities controlled by Mr. Allen) also at that
time entered into a letter agreement providing, among other things, that for
purposes of the allocation provisions of the Limited Liability Company Agreement
of Charter Holdco, the mirror units be treated as disregarded and not
outstanding until such time (and except to the extent) that, under Charter’s
share lending agreement, Charter treats the loaned shares in a manner that
assumes they will neither be returned by the borrower nor otherwise be acquired
by Charter in lieu of such a return. In 2005, Charter issued 94.9 million shares
of Class A common stock and the corresponding issuance of an equal number of
mirror membership units by Charter Holdco to Charter pursuant to the share
lending agreement. In February 2006, an additional 22.0 million shares and
corresponding units were issued.
Allocation
of Business Opportunities with Mr. Allen
As
described under "— Third Party Business Relationships in which Mr. Allen
has or had an Interest" in this section, Mr. Allen and a number of his
affiliates have interests in various entities that provide services or
programming to our subsidiaries. Given the diverse nature of Mr. Allen’s
investment activities and interests, and to avoid the possibility of future
disputes as to potential business, Charter and Charter Holdco, under the terms
of their
116
respective
organizational documents, may not, and may not allow their subsidiaries, to
engage in any business transaction outside the cable transmission business
except for the Digeo, Inc. joint venture; a joint venture to develop a digital
video recorder set-top terminal; an existing investment in Cable Sports
Southeast, LLC, a provider of regional sports programming; as an owner of the
business of Interactive Broadcaster Services Corporation or, Chat TV, an
investment in @Security Broadband Corp., a company developing broadband security
applications; and incidental businesses engaged in as of the closing of
Charter’s initial public offering in November 1999. This restriction will remain
in effect until all of the shares of Charter’s high-vote Class B common
stock have been converted into shares of Charter’s Class A common stock due
to Mr. Allen’s equity ownership falling below specified thresholds.
Should
Charter or Charter Holdco or any of their subsidiaries wish to pursue, or allow
their subsidiaries to pursue, a business transaction outside of this scope,
it
must first offer Mr. Allen the opportunity to pursue the particular business
transaction. If he decides not to pursue the business transaction and consents
to Charter or its subsidiaries engaging in the business transaction, they will
be able to do so. In any such case, the restated certificate of incorporation
of
Charter and the limited liability company agreement of Charter Holdco would
need
to be amended accordingly to modify the current restrictions on the ability
of
such entities to engage in any business other than the cable transmission
business. The cable transmission business means the business of transmitting
video, audio, including telephone, and data over cable systems owned, operated
or managed by Charter, Charter Holdco or any of their subsidiaries from time
to
time.
Under
Delaware corporate law, each director of Charter, including Mr. Allen, is
generally required to present to Charter, any opportunity he or she may have
to
acquire any cable transmission business or any company whose principal business
is the ownership, operation or management of cable transmission businesses,
so
that we may determine whether we wish to pursue such opportunities. However,
Mr. Allen and the other directors generally will not have an obligation to
present other types of business opportunities to Charter and they may exploit
such opportunities for their own account.
Also,
conflicts could arise with respect to the allocation of corporate opportunities
between us and Mr. Allen and his affiliates in connection with his
investments in businesses in which we are permitted to engage under Charter’s
restated certificate of incorporation. Certain of the indentures of Charter
and
its subsidiaries require the applicable issuer of notes to obtain, under certain
circumstances, approval of the board of directors of Charter and, where a
transaction or series of related transactions is valued at or in excess of
$50
million, a fairness opinion with respect to transactions in which Mr. Allen
has
an interest. Related party transactions are approved by our Audit Committee
in
compliance with the listing requirements applicable to NASDAQ national market
listed companies. We have not instituted any other formal plan or arrangement
to
address potential conflicts of interest.
The
restrictive provisions of the organizational documents described above may
limit
our ability to take advantage of attractive business opportunities.
Consequently, our ability to offer new products and services outside of the
cable transmission business and enter into new businesses could be adversely
affected, resulting in an adverse effect on our growth, financial condition
and
results of operations.
Third
Party Business Relationships in which Mr. Allen has or had an
Interest
As
previously noted, Mr. Allen has and has had extensive investments in the
areas of media and technology. We have a number of commercial relationships
with
third parties in which Mr. Allen has an interest. Mr. Allen or his
affiliates own equity interests or warrants to purchase equity interests in
various entities with which we do business or which provide us with products,
services or programming. Mr. Allen owns 100% of the equity of Vulcan
Ventures Incorporated and Vulcan Inc. and is the president of Vulcan Ventures.
Ms. Jo Allen Patton is a director and the President and Chief Executive Officer
of Vulcan Inc. and is a director and Vice President of Vulcan Ventures. Mr.
Lance Conn is Executive Vice President of Vulcan Inc. and Vulcan Ventures.
The
various cable, media, Internet and telephone companies in which Mr. Allen
has invested may mutually benefit one another. We can give no assurance, nor
should you expect, that any of these business relationships will be successful,
that we will realize any benefits from these relationships or that we will
enter
into any business relationships in the future with Mr. Allen’s affiliated
companies.
Mr. Allen
and his affiliates have made, and in the future likely will make, numerous
investments outside of us and our business. We cannot assure you that, in the
event that we or any of our subsidiaries enter into transactions in the future
with any affiliate of Mr. Allen, such transactions will be on terms as
favorable to us as terms we might have obtained from an unrelated third party.
117
TechTV,
Inc.
TechTV,
Inc. ("TechTV") operated a cable television network that offered programming
mostly related to technology. Pursuant to an affiliation agreement that
originated in 1998 and that terminates in 2008, TechTV has provided us with
programming for distribution via our cable systems. The affiliation agreement
provides, among other things, that TechTV must offer Charter Holdco certain
terms and conditions that are no less favorable in the affiliation agreement
than are given to any other distributor that serves the same number of or fewer
TechTV viewing customers.
In
March
2004, Charter Holdco entered into agreements with Vulcan Programming and TechTV,
which provide for (i) Charter Holdco and TechTV to amend the affiliation
agreement which, among other things, revises the description of the TechTV
network content, provides for Charter Holdco to waive certain claims against
TechTV relating to alleged breaches of the affiliation agreement and provides
for TechTV to make payment of outstanding launch receivables due to Charter
Holdco under the affiliation agreement, (ii) Vulcan Programming to pay
approximately $10 million and purchase over a 24-month period, at fair market
rates, $2 million of advertising time across various cable networks on Charter
cable systems in consideration of the agreements, obligations, releases and
waivers under the agreements and in settlement of the aforementioned claims
and
(iii) TechTV to be a provider of content relating to technology and video gaming
for Charter’s interactive television platforms through December 31, 2006
(exclusive for the first year). For the year ended December 31, 2005, we
recognized approximately $1 million of the Vulcan Programming payment as an
offset to programming expense.
We
believe that Vulcan Programming, which is 100% owned by Mr. Allen, owned an
approximate 98% equity interest in TechTV at the time Vulcan Programming sold
TechTV to an unrelated third party in May 2004.
Oxygen
Media Corporation
Oxygen
Media LLC ("Oxygen") provides programming content aimed at the female audience
for distribution over cable systems and satellite. On July 22, 2002,
Charter Holdco entered into a carriage agreement with Oxygen, whereby we agreed
to carry programming content from Oxygen. Under the carriage agreement, we
currently make Oxygen programming available to approximately 5 million of
our video customers. In August 2004, Charter Holdco and Oxygen entered into
agreements that amended and renewed the carriage agreement. The amendment to
the
carriage agreement (a) revised the number of our customers to which Oxygen
programming must be carried and for which we must pay, (b) released Charter
Holdco from any claims related to the failure to achieve distribution benchmarks
under the carriage agreement, (c) required Oxygen to make payment on outstanding
receivables for launch incentives due to us under the carriage agreement; and
(d) requires that Oxygen provide its programming content to us on economic
terms
no less favorable than Oxygen provides to any other cable or satellite operator
having fewer subscribers than us. The renewal of the carriage agreement (a)
extends the period that we will carry Oxygen programming to our customers
through January 31, 2008, and (b) requires license fees to be paid based on
customers receiving Oxygen programming, rather than for specific customer
benchmarks. For the year ended December 31, 2005, we paid Oxygen approximately
$9 million for programming content. In addition, Oxygen pays us launch
incentives for customers launched after the first year of the term of the
carriage agreement up to a total of $4 million. We recorded approximately
$0.1 million related to these launch incentives as a reduction of programming
expense for the year ended December 31, 2005.
In
August
2004, Charter Holdco and Oxygen amended an equity issuance agreement to provide
for the issuance of 1 million shares of Oxygen Preferred Stock with a
liquidation preference of $33.10 per share plus accrued dividends to Charter
Holdco in place of the $34 million of unregistered shares of Oxygen Media common
stock required under the original equity issuance agreement. Oxygen Media
delivered these shares in March 2005. The preferred stock is convertible into
common stock after December 31, 2007 at a conversion ratio, the numerator of
which is the liquidation preference and the denominator which is the fair market
value per share of Oxygen Media common stock on the conversion date.
We
recognized the guaranteed value of the investment over the life of the carriage
agreement as a reduction of programming expense. For the year ended December31,2005, we recorded approximately $2 million as a reduction of programming
expense. The carrying value of our investment in Oxygen was approximately $33
million as of December 31, 2005.
As
of
December 31, 2005, through Vulcan Programming, Mr. Allen owned an approximate
31% interest in Oxygen assuming no exercises of outstanding warrants or
conversion or exchange of convertible or exchangeable securities.
118
Ms.
Jo
Allen Patton is a director and the President of Vulcan Programming. Mr. Lance
Conn is a Vice President of Vulcan Programming. Marc Nathanson has an indirect
beneficial interest of less than 1% in Oxygen.
Portland
Trail Blazers
On
October 7, 1996, the former owner of our Falcon cable systems entered into
a letter agreement and a cable television agreement with Trail Blazers Inc.
for
the cable broadcast in the metropolitan area surrounding Portland, Oregon of
pre-season, regular season and playoff basketball games of the Portland Trail
Blazers, a National Basketball Association basketball team. Mr. Allen is
the 100% owner of the Portland Trail Blazers and Trail Blazers Inc. Under the
letter agreement, Trail Blazers Inc. was paid a fixed fee for each customer
in
areas directly served by the Falcon cable systems. Under the cable television
agreement, we shared subscription revenues with Trail Blazers Inc. We paid
approximately $116,500 for the year ended December 31, 2005 in connection
with the cable broadcast of Portland Trail Blazers basketball games under the
October 1996 cable television agreement and subsequent local cable distribution
agreements.
Digeo,
Inc.
In
March
2001, a subsidiary of Charter, Charter Communications Ventures, LLC ("Charter
Ventures") and Vulcan Ventures Incorporated formed DBroadband Holdings, LLC
for
the sole purpose of purchasing equity interests in Digeo, Inc. ("Digeo"), an
entity controlled by Paul Allen. In connection with the execution of the
broadband carriage agreement, DBroadband Holdings, LLC purchased an equity
interest in Digeo funded by contributions from Vulcan Ventures Incorporated.
The
equity interest is subject to a priority return of capital to Vulcan Ventures
up
to the amount contributed by Vulcan Ventures on Charter Ventures’ behalf. After
Vulcan Ventures recovers its amount contributed and any cumulative loss
allocations, Charter Ventures has a 100% profit interest in DBroadband Holdings,
LLC. Charter Ventures is not required to make any capital contributions,
including capital calls to Digeo. DBroadband Holdings, LLC is therefore not
included in our accompanying consolidated financial statements. Pursuant to
an
amended version of this arrangement, in 2003, Vulcan Ventures contributed a
total of $29 million to Digeo, $7 million of which was contributed on
Charter Ventures’ behalf, subject to Vulcan Ventures’ aforementioned priority
return. Since the formation of DBroadband Holdings, LLC, Vulcan Ventures has
contributed approximately $56 million on Charter Ventures’ behalf.
On
March 2, 2001, Charter Ventures entered into a broadband carriage agreement
with Digeo Interactive, LLC ("Digeo Interactive"), a wholly owned subsidiary
of
Digeo. The carriage agreement provided that Digeo Interactive would provide
to
Charter a "portal" product, which would function as the television-based
Internet portal (the initial point of entry to the Internet) for Charter’s
customers who received Internet access from Charter. The agreement term was
for
25 years and Charter agreed to use the Digeo portal exclusively for six
years. Before the portal product was delivered to Charter, Digeo terminated
development of the portal product.
On
September 27, 2001, Charter and Digeo Interactive amended the broadband
carriage agreement. According to the amendment, Digeo Interactive would provide
to Charter the content for enhanced "Wink" interactive television services,
known as Charter Interactive Channels ("i-channels"). In order to provide the
i-channels, Digeo Interactive sublicensed certain Wink technologies to Charter.
Charter is entitled to share in the revenues generated by the i-channels.
Currently, our digital video customers who receive i-channels receive the
service at no additional charge.
On
September 28, 2002, Charter entered into a second amendment to its
broadband carriage agreement with Digeo Interactive. This amendment superseded
the amendment of September 27, 2001. It provided for the development by
Digeo Interactive of future features to be included in the Basic i-TV service
to
be provided by Digeo and for Digeo’s development of an interactive "toolkit" to
enable Charter to develop interactive local content. Furthermore, Charter could
request that Digeo Interactive manage local content for a fee. The amendment
provided for Charter to pay for development of the Basic i-TV service as well
as
license fees for customers who would receive the service, and for Charter and
Digeo to split certain revenues earned from the service. In 2005, we paid Digeo
Interactive approximately $3 million for customized development of the
i-channels and the local content tool kit. This amendment expired pursuant
to
its terms on December 31, 2003. Digeo Interactive is continuing to provide
the
Basic i-TV service on a month-to-month basis.
On
June30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for
the
purchase of 100,000 digital video recorder ("DVR") units. The software for
these
DVR units is being supplied by Digeo Interactive, LLC under a license agreement
entered into in April 2004. Under the license agreement Digeo Interactive
granted to Charter Holdco the right to use Digeo’s proprietary software for the
number of DVR units that Charter deployed from a maximum of 10 headends through
year-end 2004. This maximum number of headends restriction was expanded and
119
eventually
eliminated through successive agreement amendments and the date for entering
into license agreements for units deployed was extended. The license granted
for
each unit deployed under the agreement is valid for five years. In addition,
Charter will pay certain other fees including a per-headend license fee and
maintenance fees. Maximum license and maintenance fees during the term of the
agreement are expected to be approximately $7 million. The agreement includes
an
"MFN clause" pursuant to which Charter is entitled to receive contract terms,
considered on the whole, and license fees, considered apart from other contract
terms, no less favorable than those accorded to any other Digeo customer.
Charter paid approximately $1 million in license and maintenance fees in
2005.
In
April
2004, we launched DVR service (using units containing the Digeo software) in
our
Rochester, Minnesota market using a broadband media center that is an integrated
set-top terminal with a cable converter, DVR hard drive and connectivity to
other consumer electronics devices (such as stereos, MP3 players, and digital
cameras).
In
May
2004, Charter Holdco entered into a binding term sheet with Digeo Interactive
for the development, testing and purchase of 70,000 Digeo PowerKey DVR units.
The term sheet provided that the parties would proceed in good faith to
negotiate, prior to year-end 2004, definitive agreements for the development,
testing and purchase of the DVR units and that the parties would enter into
a
license agreement for Digeo's proprietary software on terms substantially
similar to the terms of the license agreement described above. In November
2004,
Charter Holdco and Digeo Interactive executed the license agreement and in
December 2004, the parties executed the purchase agreement, each on terms
substantially similar to the binding term sheet. Total purchase price and
license and maintenance fees during the term of the definitive agreements are
expected to be approximately $41 million. The definitive agreements are
terminable at no penalty to Charter in certain circumstances. Charter paid
approximately $10 million for the year ended December 31, 2005 in capital
purchases under this agreement.
In
late
2003, Microsoft filed suit against Digeo for $9 million in a breach of contract
action, involving an agreement that Digeo and Microsoft had entered into in
2001. Digeo informed Charter that it believed it had an indemnification claim
against Charter for half that amount. Digeo settled with Microsoft agreeing
to
make a cash payment and to purchase certain amounts of Microsoft software
products and consulting services through 2008. In consideration of Digeo
agreeing to release Charter from its potential claim against Charter, after
consultation with outside counsel Charter agreed, in June 2005, to purchase
a
total of $2.3 million in Microsoft consulting services through 2008, a portion
of which amounts Digeo has informed Charter will count against Digeo’s purchase
obligations with Microsoft.
In
October 2005, Charter Holdco and Digeo Interactive entered into a binding term
sheet for the test market deployment of the Moxi Entertainment Applications
Pack
("MEAP"). The MEAP is an addition to the Moxi Client Software and will contain
ten games (such as Video Poker and Blackjack), a photo application and jukebox
application. The term sheet is limited to a test market application of
approximately 14,000 subscribers and the aggregate value is not expected to
exceed $0.1 million. In the event the test market proves successful, the
companies will replace the term sheet with a long form agreement including
a
planned roll-out across additional markets. The term sheet expires on May 1,2006.
We
believe that Vulcan Ventures, an entity controlled by Mr. Allen, owns an
approximate 60% equity interest in Digeo, Inc., on a fully-converted non-diluted
basis. Messrs. Allen and Conn and Ms. Patton are directors of Digeo. Mr. Lovett
is a director of Digeo since December 2005 and Mr. Vogel was a director of
Digeo
in 2004. During 2004 and 2005, Mr. Vogel held options to purchase 10,000 shares
of Digeo common stock.
Other
Miscellaneous Relationships
Payment
for Relative’s Services
Since
June 2003, Mr. Vogel's brother-in-law has been an employee of Charter Holdco
and
has received a salary commensurate with his position in the engineering
department.
Radio
Advertising
We
believe that, through a third party advertising agency, we have paid
approximately $67,600 in 2005 to Mapleton Communications, an affiliate of
Mapleton Investments, LLC that owns radio stations in Oregon and California.
Mr.
Nathanson is the Chairman and owner of Mapleton Investments, LLC.
120
Indemnification
Advances
Pursuant
to Charter’s
bylaws
(and the employment agreements of certain of our current and former officers),
Charter is obligated (subject to certain limitations) to indemnify and hold
harmless, to the fullest extent permitted by law, any officer, director or
employee against all expense, liability and loss (including, among other things,
attorneys’ fees) reasonably incurred or suffered by such officer, director or
employee as a result of the fact that he or she is a party or is threatened
to
be made a party or is otherwise involved in any action, suit or proceeding
by
reason of the fact that he or she is or was a director, officer or employee
of
Charter. In addition, Charter is obligated to pay, as an advancement of its
indemnification obligation, the expenses (including attorneys’ fees) incurred by
any officer, director or employee in defending any such action, suit or
proceeding in advance of its final disposition, subject to an obligation to
repay those amounts under certain circumstances. Pursuant to these
indemnification arrangements and as an advancement of costs, Charter has
reimbursed certain of its current and former directors and executive officers
a
total of approximately $16,200 in respect of invoices received in 2005, in
connection with their defense of certain legal actions. These amounts were
submitted to Charter’s director and officer insurance carrier and have been
reimbursed consistent with the terms of the settlement of the legal actions.
The
Audit
Committee appoints, retains, compensates and oversees the registered public
accountants (subject, if applicable, to board of director and/or shareholder
ratification), and approves in advance all fees and terms for the audit
engagement and non-audit engagements where nonaudit services are not prohibited
by Section 10A of the Securities Exchange Act of 1934, as amended with
registered public accountants. Preapprovals of non-audit services are sometimes
delegated to a single member of the Audit Committee. However, any pre-approvals
made by the Audit Committee’s designee are presented at the Audit Committee’s
next regularly scheduled meeting. The Audit Committee has an obligation to
consult with management on these matters. The Audit Committee approved 100%
of
the KPMG fees for the years ended December 31, 2005 and 2004. Each year,
including 2005, with respect to the proposed audit engagement, the Audit
Committee reviews the proposed risk assessment process in establishing the
scope
of examination and the reports to be rendered.
In
its
capacity as a committee of the Board, the Audit Committee oversees the work
of
the registered public accounting firm (including resolution of disagreements
between management and the public accounting firm regarding financial reporting)
for the purpose of preparing or issuing an audit report or performing other
audit, review or attest services. The registered public accounting firm reports
directly to the Audit Committee. In performing its functions, the Audit
Committee undertakes those tasks and responsibilities that, in its judgment,
most effectively contribute to and implement the purposes of the Audit Committee
charter. For more detail of the Audit Committee’s authority and
responsibilities, see Charter’s Audit Committee charter set forth in Appendix A
of our 2004 Proxy Statement filed with the SEC on June 25, 2004.
Item 15.
Exhibits
and Financial Statement Schedules.
(a)
The
following documents are filed as part of this annual
report:
(1)
Financial
Statements.
A
listing
of the financial statements, notes and reports of independent public accountants
required by Item 8 begins on page F-1 of this annual report.
(2)
Financial
Statement Schedules.
No
financial statement schedules are required to be filed by Items 8 and 15(d)
because they are not required or are not applicable, or the required information
is set forth in the applicable financial statements or notes
thereto.
(3)
The
index to the exhibits begins on page 124 of this annual
report.
We
agree
to furnish to the SEC, upon request, copies of any long-term debt instruments
that authorize an amount of securities constituting 10% or less of the total
assets of Charter and its subsidiaries on a consolidated basis.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Charter Communications, Inc. has duly caused this annual report to
be
signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of Charter Communications,
Inc.
and in the capacities and on the dates indicated.
(Exhibits
are listed by numbers corresponding to the Exhibit Table of Item 601
in Regulation S-K).
Exhibit
Description
2.2
Purchase
Agreement, dated May 29, 2003, by and between Falcon Video
Communications, L.P. and WaveDivision Holdings, LLC (incorporated
by
reference to Exhibit 2.1 to Charter Communications, Inc.’s
current report on Form 8-K filed on May 30, 2003
(File No. 000-27927)).
2.3
Asset
Purchase Agreement, dated September 3, 2003, by and between Charter
Communications VI, LLC, The Helicon Group, L.P., Hornell Television
Service, Inc., Interlink Communications Partners, LLC, Charter
Communications Holdings, LLC and Atlantic Broadband Finance, LLC
(incorporated by reference to Exhibit 2.1 to Charter Communications,
Inc.’s current report on Form 8-K/A filed on September 3, 2003
(File No. 000-27927)).
2.4
Purchase
Agreement dated as of January 26, 2006, by and between CCH II, LLC,
CCH II
Capital Corp and J.P. Morgan Securities, Inc as Representative of
several
Purchasers for $450,000,000 10.25% Senior Notes Due 2010 (incorporated
by
reference to Exhibit 10.3 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 27, 2006 (File No.
000-27927)).
First
Amendment to Amended and Restated By-Laws of Charter Communications,
Inc.
adopted as of November 8, 1999 (incorporated by reference to
Exhibit 3.2(b) to Amendment No. 1 to the registration statement on
Form S-1 filed by Charter Communications, Inc. on February 3, 2006
(File No. 333-130898)).
3.2(c)
Second
Amendment to Amended and Restated By-Laws of Charter Communications,
Inc.
adopted as of January 1, 2000 (incorporated by reference to
Exhibit 3.2(c) to Amendment No. 1 to the registration statement on
Form S-1 filed by Charter Communications, Inc. on February 3, 2006
(File No. 333-130898)).
3.2(d)
Third
Amendment to Amended and Restated By-Laws of Charter Communications,
Inc.
adopted as of June 6, 2001(incorporated by reference to
Exhibit 3.2(d) to Amendment No. 1 to the registration statement on
Form S-1 filed by Charter Communications, Inc. on February 3, 2006
(File No. 333-130898)).
Indenture
dated May 30, 2001 between Charter Communications, Inc. and BNY
Midwest Trust Company as Trustee governing 4.75% Convertible Senior
Notes due 2006 (incorporated by reference to Exhibit 4.1(b) to the
current report on Form 8-K filed by Charter Communications, Inc. on
June 1, 2001 (File
No. 000-27927)).
124
4.2(a)
Certificate
of Designation of Series A Convertible Redeemable Preferred Stock of
Charter Communications, Inc. and related Certificate of Correction
of
Certificate of Designation (incorporated by reference to Exhibit 3.1
to the quarterly report on Form 10-Q filed by Charter Communications,
Inc. on November 14, 2001 (File
No. 000-27927)).
4.2(b)
Certificate
of Amendment of Certificate of Designation of Series A Convertible
Redeemable Preferred Stock of Charter Communications, Inc. (incorporated
by reference to Annex A to the Definitive Information Statement on
Schedule 14C filed by Charter Communications, Inc. on
December 12, 2005 (File No. 000-27927)).
4.3
Indenture
relating to the 5.875% convertible senior notes due 2009, dated as
of
November 2004, by and among Charter Communications, Inc. and Wells
Fargo
Bank, N.A. as trustee (incorporated by reference to Exhibit 10.1
to the
current report on Form 8-K of Charter Communications, Inc. filed on
November 30, 2004 (File No. 000-27927)).
4.4
5.875%
convertible senior notes due 2009 Resale Registration Rights Agreement,
dated November 22, 2004, by and among Charter Communications, Inc.
and Citigroup Global Markets Inc. and Morgan Stanley and Co. Incorporated
as representatives of the initial purchasers (incorporated by reference
to
Exhibit 10.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on November 30, 2004 (File
No. 000-27927)).
Collateral
Pledge and Security Agreement, dated as of November 22, 2004, by and
between Charter Communications, Inc. and Wells Fargo Bank, N.A. as
trustee
and collateral agent (incorporated by reference to Exhibit 10.4 to
the current report on Form 8-K of Charter Communications, Inc. filed
on November 30, 2004 (File No. 000-27927)).
4.7
Collateral
Pledge and Security Agreement, dated as of November 22, 2004 among
Charter Communications, Inc., Charter Communications Holding Company,
LLC
and Wells Fargo Bank, N.A. as trustee and collateral agent (incorporated
by reference to Exhibit 10.5 to the current report on Form 8-K
of Charter Communications, Inc. filed on November 30, 2004 (File
No. 000-27927)).
10.1
Indenture,
dated as of April 9, 1998, by among Renaissance Media (Louisiana)
LLC, Renaissance Media (Tennessee) LLC, Renaissance Media Capital
Corporation, Renaissance Media Group LLC and United States Trust
Company
of New York, as trustee (incorporated by reference to Exhibit 4.1 to
the registration statement on Forms S-4 of Renaissance Media Group
LLC, Renaissance Media (Tennessee) LLC, Renaissance Media (Louisiana)
LLC
and Renaissance Media Capital Corporation filed on June 12, 1998
(File No. 333-56679)).
10.2
Indenture
relating to the 8.250% Senior Notes due 2007, dated as of
March 17, 1999, between Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and Harris Trust and
Savings
Bank (incorporated by reference to Exhibit 4.1(a) to Amendment
No. 2 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications Holdings
Capital
Corporation filed on June 22, 1999 (File
No. 333-77499)).
10.3(a)
Indenture
relating to the 8.625% Senior Notes due 2009, dated as of
March 17, 1999, among Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and Harris Trust and
Savings
Bank (incorporated by reference to Exhibit 4.2(a) to Amendment
No. 2 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications Holdings
Capital
Corporation filed on June 22, 1999 (File
No. 333-77499)).
10.3(b)
First
Supplemental Indenture relating to the 8.625% Senior Notes due 2009,
dated
as of September 28, 2005, among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation and BNY Midwest
Trust
Company as Trustee (incorporated by reference to Exhibit 10.3 to the
current report on Form 8-K of Charter Communications, Inc. filed
on October 4, 2005 (File No. 000-27927)).
10.4(a)
Indenture
relating to the 9.920% Senior Discount Notes due 2011, dated as of
March 17, 1999, among Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and Harris Trust and
Savings
Bank (incorporated by reference to Exhibit 4.3(a) to Amendment
No. 2 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications Holdings
Capital
Corporation filed on June 22, 1999 (File
No. 333-77499)).
10.4(b)
First
Supplemental Indenture relating to the 9.920% Senior Discount Notes
due
2011, dated as of September 28, 2005, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital Corporation
and BNY
Midwest Trust Company as Trustee (incorporated by reference to
Exhibit 10.4 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
125
10.5(a)
Indenture
relating to the 10.00% Senior Notes due 2009, dated as of
January 12, 2000, between Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation and Harris Trust
and
Savings Bank (incorporated by reference to Exhibit 4.1(a) to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital Corporation
filed on January 25, 2000 (File
No. 333-95351)).
10.5(b)
First
Supplemental Indenture relating to the 10.00% Senior Notes due 2009,
dated
as of September 28, 2005, between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee (incorporated by reference to Exhibit 10.5
to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
10.6(a)
Indenture
relating to the 10.25% Senior Notes due 2010, dated as of
January 12, 2000, among Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and Harris Trust and
Savings
Bank (incorporated by reference to Exhibit 4.2(a) to the registration
statement on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
January 25, 2000 (File No. 333-95351)).
10.6(b)
First
Supplemental Indenture relating to the 10.25% Senior Notes due 2010,
dated
as of September 28, 2005, among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation and BNY Midwest
Trust
Company as Trustee (incorporated by reference to Exhibit 10.6 to the
current report on Form 8-K of Charter Communications, Inc. filed
on October 4, 2005 (File No. 000-27927)).
10.7(a)
Indenture
relating to the 11.75% Senior Discount Notes due 2010, dated as of
January 12, 2000, among Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and Harris Trust and
Savings
Bank (incorporated by reference to Exhibit 4.3(a) to the registration
statement on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
January 25, 2000 (File No. 333-95351)).
10.7(b)
First
Supplemental Indenture relating to the 11.75% Senior Discount Notes
due
2010, among Charter Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and BNY Midwest Trust Company as Trustee,
dated as of September 28, 2005 (incorporated by reference to
Exhibit 10.7 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
10.8(a)
Indenture
dated as of January 10, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 10.750% senior notes due 2009
(incorporated by reference to Exhibit 4.2(a) to the registration
statement on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
February 2, 2001 (File No. 333-54902)).
10.8(b)
First
Supplemental Indenture dated as of September 28, 2005 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing 10.750%
Senior Notes due 2009 (incorporated by reference to Exhibit 10.8 to
the current report on Form 8-K of Charter Communications, Inc.
filed on October 4, 2005 (File
No. 000-27927)).
10.9(a)
Indenture
dated as of January 10, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 11.125% senior notes due 2011
(incorporated by reference to Exhibit 4.2(b) to the registration
statement on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
February 2, 2001 (File No. 333-54902)).
10.9(b)
First
Supplemental Indenture dated as of September 28, 2005, between
Charter Communications Holdings, LLC, Charter Communications Capital
Corporation and BNY Midwest Trust Company governing 11.125% Senior
Notes
due 2011 (incorporated by reference to Exhibit 10.9 to the current
report on Form 8-K of Charter Communications, Inc. filed on
October 4, 2005 (File No. 000-27927)).
10.10(a)
Indenture
dated as of January 10, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 13.500% senior discount notes due
2011 (incorporated by reference to Exhibit 4.2(c) to the registration
statement on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
February 2, 2001 (File No. 333-54902)).
10.10(b)
First
Supplemental Indenture dated as of September 28, 2005, between
Charter Communications Holdings, LLC, Charter Communications Holdings
Capital Corporation and BNY Midwest Trust Company as Trustee governing
13.500% Senior Discount Notes due 2011 (incorporated by reference
to
Exhibit 10.10 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
126
10.11(a)
Indenture
dated as of May 15, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 9.625% Senior Notes due 2009
(incorporated by reference to Exhibit 10.2(a) to the current report
on Form 8-K filed by Charter Communications, Inc. on June 1,2001 (File No. 000-27927)).
10.11(b)
First
Supplemental Indenture dated as of January 14, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
9.625% Senior Notes due 2009 (incorporated by reference to
Exhibit 10.2(a) to the current report on Form 8-K filed by
Charter Communications, Inc. on January 15, 2002 (File
No. 000-27927)).
10.11(c)
Second
Supplemental Indenture dated as of June 25, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
9.625% Senior Notes due 2009 (incorporated by reference to
Exhibit 4.1 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on August 6, 2002 (File
No. 000-27927)).
10.11(d)
Third
Supplemental Indenture dated as of September 28, 2005 between Charter
Communications Holdings, LLC, Charter Communications Capital Corporation
and BNY Midwest Trust Company as Trustee governing 9.625% Senior
Notes due
2009 (incorporated by reference to Exhibit 10.11 to the current
report on Form 8-K of Charter Communications, Inc. filed on
October 4, 2005 (File No. 000-27927)).
10.12(a)
Indenture
dated as of May 15, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 10.000% Senior Notes due 2011
(incorporated by reference to Exhibit 10.3(a) to the current report
on Form 8-K filed by Charter Communications, Inc. on June 1,2001 (File No. 000-27927)).
10.12(b)
First
Supplemental Indenture dated as of January 14, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
10.000% Senior Notes due 2011 (incorporated by reference to
Exhibit 10.3(a) to the current report on Form 8-K filed by
Charter Communications, Inc. on January 15, 2002 (File
No. 000-27927)).
10.12(c)
Second
Supplemental Indenture dated as of June 25, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
10.000% Senior Notes due 2011 (incorporated by reference to
Exhibit 4.2 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on August 6, 2002 (File
No. 000-27927)).
10.12(d)
Third
Supplemental Indenture dated as of September 28, 2005 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing the
10.000%
Senior Notes due 2011 (incorporated by reference to
Exhibit 10.12 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
10.13(a)
Indenture
dated as of May 15, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 11.750% Senior Discount Notes due
2011 (incorporated by reference to Exhibit 10.4(a) to the current
report on Form 8-K filed by Charter Communications, Inc. on
June 1, 2001 (File No. 000-27927)).
10.13(b)
First
Supplemental Indenture dated as of September 28, 2005 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing 11.750%
Senior Discount Notes due 2011 (incorporated by reference to
Exhibit 10.13 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
10.14
4.75%
Mirror Note in the principal amount of $632.5 million dated as of
May 30, 2001, made by Charter Communications Holding Company, LLC, a
Delaware limited liability company, in favor of Charter Communications,
Inc., a Delaware corporation (incorporated by reference to
Exhibit 4.5 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on August 6, 2002 (File
No. 000-27927)).
10.15(a)
Indenture
dated as of January 14, 2002 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY
Midwest
Trust Company as Trustee governing 12.125% Senior Discount Notes due
2012 (incorporated by reference to Exhibit 10.4(a) to the current
report on Form 8-K filed by Charter Communications, Inc. on
January 15, 2002 (File
No. 000-27927)).
127
10.15(b)
First
Supplemental Indenture dated as of June 25, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
12.125% Senior Discount Notes due 2012 (incorporated by reference to
Exhibit 4.3 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on August 6, 2002 (File
No. 000-27927)).
10.15(c)
Second
Supplemental Indenture dated as of September 28, 2005 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing 12.125%
Senior Discount Notes due 2012 (incorporated by reference to
Exhibit 10.14 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
10.16
Indenture
relating to the 10.25% Senior Notes due 2010, dated as of
September 23, 2003, among CCH II, LLC, CCH II Capital
Corporation and Wells Fargo Bank, National Association (incorporated
by
reference to Exhibit 10.1 to the current report on Form 8-K of
Charter Communications Inc. filed on September 26, 2003 (File
No. 000-27927)).
10.17
Indenture
relating to the 8 3/4% Senior Notes due 2013, dated as of
November 10, 2003, by and among CCO Holdings, LLC, CCO Holdings
Capital Corp. and Wells Fargo Bank, N.A., as trustee (incorporated
by
reference to Exhibit 4.1 to Charter Communications, Inc.’s current
report on Form 8-K filed on November 12, 2003 (File
No. 000-27927)).
10.18
Indenture
relating to the 8% senior second lien notes due 2012 and 8
3/8% senior second lien notes due 2014, dated as of April 27,2004, by and among Charter Communications Operating, LLC, Charter
Communications Operating Capital Corp. and Wells Fargo Bank, N.A.
as
trustee (incorporated by reference to Exhibit 10.32 to Amendment
No. 2 to the registration statement on Form S-4 of CCH II,
LLC filed on May 5, 2004 (File
No. 333-111423)).
10.19
Share
Lending Agreement, dated as of November 22, 2004 between Charter
Communications, Inc., Citigroup Global Markets Limited, through Citigroup
Global Markets, Inc. (incorporated by reference to Exhibit 10.6 to
the current report on Form 8-K of Charter Communications, Inc. filed
on November 30, 2004 (File No. 000-27927)).
10.20
Holdco
Mirror Notes Agreement, dated as of November 22, 2004, by and between
Charter Communications, Inc. and Charter Communications Holding Company,
LLC (incorporated by reference to Exhibit 10.7 to the current report
on Form 8-K of Charter Communications, Inc. filed on
November 30, 2004 (File No. 000-27927)).
10.21
Unit
Lending Agreement, dated as of November 22, 2004, by and between
Charter Communications, Inc. and Charter Communications Holding Company,
LLC (incorporated by reference to Exhibit 10.8 to the current report
on Form 8-K of Charter Communications, Inc. filed on
November 30, 2004 (File No. 000-27927)).
10.22
5.875%
Mirror Convertible Senior Note due 2009, in the principal amount
of
$862,500,000 dated as of November 22, 2004 made by Charter
Communications Holding Company, LLC, a Delaware limited liability
company,
in favor of Charter Communications, Inc., a Delaware limited liability
company, in favor of Charter Communications, Inc., a Delaware corporation
(incorporated by reference to Exhibit 10.9 to the current report on
Form 8-K of Charter Communications, Inc. filed on November 30,2004 (File No. 000-27927)).
10.23
Indenture
dated as of December 15, 2004 among CCO Holdings, LLC, CCO Holdings
Capital Corp. and Wells Fargo Bank, N.A., as trustee (incorporated
by
reference to Exhibit 10.1 to the current report on Form 8-K of CCO
Holdings, LLC filed on December 21, 2004 (File No.
333-112593)).
10.24
Indenture
dated as of September 28, 2005 among CCH I Holdings, LLC
and CCH I Holdings Capital Corp., as Issuers and Charter
Communications Holdings, LLC, as Parent Guarantor, and The Bank of
New
York Trust Company, NA, as Trustee, governing: 11.125% Senior Accreting
Notes due 2014, 9.920% Senior Accreting Notes due 2014, 10.000% Senior
Accreting Notes due 2014, 11.75% Senior Accreting Notes due 2014,
13.50%
Senior Accreting Notes due 2014, 12.125% Senior Accreting Notes due
2015
(incorporated by reference to Exhibit 10.1 to the current report on
Form 8-K of Charter Communications, Inc. filed on
October 4, 2005 (File No. 000-27927)).
10.25
Indenture
dated as of September 28, 2005 among CCH I, LLC and CCH I
Capital Corp., as Issuers, Charter Communications Holdings, LLC, as
Parent Guarantor, and The Bank of New York Trust Company, NA, as
Trustee, governing 11.00% Senior Secured Notes due 2015 (incorporated
by reference to Exhibit 10.2 to the current report on Form 8-K
of Charter Communications, Inc. filed on October 4, 2005 (File
No. 000-27927)).
10.26
Pledge
Agreement made by CCH I, LLC in favor of The Bank of New York Trust
Company, NA, as Collateral Agent dated as of September 28, 2005
(incorporated by reference to Exhibit 10.15 to the current report on
Form 8-K of Charter Communications, Inc. filed on October 4,2005 (File No. 000-27927)).
128
10.27(a)
Senior
Bridge Loan Agreement dated as of October 17, 2005 by and among CCO
Holdings, LLC, CCO Holdings Capital Corp., certain lenders, JPMorgan
Chase
Bank, N.A., as Administrative Agent, J.P. Morgan Securities Inc.
and
Credit Suisse, Cayman Islands Branch, as joint lead arrangers and
joint
bookrunners, and Deutsche Bank Securities Inc., as documentation
agent.
(incorporated by reference to Exhibit 99.1 to the current report
on
Form 8-K of Charter Communications, Inc. filed on October 19,2005 (File No. 000-27927)).
10.27(b)
Waiver
and Amendment Agreement to the Senior Bridge Loan Agreement dated
as of
January 26, 2006 by and among CCO Holdings, LLC, CCO Holdings Capital
Corp., certain lenders, JPMorgan Chase Bank, N.A., as Administrative
Agent, J.P. Morgan Securities Inc. and Credit Suisse, Cayman Islands
Branch, as joint lead arrangers and joint bookrunners, and Deutsche
Bank
Securities Inc., as documentation agent (incorporated by reference
to
Exhibit 10.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 27, 2006
(File No. 000-27927)).
10.28
Settlement
Agreement and Mutual Releases, dated as of October 31, 2005, by and
among Charter Communications, Inc., Special Committee of the Board
of
Directors of Charter Communications, Inc., Charter Communications
Holding
Company, LLC, CCHC, LLC, CC VIII, LLC, CC V, LLC, Charter
Investment, Inc., Vulcan Cable III, LLC and Paul G. Allen (incorporated
by
reference to Exhibit 10.17 to the quarterly report on Form 10-Q
of Charter Communications, Inc. filed on November 2, 2005 (File
No. 000-27927)).
10.29
Exchange
Agreement, dated as of October 31, 2005, by and among Charter
Communications Holding Company, LLC, Charter Investment, Inc. and
Paul G.
Allen (incorporated by reference to Exhibit 10.18 to the quarterly
report on Form 10-Q of Charter Communications, Inc. filed on
November 2, 2005 (File No. 000-27927)).
Consulting
Agreement, dated as of March 10, 1999, by and between Vulcan
Northwest Inc., Charter Communications, Inc. (now called Charter
Investment, Inc.) and Charter Communications Holdings, LLC (incorporated
by reference to Exhibit 10.3 to Amendment No. 4 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital Corporation
filed on July 22, 1999 (File No. 333-77499)).
10.32
Letter
Agreement, dated September 21, 1999, by and among Charter
Communications, Inc., Charter Investment, Inc., Charter Communications
Holding Company, Inc. and Vulcan Ventures Inc. (incorporated by reference
to Exhibit 10.22 to Amendment No. 3 to the registration
statement on Form S-1 of Charter Communications, Inc. filed on
October 18, 1999 (File No. 333-83887)).
10.33
Form
of Exchange Agreement, dated as of November 12, 1999 by and among
Charter Investment, Inc., Charter Communications, Inc., Vulcan
Cable III Inc. and Paul G. Allen (incorporated by reference to
Exhibit 10.13 to Amendment No. 3 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on October 18,1999 (File No. 333-83887)).
10.34(a)
First
Amended and Restated Mutual Services Agreement, dated as of
December 21, 2000, by and between Charter Communications, Inc.,
Charter Investment, Inc. and Charter Communications Holding Company,
LLC
(incorporated by reference to Exhibit 10.2(b) to the registration
statement on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
February 2, 2001 (File No. 333-54902)).
10.34(b)
Letter
Agreement, dated June 19, 2003, by and among Charter Communications,
Inc., Charter Communications Holding Company, LLC and Charter Investment,
Inc. regarding Mutual Services Agreement (incorporated by reference
to
Exhibit No. 10.5(b) to the quarterly report on Form 10-Q filed
by Charter Communications, Inc. on August 5, 2003 (File
No. 000-27927)).
10.34(c)
Second
Amended and Restated Mutual Services Agreement, dated as of June 19,2003 between Charter Communications, Inc. and Charter Communications
Holding Company, LLC (incorporated by reference to Exhibit 10.5(a) to
the quarterly report on Form 10-Q filed by Charter Communications,
Inc. on August 5, 2003 (File No. 000-27927)).
10.35(a)
Amended
and Restated Limited Liability Company Agreement for Charter
Communications Holding Company, LLC made as of August 31, 2001
(incorporated by reference to Exhibit 10.9 to the quarterly report on
Form 10-Q filed by Charter Communications, Inc. on November 14,2001 (File No. 000-27927)).
10.35(b)
Letter
Agreement between Charter Communications, Inc. and Charter Investment
Inc.
and Vulcan Cable III Inc. amending the Amended and Restated Limited
Liability Company Agreement of Charter Communications Holding Company,
LLC, dated as of November 22, 2004 (incorporated by reference to
Exhibit 10.10 to the current report on Form 8-K of Charter
Communications, Inc. filed on November 30, 2004 (File
No. 000-27927)).
129
10.36
Second
Amended and Restated Limited Liability Company Agreement for Charter
Communications Holdings, LLC, dated as of October 31, 2005 (incorporated
by reference to Exhibit 10.21 to the quarterly report on Form 10-Q
of
Charter Communications, Inc. filed on November 2, 2005 (File No.
000-27927)).
10.37(a)
Amended
and Restated Limited Liability Company Agreement for
CC VIII, LLC, dated as of March 31, 2003 (incorporated by
reference to Exhibit 10.27 to the annual report on Form 10-K of
Charter Communications, Inc. filed on April 15, 2003 (File
No. 000-27927)).
10.37(b)
Third
Amended and Restated Limited Liability Company Agreement for CC VIII,
LLC, dated as of October 31, 2005 (incorporated by reference to Exhibit
10.20 to the quarterly report on Form 10-Q filed by Charter
Communications, Inc. on November 2, 2005 (File
No. 000-27927)).
10.38(a)
Amended
and Restated Limited Liability Company Agreement of Charter Communications
Operating, LLC, dated as of June 19, 2003 (incorporated by reference
to Exhibit No. 10.2 to the quarterly report on Form 10-Q
filed by Charter Communications, Inc. on August 5, 2003 (File
No. 000-27927)).
10.38(b)*
First
Amendment to the Amended and Restated Limited Liability Company Agreement
of Charter Communications Operating, LLC, adopted as of June 22,2004.
10.39
Amended
and Restated Management Agreement, dated as of June 19, 2003, between
Charter Communications Operating, LLC and Charter Communications,
Inc.
(incorporated by reference to Exhibit 10.4 to the quarterly report on
Form 10-Q filed by Charter Communications, Inc. on August 5,2003 (File No. 333-83887)).
10.40
Amended
and Restated Credit Agreement among Charter Communications Operating,
LLC,
CCO Holdings, LLC and certain lenders and agents named therein dated
April 27, 2004 (incorporated by reference to Exhibit 10.25 to
Amendment No. 2 to the registration statement on Form S-4 of
CCH II, LLC filed on May 5, 2004 (File
No. 333-111423)).
10.41(a)
Stipulation
of Settlement, dated as of January 24, 2005, regarding settlement of
Consolidated Federal Class Action entitled in Re Charter
Communications, Inc. Securities Litigation. (incorporated by reference
to
Exhibit 10.48 to the Annual Report on Form 10-K filed by Charter
Communications, Inc. on March 3, 2005 (File
No. 000-27927)).
10.41(b)
Amendment
to Stipulation of Settlement, dated as of May 23, 2005, regarding
settlement of Consolidated Federal Class Action entitled In Re Charter
Communications, Inc. Securities Litigation (incorporated by reference
to
Exhibit 10.35(b) to Amendment No. 3 to the registration
statement on Form S-1 filed by Charter Communications, Inc. on
June 8, 2005 (File No. 333-121186)).
10.42
Settlement
Agreement and Mutual Release, dated as of February 1, 2005, by and
among Charter Communications, Inc. and certain other insureds, on
the
other hand, and Certain Underwriters at Lloyd’s of London and certain
subscribers, on the other hand. (incorporated by reference to
Exhibit 10.49 to the annual report on Form 10-K filed by Charter
Communications, Inc. on March 3, 2005 (File
No. 000-27927)).
10.43
Stipulation
of Settlement, dated as of January 24, 2005, regarding settlement of
Federal Derivative Action, Arthur J. Cohn v. Ronald L.
Nelson et al and Charter Communications, Inc. (incorporated by reference
to Exhibit 10.50 to the annual report on Form 10-K filed by
Charter Communications, Inc. on March 3, 2005 (File
No. 000-27927)).
10.44(a)+
Charter
Communications Holdings, LLC 1999 Option Plan (incorporated by reference
to Exhibit 10.4 to Amendment No. 4 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July 22, 1999
(File No. 333-77499)).
10.44(b)+
Assumption
Agreement regarding Option Plan, dated as of May 25, 1999, by and
between Charter Communications Holdings, LLC and Charter Communications
Holding Company, LLC (incorporated by reference to Exhibit 10.13 to
Amendment No. 6 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation filed on August 27, 1999 (File
No. 333-77499)).
10.44(c)+
Form
of Amendment No. 1 to the Charter Communications Holdings, LLC 1999
Option Plan (incorporated by reference to Exhibit 10.10(c) to
Amendment No. 4 to the registration statement on Form S-1 of
Charter Communications, Inc. filed on November 1, 1999 (File
No. 333-83887)).
10.44(d)+
Amendment
No. 2 to the Charter Communications Holdings, LLC 1999 Option Plan
(incorporated by reference to Exhibit 10.4(c) to the annual report on
Form 10-K filed by Charter Communications, Inc. on March 30,2000 (File No. 000-27927)).
10.44(e)+
Amendment
No. 3 to the Charter Communications 1999 Option Plan (incorporated by
reference to Exhibit 10.14(e) to the annual report of Form 10-K
of Charter Communications, Inc. filed on March 29, 2002 (File
No. 000-27927)).
130
10.44(f)+
Amendment
No. 4 to the Charter Communications 1999 Option Plan (incorporated by
reference to Exhibit 10.10(f) to the annual report on Form 10-K
of Charter Communications, Inc. filed on April 15, 2003 (File
No. 000-27927)).
10.45(a)+
Charter
Communications, Inc. 2001 Stock Incentive Plan (incorporated by reference
to Exhibit 10.25 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on May 15, 2001 (File
No. 000-27927)).
10.45(b)+
Amendment
No. 1 to the Charter Communications, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.11(b) to the annual report
on Form 10-K of Charter Communications, Inc. filed on April 15,2003 (File No. 000-27927)).
10.45(c)+
Amendment
No. 2 to the Charter Communications, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.10 to the quarterly report
on Form 10-Q filed by Charter Communications, Inc. on
November 14, 2001 (File No. 000-27927)).
10.45(d)+
Amendment
No. 3 to the Charter Communications, Inc. 2001 Stock Incentive Plan
effective January 2, 2002 (incorporated by reference to
Exhibit 10.15(c) to the annual report of Form 10-K of Charter
Communications, Inc. filed on March 29, 2002 (File
No. 000-27927)).
10.45(e)+
Amendment
No. 4 to the Charter Communications, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.11(e) to the annual report
on Form 10-K of Charter Communications, Inc. filed on April 15,2003 (File No. 000-27927)).
10.45(f)+
Amendment
No. 5 to the Charter Communications, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.11(f) to the annual report
on Form 10-K of Charter Communications, Inc. filed on April 15,2003 (File No. 000-27927)).
10.45(g)+
Amendment
No. 6 to the Charter Communications, Inc. 2001 Stock Incentive Plan
effective December 23, 2004 (incorporated by reference to
Exhibit 10.43(g) to the registration statement on Form S-1 of
Charter Communications, Inc. filed on October 5, 2005 (File
No. 333-128838)).
10.45(h)+
Amendment
No. 7 to the Charter Communications, Inc. 2001 Stock Incentive Plan
effective August 23, 2005 (incorporated by reference to
Exhibit 10.43(h) to the registration statement on Form S-1 of
Charter Communications, Inc. filed on October 5, 2005 (File
No. 333-128838)).
10.45(i)+
Description
of Long-Term Incentive Program to the Charter Communications, Inc.
2001
Stock Incentive Plan (incorporated by reference to Exhibit 10.11(g)
to the annual report on Form 10-K filed by Charter Communications,
Inc. on March 15, 2004 (File No. 000-27927)).
10.46+
Description
of Charter Communications, Inc. 2005 Executive Bonus Plan (incorporated
by
reference to Exhibit 10.51 to the annual report on Form 10-K
filed by Charter Communications, Inc. on March 3, 2005 (File
No. 000-27927)).
10.47+
2005
Executive Cash Award Plan dated as of June 9, 2005 (incorporated by
reference to Exhibit 99.1 to the current report on Form 8-K of
Charter Communications, Inc. filed June 15, 2005 (File
No. 000-27927)).
10.48+
Executive
Services Agreement, dated as of January 17, 2005, between Charter
Communications, Inc. and Robert P. May (incorporated by reference
to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 21, 2005 (File
No. 000-27927)).
10.49+
Employment
Agreement, dated as of October 8, 2001, by and between Carl E. Vogel
and Charter Communications, Inc. (Incorporated by reference to
Exhibit 10.4 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on November 14, 2001 (File
No. 000-27927)).
Employment
Agreement, dated as of April 1, 2005, by and between Michael J. Lovett
and
Charter Communications, Inc. (incorporated by reference to
Exhibit 10.11 to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on May 3, 2005 (File
No. 000-27927)).
10.52+
Letter
Agreement, dated April 15, 2005, by and between Charter
Communications, Inc. and Paul E. Martin (incorporated by reference
to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed April 19, 2005
(File No. 000-27927)).
10.53+
Restricted
Stock Agreement, dated as of July 13, 2005, by and between
Robert P. May and Charter Communications, Inc. (incorporated by
reference to Exhibit 99.1 to the current report on Form 8-K of
Charter Communications, Inc. filed July 13, 2005 (File
No. 000-27927)).
10.54+
Restricted
Stock Agreement, dated as of July 13, 2005, by and between Michael J.
Lovett and Charter Communications, Inc. (incorporated by reference
to
Exhibit 99.2 to the current report on Form 8-K of Charter
Communications, Inc. filed July 13, 2005 (File
No. 000-27927)).
10.55+
Employment
Agreement, dated as of August 9, 2005, by and between Neil Smit and
Charter Communications, Inc. (incorporated by reference to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on August 15, 2005 (File
No. 000-27927)).
131
10.56+
Employment
Agreement dated as of September 2, 2005, by and between Paul E.
Martin and Charter Communications, Inc. (incorporated by reference
to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on September 9, 2005 (File
No. 000-27927)).
10.57+
Employment
Agreement dated as of September 2, 2005, by and between Wayne H.
Davis and Charter Communications, Inc. (incorporated by reference
to
Exhibit 99.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on September 9, 2005 (File
No. 000-27927)).
10.58+
Employment
Agreement dated as of October 31, 2005, by and between Sue Ann
Hamilton and Charter Communications, Inc. (incorporated by reference
to
Exhibit 10.21 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on November 2, 2005 (File
No. 000-27927)).
10.59+
Employment
Agreement effective as of October 10, 2005, by and between Grier C.
Raclin and Charter Communications, Inc. (incorporated by reference
to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on November 14, 2005 (File
No. 000-27927)).
10.60+
Employment
Offer Letter, dated November 22, 2005, by and between Charter
Communications, Inc. and Robert A. Quigley (incorporated by reference
to
10.68 to Amendment No. 1 to the registration statement on Form S-1
of
Charter Communications, Inc. filed on February 2, 2006 (File No.
333-130898)).
10.61+
Employment
Agreement dated as of December 9, 2005, by and between Robert
A. Quigley and Charter Communications, Inc. (incorporated by
reference to Exhibit 99.1 to the current report on Form 8-K of
Charter Communications, Inc. filed on December 13, 2005 (File
No. 000-27927)).
10.62+
Retention
Agreement dated as of January 9, 2006, by and between Paul E. Martin
and Charter Communications, Inc. (incorporated by reference to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 10, 2006 (File
No. 000-27927)).
10.63+
Employment
Agreement dated as of January 20, 2006 by and between Jeffrey T.
Fisher
and Charter Communications, Inc.(incorporated by reference to Exhibit
10.1
to the current report on Form 8-K of Charter Communications, Inc.
filed on
January 27, 2006 (File No. 000-27927)).
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors
Charter
Communications, Inc.:
We
have
audited the accompanying consolidated balance sheets of Charter Communications,
Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and
the related consolidated statements of operations, changes in shareholders’
equity (deficit), and cash flows for each of the years in the three-year
period
ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Charter Communications,
Inc.
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005, based on criteria
established in
Internal Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and
our report dated February 27, 2006 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
As
discussed in Note 7 to the consolidated financial statements, effective
September 30, 2004, the Company adopted EITF Topic D-108, Use
of the Residual Method to Value Acquired Assets Other than
Goodwill.
As
discussed in Note 21 to the consolidated financial statements, effective
January1, 2003, the Company adopted Statement of Financial Accounting Standards
No.
123, Accounting
for Stock-Based Compensation,
as
amended by Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB
Statement No. 123.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Charter
Communications, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Charter
Communications, Inc. (the Company) maintained effective internal control
over
financial reporting as of December 31, 2005, based on criteria established
in
Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated,
in
all material respects, based on criteria established in Internal
Control - Integrated Framework
issued
by COSO.Also,
in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on
criteria
established in Internal
Control - Integrated Framework issued
by
COSO.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2005 and 2004, and the related consolidated statements
of
operations, changes in shareholders’ equity (deficit), and cash flows for each
of the years in the three-year period ended December 31, 2005, and our report
dated February 27, 2006expressed
an unqualified opinion on those consolidated financial statements.
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets
at
December 31, 2005 are the 48% 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, which is the sole owner of Charter Communications Holdings,
LLC ("Charter Holdings"). The consolidated financial statements include the
accounts of Charter, Charter Holdco, Charter Holdings and all of their wholly
owned subsidiaries where the underlying operations reside, which are
collectively referred to herein as the "Company." Charter has 100% voting
control over Charter Holdco and had historically consolidated on that basis.
Charter continues to consolidate 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 its customers traditional cable video
programming (analog and digital video) as well as high-speed Internet services
and, in some areas, advanced broadband services such as high-definition
television, video on demand and telephone. The Company sells its cable video
programming, high-speed Internet and advanced broadband services on a
subscription basis. The Company also sells local advertising on
satellite-delivered networks.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Areas involving significant judgments and estimates include
capitalization of labor and overhead costs; depreciation and amortization costs;
impairments of property, plant and equipment, franchises and goodwill; income
taxes; and contingencies. Actual results could differ from those
estimates.
Reclassifications.
Certain
prior year amounts have been reclassified to conform with the 2005
presentation.
2.Liquidity
and Capital Resources
The
Company incurred net loss applicable to common stock of $970 million, $4.3
billion and $242 million in 2005, 2004 and 2003, respectively. The Company’s net
cash flows from operating activities were $260 million, $472 million and
$765 million for the years ending December 31, 2005, 2004 and 2003,
respectively.
The
Company has a significant level of debt. The Company's long-term financing
as of
December 31, 2005 consists of $5.7 billion of credit facility debt, $12.8
billion accreted value of high-yield notes and $863 million accreted value
of
convertible senior notes. In 2006, $50 million of the Company’s debt matures and
in 2007, an additional $385 million matures. In 2008 and beyond, significant
additional amounts will become due under the Company’s remaining long-term debt
obligations.
Recent
Financing Transactions
On
January 30, 2006, CCH II, LLC ("CCH II") and CCH II Capital Corp. issued $450
million in debt securities, the proceeds of which were provided, directly or
indirectly, to Charter Communications Operating, LLC ("Charter Operating"),
which used such funds to reduce borrowings, but not commitments, under the
revolving portion of its credit facilities.
In
October 2005, CCO Holdings, LLC ("CCO Holdings") and CCO Holdings Capital Corp.,
as guarantor thereunder, entered into a senior bridge loan agreement (the
"Bridge Loan") with JPMorgan Chase Bank, N.A., Credit Suisse, Cayman Islands
Branch and Deutsche Bank AG Cayman Islands Branch (the "Lenders") whereby the
Lenders committed to make loans to CCO Holdings in an aggregate amount of $600
million. Upon the issuance of
$450
million of CCH II notes discussed above, the commitment under the Bridge
Loan
was reduced to $435 million. CCO Holdings may draw upon the facility between
January 2, 2006 and September 29, 2006 and the loans will mature on the sixth
anniversary of the first borrowing under the Bridge Loan.
In
September 2005, Charter Holdings and its wholly owned subsidiaries, CCH I,
LLC
("CCH I") and CCH I Holdings, LLC ("CIH"), completed the exchange of
approximately $6.8 billion total principal amount of outstanding debt securities
of Charter Holdings in a private placement for new debt securities. Holders
of
Charter Holdings notes due in 2009 and 2010 exchanged $3.4 billion principal
amount of notes for $2.9 billion principal amount of new 11% CCH I notes due
2015. Holders of Charter Holdings notes due 2011 and 2012 exchanged $845 million
principal amount of notes for $662 million principal amount of 11% CCH I notes
due 2015. In addition, holders of Charter Holdings notes due 2011 and 2012
exchanged $2.5 billion principal amount of notes for $2.5 billion principal
amount of various series of new CIH notes. Each series of new CIH notes has
the
same interest rate and provisions for payment of cash interest as the series
of
old Charter Holdings notes for which such CIH notes were exchanged. In addition,
the maturities for each series were extended three years.
See Note
9 for discussion of transaction and related financial statement
impact.
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 year ended December 31, 2005, the Company generated $260 million of
net
cash flows from operating activities after paying cash interest of $1.5 billion.
In
addition, the Company used $1.1 billion for purchases of property, plant and
equipment. Finally, the Company had net cash flows from financing activities
of
$136 million.
The
Company expects that cash on hand, cash flows from operating activities and
the
amounts available under its credit facilities and Bridge Loan will be adequate
to meet its cash needs in 2006. The Company believes that cash flows from
operating activities and amounts available under the Company’s credit facilities
and Bridge Loan will not be sufficient to fund the Company’s operations and
satisfy its interest and debt repayment obligations in 2007 and beyond. The
Company is working with its financial advisors to address this funding
requirement. However, there can be no assurance that such funding will be
available to the Company. In addition, Paul G. Allen, Charter’s Chairman and
controlling shareholder, and his affiliates are not obligated to purchase equity
from, contribute to or loan funds to the Company.
Debt
Covenants
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Operating credit
facilities and Bridge Loan. The Charter Operating credit facilities, along
with
the Company’s and its subsidiaries’ indentures and Bridge Loan, contain certain
restrictive covenants, some of which require the Company to maintain specified
financial ratios and meet financial tests and to provide audited financial
statements with an unqualified opinion from the Company’s independent auditors.
As of December 31, 2005, the Company is in compliance with the covenants under
its indentures, Bridge Loan and credit facilities, and the Company expects
to
remain in compliance with those covenants for the next twelve months. As of
December 31, 2005, the
Company’s potential availability under its credit facilities totaled
approximately $553 million, none of which was limited by
covenants.
In addition, as of January 2, 2006, the Company has additional borrowing
availability of $600 million under the Bridge Loan (which was reduced to $435
million as a result of the issuance of the CCH II notes). Continued
access to the Company’s credit facilities and Bridge Loan is subject to the
Company remaining in compliance with these covenants, including covenants tied
to the Company’s operating performance. If any events of non-compliance occur,
funding under the credit facilities and Bridge Loan 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.
Charter’s
ability to make interest payments on its convertible senior notes, and, in
2006
and 2009, to repay the outstanding principal of its convertible senior notes
of
$20 million and $863 million, respectively, will depend on its ability to raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco and its subsidiaries. During 2005, Charter Holdings distributed $60
million to Charter Holdco.
As of
December 31, 2005, Charter Holdco was owed $22 million in intercompany loans
from its subsidiaries, which were available to pay interest and principal on
Charter's convertible senior notes. In
addition, Charter has $98 million of governmental securities pledged as security
for the next four scheduled semi-annual interest payments on Charter’s 5.875%
convertible senior notes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, CCHC and
Charter Holdco) for
payment of principal on parent company notes are
restricted under the indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes and Charter Operating notes unless
there is no default, each applicable subsidiary’s leverage ratio test is met at
the time of such distribution and, in the case of the convertible senior notes,
other specified tests are met. For
the
quarter ended December 31, 2005, there was no default under any of these
indentures and each such subsidiary met its applicable leverage ratio tests
based
on
December 31, 2005 financial results.
Such
distributions would be restricted, however, if any such subsidiary fails to
meet
these tests. In the past, certain subsidiaries have from time to time failed
to
meet their leverage ratio test. There can be no assurance that they will satisfy
these tests at the time of such distribution. Distributions
by Charter Operating and CCO Holdings for payment of principal on parent company
notes are further restricted by the covenants in the credit facilities and
Bridge Loan, respectively.
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. However, distributions for payment of
interest on the convertible senior notes are further limited to when each
applicable subsidiary’s leverage ratio test is met and other specified tests are
met. There can be no assurance that they will satisfy these tests at the time
of
such distribution.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on the
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 December31, 2005, there was no default under Charter Holdings’ indentures and Charter
Holdings met its leverage ratio test based on December 31, 2005 financial
results.
Such
distributions would be restricted, however, if Charter Holdings fails to meet
these tests. In the past, Charter Holdings has from time to time failed to
meet
this leverage ratio test. There can be no assurance that Charter Holdings will
satisfy these tests at the time of such distribution. 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.
3.Summary
of Significant Accounting Policies
Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are carried
at
cost, which approximates market value.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost, including all material, labor and
certain indirect costs associated with the construction of cable transmission
and distribution facilities. While
the
Company’s capitalization is based on specific activities, once capitalized,
costs are tracked by fixed asset category at the cable system level and not
on a
specific asset basis. Costs associated with initial customer
installations and the additions of network equipment
necessary
to enable advanced services are capitalized. Costs capitalized as part of
initial customer installations include materials, labor, and certain indirect
costs. Indirect costs are associated with the activities of the Company’s
personnel who assist in connecting and activating the new service and consist
of
compensation and indirect costs associated with these support functions.
Indirect costs primarily include employee benefits and payroll taxes, direct
variable costs associated with capitalizable activities, consisting primarily
of
installation and construction vehicle costs, the cost of dispatch personnel
and
indirect costs directly attributable to capitalizable activities. The costs
of
disconnecting service at a customer’s dwelling or reconnecting service to a
previously installed dwelling are charged to operating expense in the period
incurred. Costs for repairs and maintenance are charged to operating expense
as
incurred, while plant and equipment replacement and betterments, including
replacement of cable drops from the pole to the dwelling, are capitalized.
Depreciation
is recorded using the straight-line composite method over management’s estimate
of the useful lives of the related assets as follows:
Cable
distribution systems
7-20 years
Customer
equipment and installations
3-5 years
Vehicles
and equipment
1-5 years
Buildings
and leasehold improvements
5-15 years
Furniture,
fixtures and equipment
5 years
Asset
Retirement Obligations
Certain
of our franchise agreements and leases contain provisions requiring us to
restore facilities or remove equipment in the event that the franchise or
lease
agreement is not renewed. We expect to continually renew our franchise
agreements and have concluded that substantially all of the related franchise
rights are indefinite lived intangible assets. Accordingly, the possibility
is
remote that we would be required to incur significant restoration or removal
costs related to these franchise agreements in the foreseeable future.
Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for
Asset Retirement Obligations," as interpreted by FIN No. 47, Accounting
for Conditional Asset Retirement Obligations - an Interpretation of FASB
Statement No. 143, requires that a liability be recognized for an asset
retirement obligation in the period in which it is incurred if a reasonable
estimate of fair value can be made. We have not recorded an estimate for
potential franchise related obligations but would record an estimated liability
in the unlikely event a franchise agreement containing such a provision were
no
longer expected to be renewed. We also expect to renew many of our lease
agreements related to the continued operation of our cable business in the
franchise areas. For our lease agreements, the liabilities related to the
removal provisions, where applicable, have been recorded and are not significant
to the financial statements.
Franchises
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 SFAS No. 142, Goodwill
and Other Intangible Assets.
All
franchises that qualify for indefinite-life treatment under SFAS No. 142
are no longer amortized against earnings but instead are tested for impairment
annually as of October 1, or more frequently as warranted by events or
changes in circumstances (see Note 7). The Company concluded that 99% of its
franchises qualify for indefinite-life treatment; however, certain franchises
did not qualify for indefinite-life treatment due to technological or
operational factors that limit their lives. These franchise costs are amortized
on a straight-line basis over 10 years. Costs incurred in renewing cable
franchises are deferred and amortized over 10 years.
Other
Noncurrent Assets
Other
noncurrent assets primarily include deferred financing costs, governmental
securities, investments in equity securities and goodwill. Costs related to
borrowings are deferred and amortized to interest expense over the terms of
the
related borrowings.
Investments
in equity securities are accounted for at cost, under the equity method of
accounting or in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
Charter
recognizes losses for any decline in value considered to be other than
temporary. Certain marketable equity securities are classified as
available-for-sale and reported at market value with unrealized gains and losses
recorded as accumulated other comprehensive income or loss.
The
following summarizes investment information as of and for the years ended
December 31, 2005 and 2004:
The
gain
on equity investments, under the equity method for the year ended December31,2005 primarily represents a gain realized on an exchange of the Company’s
interest in an equity investee for an investment in a larger enterprise. Such
amounts are included in other, net in the statements of operations.
As
required by the indentures to the Company’s 5.875% convertible senior notes
issued in November 2004, the Company purchased U.S. government securities valued
at approximately $144 million with maturities corresponding to the interest
payment dates for the convertible senior notes. These securities were pledged
and are held in escrow to provide payment in full for the first six interest
payments of the convertible senior notes (see Note 9), two of which were funded
in 2005. These securities are accounted for as held-to-maturity securities.
At
December 31, 2005, the carrying value and fair value of the securities was
approximately $98 million and $97 million, respectively, with approximately
$50
million recorded in prepaid and other assets and approximately $48 million
recorded in other assets on the Company’s consolidated balance sheet.
Valuation
of Property, Plant and Equipment
The
Company evaluates the recoverability of long-lived assets to be held and used
for impairment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable using asset groupings
consistent with those used to evaluate franchises. Such events or changes
in circumstances could include such factors as impairment of the Company’s
indefinite life franchise under SFAS No. 142, changes in technological advances,
fluctuations in the fair value of such assets, adverse changes in relationships
with local franchise authorities, adverse changes in market conditions or a
deterioration of operating results. If a review indicates that the carrying
value of such asset is not recoverable from estimated undiscounted cash flows,
the carrying value of such asset is reduced to its estimated fair value. While
the Company believes that its estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect its
evaluations of asset recoverability. No impairments of long-lived assets to
be
held and used were recorded in 2005, 2004 and 2003, however, approximately
$39
million of impairment on assets held for sale was recorded for the year ended
December 31, 2005 (see Note 4).
Derivative
Financial Instruments
The
Company accounts for derivative financial instruments in accordance with SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended. For those instruments which qualify as hedging activities, related
gains or losses are recorded in accumulated other comprehensive income. For
all
other derivative instruments, the related gains or losses are recorded in the
income statement. The Company uses interest rate risk
management
derivative instruments, such as interest rate swap agreements, interest rate
cap
agreements and interest rate collar agreements (collectively referred to herein
as interest rate agreements) as required under the terms of the credit
facilities of the Company’s subsidiaries. The Company’s policy is to manage
interest costs using a mix of fixed and variable rate debt. Using interest
rate
swap agreements, the Company agrees to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference
to an agreed-upon notional principal amount. Interest rate cap agreements are
used to lock in a maximum interest rate should variable rates rise, but enable
the Company to otherwise pay lower market rates. Interest rate collar agreements
are used to limit exposure to and benefits from interest rate fluctuations
on
variable rate debt to within a certain range of rates. The Company does not
hold
or issue any derivative financial instruments for trading purposes.
Certain
provisions of the Company’s 5.875% convertible senior notes issued in November
2004 were considered embedded derivatives for accounting purposes and were
required to be separately accounted for 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 consolidated statement
of operations. For the year ended December 31, 2005 and 2004, the Company
recognized $29 million in gains and $1 million in losses, respectively, related
to these derivatives. The gains resulted in a reduction of interest expense
while the losses resulted in an increase in interest expense related to these
derivatives. At December 31, 2005 and 2004, $1 million and $10 million,
respectively, is recorded in accounts payable and accrued expenses relating
to
the short-term portion of these derivatives and $1 million and $21 million,
respectively, is recorded in other long-term liabilities related to the
long-term portion.
Revenue
Recognition
Revenues
from residential and commercial video, high-speed Internet and telephone
services are recognized when the related services are provided. Advertising
sales are recognized at estimated realizable values in the period that the
advertisements are broadcast. Local governmental authorities impose franchise
fees on the Company ranging up to a federally mandated maximum of 5% of gross
revenues as defined in the franchise agreement. Such fees are collected on
a
monthly basis from the Company’s customers and are periodically remitted to
local franchise authorities. Franchise fees are reported as revenues on a gross
basis with a corresponding operating expense.
Programming
Costs
The
Company has various contracts to obtain analog, digital and premium video
programming from program suppliers whose compensation is typically based on
a
flat fee per customer. The cost of the right to exhibit network programming
under such arrangements is recorded in operating expenses in the month the
programming is available for exhibition. Programming costs are paid each month
based on calculations performed by the Company and are subject to periodic
audits performed by the programmers. Certain programming contracts contain
launch incentives to be paid by the programmers. The Company receives these
payments related to the activation of the programmer’s cable television channel
and recognizes the launch incentives on a straight-line basis over the life
of
the programming agreement as a reduction of programming expense. This offset
to
programming expense was $42 million, $62 million and $64 million for the years
ended December 31, 2005, 2004 and 2003, respectively. Programming costs included
in the accompanying statement of operations were $1.4 billion, $1.3 billion
and
$1.2 billion for the years ended December 31, 2005, 2004 and 2003,
respectively. As of December 31, 2005 and 2004, the deferred amount of
launch incentives, included in other long-term liabilities, were $83 million
and
$105 million, respectively.
Advertising
Costs
Advertising
costs associated with marketing the Company’s products and services are
generally expensed as costs are incurred. Such advertising expense was $97
million, $72 million and $62 million for the years ended December 31, 2005,
2004 and 2003, respectively.
The
Company has historically accounted for stock-based compensation in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by SFAS No. 123, Accounting
for Stock-Based Compensation.
On
January 1, 2003, the Company adopted the fair value measurement provisions
of SFAS No. 123 using the prospective method under which the Company will
recognize compensation expense of a stock-based award to an employee over the
vesting period based on the fair value of the award on the grant date consistent
with the method described in Financial Accounting Standards Board Interpretation
("FIN") No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans.
Adoption of these provisions resulted in utilizing a preferable accounting
method as the consolidated financial statements will present the estimated
fair
value of stock-based compensation in expense consistently with other forms
of
compensation and other expense associated with goods and services received
for
equity instruments. In accordance with SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, the
fair
value method was applied only to awards granted or modified after
January 1, 2003, whereas awards granted prior to such date were accounted
for under APB No. 25, unless they were modified or settled in cash.
SFAS
No. 123 requires pro forma disclosure of the impact on earnings as if the
compensation expense for these plans had been determined using the fair value
method. The following table presents the Company’s net loss and loss per share
as reported and the pro forma amounts that would have been reported using the
fair value method under SFAS No. 123 for the years presented:
Add
back stock-based compensation expense related to stock
options
included in reported net loss (net of minority interest)
14
31
2
Less
employee stock-based compensation expense determined under fair
value
based method for all employee stock option awards
(net
of minority interest)
(14)
(33)
(14)
Effects
of unvested options in stock option exchange (see Note 21)
--
48
--
Pro
forma
$
(970)
$
(4,299)
$
(254)
Loss
per common shares, basic and diluted:
As
reported
$
(3.13)
$
(14.47)
$
(0.82)
Pro forma
$
(3.13)
$
(14.32)
$
(0.86)
The
fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used for grants during the years ended December 31, 2005, 2004 and 2003,
respectively: risk-free interest rates of 4.0%, 3.3%, and 3.0%; expected
volatility of 70.9%, 92.4% and 93.6%; and expected lives of 4.5 years, 4.6
years
and 4.5 years, respectively. The valuations assume no dividends are paid.
The
Company recognized $5 million of benefit for the year ended December 31, 2004
related to changes in estimated legal reserves established as part of previous
business combinations, which, based on an evaluation of current facts and
circumstances, are no longer required.
The
Company recognized $72 million of benefit for the year ended December 31, 2003
as a result of the settlement of estimated liabilities recorded in connection
with prior business combinations. The majority of this benefit (approximately
$52 million) is due to the renegotiation of a major programming contract, for
which a liability had been recorded for the above market portion of the
agreement in conjunction with the Falcon acquisition in 1999 and
the
Bresnan acquisition in 2000. The remaining benefit relates to the reversal
of
previously recorded liabilities, which are no longer required.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of the Company’s assets
and liabilities and expected benefits of utilizing net operating loss
carryforwards. The impact on deferred taxes of changes in tax rates and tax
law,
if any, applied to the years during which temporary differences are expected
to
be settled, are reflected in the consolidated financial statements in the period
of enactment (see Note 24).
Minority
Interest
Minority
interest on the consolidated balance sheets primarily represents preferred
membership interests in an indirect subsidiary of Charter held by Mr. Paul
G.
Allen. Minority interest totaled $188 million and $648 million as of
December 31, 2005 and 2004, respectively, on the accompanying consolidated
balance sheets.
Reported
losses allocated to minority interest on the statement of operations reflect
the
minority interests in CC VIII and Charter Holdco. Because minority interest
in
Charter Holdco was substantially eliminated at December 31, 2003, beginning
in
2004, Charter began to absorb substantially all future losses before income
taxes that otherwise would have been allocated to minority interest (see Note
11).
Loss
per Common Share
Basic
loss per common share is computed by dividing the net loss applicable to common
stock by 310,159,047 shares, 300,291,877 shares and 294,597,519 shares for
the
years ended December 31, 2005, 2004 and 2003, representing the weighted-average
common shares outstanding during the respective periods. Diluted loss per common
share equals basic loss per common share for the periods presented, as the
effect of stock options and other convertible securities are antidilutive
because the Company incurred net losses. All membership units of Charter Holdco
are exchangeable on a one-for-one basis into common stock of Charter at the
option of the holders. As of December 31, 2005, Charter Holdco has 755,386,702
membership units outstanding. Should the holders exchange units for shares,
the
effect would not be dilutive because the Company incurred net losses.
The
94.9
million shares issued in November 2005 and July 2005 pursuant to the share
lending agreement described in Note 14 are required to be returned, in
accordance with the contractual arrangement, and are treated in basic and
diluted earnings per share as if they were already returned and retired.
Consequently, there is no impact of the shares of common stock lent under the
share lending agreement in the earnings per share calculation.
Segments
SFAS
No. 131, Disclosure
about Segments of an Enterprise and Related Information,
established standards for reporting information about operating segments in
annual financial statements and in interim financial reports issued to
shareholders. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated on
a
regular basis by the chief operating decision maker, or decision making group,
in deciding how to allocate resources to an individual segment and in assessing
performance of the segment.
The
Company’s operations are managed on the basis of geographic divisional operating
segments. The Company has evaluated the criteria for aggregation of the
geographic operating segments under paragraph 17 of SFAS No. 131 and
believes it meets each of the respective criteria set forth. The Company
delivers similar products and services within each of its geographic divisional
operations. Each geographic and divisional service area utilizes similar means
for delivering the programming of the Company’s services; have similarity in the
type or class of customer receiving the products and services; distributes
the
Company’s services over a unified network; and operates within a consistent
regulatory environment. In addition, each of the geographic divisional
operating
segments
has similar economic characteristics. In light of the Company’s similar
services, means for delivery, similarity in type of customers, the use of a
unified network and other considerations across its geographic divisional
operating structure, management has determined that the Company has one
reportable segment, broadband services.
4.Sale
of Assets
In
2005,
the Company closed the sale of certain cable systems in Texas, West Virginia
and
Nebraska, representing a total of approximately 33,000 analog video customers.
During the year ended December 31, 2005, those cable systems met the criteria
for assets held for sale under Statement of Financial Accounting Standards
("SFAS") No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
As
such, the assets were written down to fair value less estimated costs to sell
resulting in asset impairment charges during the year ended December 31, 2005
of
approximately $39 million.
In
2004,
the Company closed the sale of certain cable systems in Florida, Pennsylvania,
Maryland, Delaware, New York and West Virginia to Atlantic Broadband Finance,
LLC. These transactions resulted in a $106 million gain recorded as a gain
on
sale of assets in the Company’s consolidated statements of operations. The total
net proceeds from the sale of all of these systems were approximately $735
million. The proceeds were used to repay a portion of amounts outstanding under
the Company’s revolving credit facility.
5.Allowance
for Doubtful Accounts
Activity
in the allowance for doubtful accounts is summarized as follows for the years
presented:
Uncollected
balances written off, net of recoveries
(74
)
(94
)
(81
)
Balance,
end of year
$
17
$
15
$
17
6.
Property,
Plant and Equipment
Property,
plant and equipment consists of the following as of December 31, 2005 and 2004:
2005
2004
Cable
distribution systems
$
7,035
$
6,596
Customer
equipment and installations
3,934
3,500
Vehicles
and equipment
473
433
Buildings
and leasehold improvements
584
578
Furniture,
fixtures and equipment
563
493
12,589
11,600
Less:
accumulated depreciation
(6,749
)
(5,311
)
$
5,840
$
6,289
The
Company periodically evaluates the estimated useful lives used to depreciate
its
assets and the estimated amount of assets that will be abandoned or have minimal
use in the future. A significant change in assumptions about the extent or
timing of future asset retirements, or in the Company’s use of new technology
and upgrade programs, could materially affect future depreciation expense.
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 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. Such test
resulted in a total franchise impairment of approximately $3.3 billion during
the third quarter of 2004. The 2003 and 2005 annual impairment tests resulted
in
no impairment. Franchises are aggregated into essentially inseparable asset
groups to conduct the valuations. The asset groups generally represent
geographic clustering of the Company’s cable systems into groups by which such
systems are managed. Management believes such grouping represents the highest
and best use of those assets.
The
Company’s 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 its total entity value. The value of goodwill is
the
difference between the total entity value and amounts assigned to the other
assets.
Franchises,
for 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 such as interactivity and telephone
to
the potential customers (service marketing rights). Fair value is determined
based on estimated discounted future cash flows 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 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.
The
Company follows the guidance of Emerging Issues Task Force ("EITF") Issue 02-17,
Recognition
of Customer Relationship Intangible Assets Acquired in a Business Combination,
in
valuing customer relationships. Customer relationships, for valuation purposes,
represent the value of the business relationship with existing customers and
are
calculated by projecting future after-tax cash flows from these customers
including the right to deploy and market additional services such as
interactivity and telephone to these customers. The present value of these
after-tax cash flows yields the fair value of the customer relationships.
Substantially all acquisitions occurred prior to January 1, 2002. The Company
did not record any value associated with the customer relationship intangibles
related to those acquisitions. For acquisitions subsequent to January 1, 2002the Company did assign a value to the customer relationship intangible, which
is
amortized over its estimated useful life.
In
September 2004, the SEC staff issued EITF Topic D-108 which requires the direct
method of separately valuing all intangible assets and does not permit goodwill
to be included in franchise assets. The Company adopted Topic D-108 in its
impairment assessment as of September 30, 2004 that resulted in a total
franchise impairment of approximately $3.3 billion. The Company recorded a
cumulative effect of accounting change of $765 million (approximately $875
million before tax effects of $91 million and minority interest effects of
$19
million) for the year ended December 31, 2004 representing the portion of the
Company's total franchise impairment attributable to no longer including
goodwill with franchise assets. The effect of the adoption was to increase
net
loss and loss per share by $765 million and $2.55, respectively, for the year
ended December 31, 2004. The remaining $2.4 billion of the total franchise
impairment was attributable to the use of lower projected growth rates and
the
resulting revised estimates of future cash flows in the Company's valuation,
and
was recorded as impairment of franchises in the Company's accompanying
consolidated statements of operations for the year ended December 31, 2004.
Sustained analog video customer losses by the Company in the third quarter
of
2004 primarily as a result of increased competition from direct broadcast
satellite providers and decreased growth rates in the Company's high-speed
Internet customers in the third quarter of 2004, in part, as a result of
increased competition from digital subscriber line service providers led to
the
lower projected growth rates and the revised estimates of future cash flows
from
those used at October 1, 2003.
For
the
years ended December 31, 2005 and 2004, the net carrying amount of
indefinite-lived franchises was reduced by $52 million and $490 million,
respectively, related to the sale of cable systems (see Note 4). Additionally,
in 2004 and 2005, approximately $37 million and $13 million, respectively,
of
franchises that were previously classified as finite-lived were reclassified
to
indefinite-lived, based on the Company’s renewal of these franchise assets in
2004 and 2005. Franchise amortization expense for the years ended
December 31, 2005, 2004 and 2003 was $4 million, $4 million and $9 million,
respectively, which represents the amortization relating to franchises that
did
not qualify for indefinite-life treatment under SFAS No. 142, including
costs associated with franchise renewals. The Company expects that amortization
expense on franchise assets will be approximately $2 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.
8.
Accounts
Payable and Accrued
Expenses
Accounts
payable and accrued expenses consist of the following as of December 31, 2005
and 2004:
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 except as follows. The accreted value of the CIH notes
issued in exchange for Charter Holdings notes and the CCH I notes issued
in
exchange for the 8.625% Charter Holdings notes due 2009 are recorded at the
historical book values of the Charter Holdings notes for financial reporting
purposes as opposed to 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 December 31, 2005, the accreted value of the Company’s
debt for legal purposes and notes indenture purposes is $18.8
billion.
On
January 30, 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which will be provided, directly or indirectly,
to
Charter Operating, which will use such funds to reduce borrowings, but not
commitments, under the revolving portion of its credit facilities.
In
October 2005, CCO Holdings and CCO Holdings Capital Corp., as guarantor
thereunder, entered into the Bridge Loan with the Lenders whereby the Lenders
committed to make loans to CCO Holdings in an aggregate amount of $600 million.
Upon the issuance of $450 million of CCH II notes discussed above, the
commitment under the bridge loan agreement was reduced to $435 million. CCO
Holdings may draw upon the facility between January 2, 2006 and September 29,2006 and the loans will mature on the sixth anniversary of the first borrowing
under the bridge loan. Each loan will accrue interest at a rate equal to an
adjusted LIBOR rate plus a spread. The spread will initially be 450 basis points
and will increase (a) by an additional 25 basis points at the end of the
six-month period following the date of the first borrowing, (b) by an additional
25 basis points at the end of each of the next two subsequent three month
periods and (c) by 62.5 basis points at the end of each of the next two
subsequent three-month periods. CCO Holdings will be required to prepay loans
from the net proceeds from (i) the issuance of equity or incurrence of debt
by
Charter and its subsidiaries, with certain exceptions, and (ii) certain asset
sales (to the extent not used for other purposes permitted under the bridge
loan).
In
August
2005, CCO Holdings issued $300 million in debt securities, the proceeds of
which
were used for general corporate purposes, including the payment of distributions
to its parent companies, including Charter Holdings, to pay interest expense.
Gain
on Extinguishment of Debt
In
September 2005, Charter Holdings and its wholly owned subsidiaries, CCH I and
CIH, completed the exchange of approximately $6.8 billion total principal amount
of outstanding debt securities of Charter Holdings in a private placement for
new debt securities. Holders of Charter Holdings notes due in 2009 and 2010
exchanged $3.4 billion principal amount of notes for $2.9 billion principal
amount of new 11% CCH I senior secured notes due 2015. Holders of Charter
Holdings notes due 2011 and 2012 exchanged $845 million principal amount of
notes for $662 million principal amount of 11% CCH I notes due 2015. In
addition, holders of Charter Holdings notes due 2011 and 2012 exchanged $2.5
billion principal amount of notes for $2.5 billion principal amount of various
series of new CIH notes. Each series of new CIH notes has the same interest
rate
and provisions for payment of cash interest as the series of old Charter
Holdings notes for which such CIH notes were exchanged. In addition, the
maturities for each series were extended three years. The exchanges resulted
in
a net gain on extinguishment of debt of approximately $490 million for the
year
ended December 31, 2005.
In
March
and June 2005, Charter Operating consummated exchange transactions with a small
number of institutional holders of Charter Holdings 8.25% senior notes due
2007
pursuant to which Charter Operating issued, in private placements, approximately
$333 million principal amount of new notes with terms identical to Charter
Operating's 8.375% senior second lien notes due 2014 in exchange for
approximately $346 million of the Charter Holdings 8.25% senior notes due 2007.
The exchanges resulted in a net gain on extinguishment of debt of approximately
$10 million for the year ended December 31, 2005. The Charter Holdings notes
received in the exchange were thereafter distributed to Charter Holdings and
cancelled.
During
the year ended December 31, 2005, the Company repurchased, in private
transactions, from a small number of institutional holders, a total of $136
million principal amount of its 4.75% convertible senior notes due 2006.
These
transactions resulted in a net gain on extinguishment of debt of approximately
$3 million for the year ended December 31, 2005.
In
March
2005, Charter’s subsidiary, CC V Holdings, LLC, redeemed all of its 11.875%
notes due 2008, at 103.958% of principal amount, plus accrued and unpaid
interest to the date of redemption. The total cost of redemption was
approximately $122 million and was funded through borrowings under the Charter
Operating credit facilities. The redemption resulted in a loss on extinguishment
of debt for the year ended December 31, 2005 of approximately $5 million.
Following such redemption, CC V Holdings, LLC and its subsidiaries (other than
non-guarantor subsidiaries) guaranteed the Charter Operating credit facilities
and granted a lien on all of their assets as to which a lien can be perfected
under the Uniform Commercial Code by the filing of a financing
statement.
On
November 22, 2004, the Company issued $862.5 million original principal amount
of 5.875% convertible senior notes due 2009, which are convertible into shares
of Charter’s Class A common stock, par value $.001 per share, at a rate of
413.2231 shares per $1,000 principal amount of notes (or approximately $2.42
per
share), subject to adjustment in certain circumstances. On December 23, 2004,
the Company used a portion of the proceeds from the sale of the notes to redeem
all of its outstanding 5.75% convertible senior notes due 2005 (total principal
amount of $588 million). The redemption resulted in a loss on extinguishment
of
debt of $10 million for the year ended December 31, 2004.
In
April
2004, Charter’s indirect subsidiaries, Charter Operating and Charter
Communications Operating Capital Corp., sold $1.5 billion of senior second-lien
notes in a private transaction. Additionally, Charter Operating amended and
restated its $5.1 billion credit facilities, among other things, to defer
maturities and increase availability under those facilities to approximately
$6.5 billion, consisting of a $1.5 billion six-year revolving credit facility,
a
$2.0 billion six-year term loan facility and a $3.0 billion seven-year term
loan
facility. Charter Operating used the additional borrowings under the amended
and
restated credit facilities, together with proceeds from the sale of the Charter
Operating senior second-lien notes to refinance the credit facilities of its
subsidiaries, CC VI Operating Company, LLC ("CC VI Operating"), Falcon Cable
Communications, LLC ("Falcon Cable"), and CC VIII Operating, LLC ("CC VIII
Operating"), all in concurrent transactions. In addition, Charter Operating
was
substituted as the lender in place of the banks under those subsidiaries’ credit
facilities. These transactions resulted in a net loss on extinguishment of
debt
of $21 million for the year ended December 31, 2004.
The
Company recognized a loss of approximately $23 million recorded as loss on
debt
to equity conversion on the accompanying consolidated statement of operations
for the year ended December 31, 2004 from privately negotiated exchanges of
a
total of $30 million principal amount of Charter’s 5.75% convertible senior
notes for shares of Charter Class A common stock. The exchanges resulted in
the
issuance of more shares in the exchange transaction than would have been
issuable under the original terms of the convertible senior notes.
In
September 2003, Charter, Charter Holdings and their indirect subsidiary, CCH
II
purchased, in a non-monetary transaction, a total of approximately
$609
million principal amount of Charter’s outstanding convertible senior notes and
approximately
$1.3
billion principal amount of the senior notes and senior discount notes issued
by
Charter Holdings from institutional investors in a small number of privately
negotiated transactions. As consideration for these securities, CCH II issued
approximately
$1.6
billion principal amount of 10.25% notes due 2010,
and
realized approximately $294 million of debt discount.
CCH II
also issued an additional $30 million principal amount of 10.25% notes for
an
equivalent amount of cash and used the proceeds for transaction costs and for
general corporate purposes. This transaction resulted in a gain on
extinguishment of debt of $267 million for the year ended December 31, 2003.
See
discussion of the CCH II notes below for more details.
4.75%
Charter Convertible Notes.In
May
2001, Charter issued 4.75% convertible senior notes with a total principal
amount at maturity of $633 million. As of December 31, 2005, there was $20
million in total principal amount of these notes outstanding. The 4.75% Charter
convertible notes rank equally with any of Charter’s future unsubordinated and
unsecured indebtedness, but are structurally subordinated to all existing and
future indebtedness and other liabilities of Charter’s
subsidiaries.
The
4.75%
Charter convertible notes are convertible at the option of the holder into
shares of Class A common stock at a conversion rate of 38.0952 shares per $1,000
principal amount of notes, which is equivalent to a price of $26.25 per share,
subject to certain adjustments. Specifically, the adjustments include
anti-dilutive provisions, which automatically occur based on the occurrence
of
specified events to provide protection rights to holders of the notes.
Additionally, Charter may adjust the conversion ratio under certain
circumstances when deemed appropriate. These notes are redeemable at Charter’s
option at amounts decreasing from 101.9% to 100% of the principal amount, plus
accrued and unpaid interest beginning on June 4, 2004, to the date of
redemption. Interest is payable semiannually on December 1 and June 1, until
maturity on June 1, 2006.
Upon
a
change of control, subject to certain conditions and restrictions, Charter
may
be required to repurchase the notes, in whole or in part, at 100% of their
principal amount plus accrued interest at the repurchase date.
5.875%
Charter Convertible Notes.
In
November 2004, Charter issued 5.875% convertible senior notes due 2009 with
a
total original principal amount of $862.5 million. The 5.875% convertible senior
notes are unsecured (except with respect to the collateral as described below)
and rank equally with our existing and future unsubordinated and unsecured
indebtedness (except with respect to the collateral described below), but are
structurally subordinated to all existing and future indebtedness and other
liabilities of our subsidiaries. Interest is payable semi-annually in arrears.
As of December 31, 2005, there was $862.5 million in total principal amount
outstanding and $843 million in accreted value outstanding.
The
5.875% convertible senior notes are convertible at any time at the option of
the
holder into shares of Class A common stock at an initial conversion rate of
413.2231 shares per $1,000 principal amount of notes, which is equivalent to
a
conversion price of approximately $2.42 per share, subject to certain
adjustments. Specifically, the adjustments include anti-dilutive provisions,
which cause adjustments to occur automatically based on the occurrence of
specified events to provide protection rights to holders of the notes. The
conversion rate may also be increased (but not to exceed 462 shares per $1,000
principal amount of notes) upon a specified change of control transaction.
Additionally, Charter may elect to increase the conversion rate under certain
circumstances when deemed appropriate and subject to applicable limitations
of
the NASDAQ stock market. Holders who convert their notes prior to November16,2007 will receive an early conversion make whole amount in respect of their
notes based on a proportional share of the portfolio of pledged securities
described below, with specified adjustments.
No
holder
of notes will be entitled to receive shares of our Class A common stock on
conversion to the extent that receipt of the shares would cause the converting
holder to become, directly or indirectly, a "beneficial holder" (within the
meaning of Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) of more than 4.9% of the outstanding shares of our
Class
A common stock if such conversion would take place prior to November 16, 2008,
or more than 9.9% thereafter.
If
a
holder tenders a note for conversion, we may direct that holder (unless we
have
called those notes for redemption) to a financial institution designated by
us
to conduct a transaction with that institution, on substantially the same terms
that the holder would have received on conversion, but if any such financial
institution does not accept such notes or does not deliver the required
conversion consideration, we remain obligated to convert the notes.
Charter
Holdco used a portion of the proceeds from the sale of the notes to purchase
a
portfolio of U.S. government securities in an amount which we believe will
be
sufficient to make the first six interest payments on the notes. These
government securities were pledged to us as security for a mirror note issued
by
Charter Holdco to Charter and pledged to the trustee under the indenture
governing the notes as security for our obligations thereunder. Such securities
are being used to fund the next four interest payments under the notes. The
fair
value of the pledged securities was $97 million at December 31, 2005.
Upon
a
change of control and certain other fundamental changes, subject to certain
conditions and restrictions, Charter may be required to repurchase the notes,
in
whole or in part, at 100% of their principal amount plus accrued interest at
the
repurchase date.
We
may
redeem the notes in whole or in part for cash at any time at a redemption price
equal to 100% of the aggregate principal amount plus accrued and unpaid
interest, deferred interest and liquidated damages, 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, if such 30 trading day period begins
prior to November 16, 2007 or 150% of the conversion price, if such 30 trading
period begins thereafter. Holders who convert notes that we have 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 later of November 17, 2007
and
the redemption date through the scheduled maturity date for the notes, plus
any
accrued deferred interest.
March
1999 Charter Holdings Notes.The
March
1999 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Communications Capital Corporation ("Charter Capital").
The
March 1999 8.250% Charter Holdings notes mature on April 1, 2007, and as of
December 31, 2005, there was $105 million in total principal amount outstanding.
The March 1999 8.625% Charter Holdings notes mature on April 1, 2009 and as
of
December 31, 2005, there was $292 million in total principal amount outstanding.
The March 1999 9.920% Charter Holdings notes mature on April 1, 2011 and as
of
December 31, 2005, the total principal amount and accreted value outstanding
was
$198 million. Cash interest on the March 1999 9.920% Charter Holdings notes
began to accrue on April 1, 2004.
The
March
1999 Charter Holdings notes are senior debt obligations of Charter Holdings
and
Charter Capital. They rank equally with all other current and future
unsubordinated obligations of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter Holdings' subsidiaries,
including the CIH notes, the CCH I notes, the CCH II notes, the CCO Holdings
notes, the Renaissance notes, the Charter Operating notes and the Charter
Operating credit facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the March 1999
8.250% Charter Holdings notes prior to their maturity on April 1, 2007. Charter
Holdings and Charter Capital may redeem some or all of the March 1999 8.625%
Charter Holdings notes and the March 1999 9.920% Charter Holdings notes at
any
time, in each case, at a premium. The optional redemption price declines to
100%
of the principal amount of March 1999 Charter Holdings notes redeemed, plus
accrued and unpaid interest, if any, for redemption on or after April 1,2007.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding March 1999 Charter
Holdings notes at 101% of their principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The
indentures governing the March 1999 Charter Holdings notes contain restrictive
covenants that limit certain transactions or activities by Charter Holdings
and
its restricted subsidiaries. Substantially all of Charter Holdings' direct
and
indirect subsidiaries are currently restricted subsidiaries.
January
2000 Charter Holdings Notes. The
January 2000 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. The January 2000 10.00% Charter Holdings notes
mature on April 1, 2009, and as of December 31, 2005, there was $154 million
in
total principal amount of these notes outstanding. The January 2000 10.25%
Charter Holdings notes mature on January 15, 2010 and as of December 31, 2005,
there was $49 million in total principal amount of these notes outstanding.
The
January 2000 11.75% Charter Holdings notes mature on January 15, 2010 and as
of
December 31, 2005, the total principal amount and accreted value outstanding
of
these notes was $43 million. Cash interest on the January 2000 11.75% Charter
Holdings notes began to accrue on January 15, 2005.
The
January 2000 Charter Holdings notes are senior debt obligations of Charter
Holdings and Charter Capital. They rank equally with all other current and
future unsubordinated obligations of Charter Holdings and Charter Capital.
They
are structurally subordinated to the obligations of Charter Holdings'
subsidiaries, including the CIH notes, the CCH I notes, the CCH II notes, the
CCO Holdings notes, the Renaissance notes, the Charter Operating notes and
the
Charter Operating credit facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the January
2000
10.00% Charter Holdings notes prior to their maturity on April 1, 2009. Charter
Holdings and Charter Capital may redeem some or all of the January 2000 10.25%
Charter Holdings notes and the January 2000 11.75% Charter Holdings notes at
any
time, in each case, at a premium. The optional redemption price declines to
100%
of the principal amount of the January 2000 Charter Holdings notes redeemed,
plus accrued and unpaid interest, if any, for redemption on or after January15,2008.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2000
Charter Holdings notes at 101% of their total principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The
indentures governing the January 2000 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999 Charter
Holdings notes.
January
2001 Charter Holdings Notes.The
January 2001 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. The January 2001 10.750% Charter Holdings notes
mature on October 1, 2009, and as of December 31, 2005, there was $131 million
in total principal amount of these notes outstanding. The January 2001 11.125%
Charter Holdings notes mature on January 15, 2011 and as of December 31, 2005,
there was $217 million in total principal amount outstanding. The January 2001
13.500% Charter Holdings notes mature on January 15, 2011 and as of December31,2005 the total principal amount and accreted value outstanding of these notes
was $94 million. Cash interest on the January 2001 13.500% Charter Holdings
notes began to accrue on January 15, 2006.
The
January 2001 Charter Holdings notes are senior debt obligations of Charter
Holdings and Charter Capital. They rank equally with all other current and
future unsubordinated obligations of Charter Holdings and Charter Capital.
They
are structurally subordinated to the obligations of Charter Holdings'
subsidiaries, including the CIH notes, the CCH I notes, the CCH II notes, the
CCO Holdings notes, the Renaissance notes, the Charter Operating notes and
the
Charter Operating credit facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the January
2001
10.750% Charter Holdings notes prior to their maturity date on October 1, 2009.
Charter Holdings and Charter Capital may redeem some or all of the January
2001
11.125% Charter Holdings notes and the January 2001 13.500% Charter Holdings
notes at any time, in each case, at a premium. The optional redemption price
declines to 100% of the principal amount of the January 2001 Charter Holdings
notes redeemed, plus accrued and unpaid interest, if any, for redemption on
or
after January 15, 2009.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2001
Charter Holdings notes at 101% of their total principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The
indentures governing the January 2001 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999 and
January 2000 Charter Holdings notes.
May
2001 Charter Holdings Notes.The
May
2001 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital. The May 2001 9.625% Charter Holdings notes mature
on November 15, 2009, and as of December 31, 2005, combined with the January
2002 additional bond issue, there was $107 million in total principal amount
outstanding. The May 2001 10.000% Charter Holdings notes mature on May 15,2011
and as of December 31, 2005, combined with the January 2002 additional bond
issue, there was $137 million in total principal amount outstanding and the
total accreted value of the 10.000% notes was approximately $136 million. The
May 2001 11.750% Charter Holdings notes mature on May 15, 2011 and as of
December 31, 2005, the total principal amount outstanding was $125 million
and
the total accreted value of the 11.750% notes was approximately
$120
million. Cash interest on the May 2001 11.750% Charter Holdings notes will
not
accrue prior to May 15, 2006.
The
May
2001 Charter Holdings notes are senior debt obligations of Charter Holdings
and
Charter Capital. They rank equally with all other current and future
unsubordinated obligations of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter Holdings' subsidiaries,
including the CIH notes, the CCH I notes, the CCH II notes, the CCO Holdings
notes, the Renaissance notes, the Charter Operating notes and the Charter
Operating credit facilities.
Charter
Holdings and Charter Capital will not have the right to redeem the May 2001
9.625% Charter Holdings notes prior to their maturity on November 15, 2009.
On
or after May 15, 2006, Charter Holdings and Charter Capital may redeem some
or
all of the May 2001 10.000% Charter Holdings notes and the May 2001 11.750%
Charter Holdings notes at any time, in each case, at a premium. The optional
redemption price declines to 100% of the principal amount of the May 2001
Charter Holdings notes redeemed, plus accrued and unpaid interest, if any,
for
redemption on or after May 15, 2009.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding May 2001 Charter
Holdings notes at 101% of their total principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The
indentures governing the May 2001 Charter Holdings notes contain substantially
identical events of default, affirmative covenants and negative covenants as
those contained in the indentures governing the March 1999, January 2000 and
January 2001 Charter Holdings notes.
January
2002 Charter Holdings Notes. The
January 2002 Charter Holdings notes are general unsecured obligations of Charter
Holdings and Charter Capital.
The
January 2002 12.125% senior discount notes mature on January 15, 2012, and
as of
December 31, 2005, the total principal amount outstanding was $113 million
and
the total accreted value of these notes was approximately $100 million. Cash
interest on the January 2002 12.125% Charter Holdings notes will not accrue
prior to January 15, 2007.
The
January 2002 Charter Holdings notes are senior debt obligations of Charter
Holdings and Charter Capital. They rank equally with the current and future
unsecured and unsubordinated debt of Charter Holdings. They are structurally
subordinated to the obligations of Charter Holdings' subsidiaries, including
the
CIH notes, the CCH I notes, the CCH II notes, the CCO Holdings notes, the
Renaissance notes, the Charter Operating notes and the Charter Operating credit
facilities.
The
Charter Holdings 12.125% senior discount notes are redeemable at the option
of
the issuers at amounts decreasing from 106.063% to 100% of accreted value
beginning January 15, 2007.
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding January 2002
Charter Holdings notes at 101% of their total principal amount or accreted
value, as applicable, plus accrued and unpaid interest, if any.
The
indentures governing the January 2002 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the March 1999, January
2000, January 2001 and May 2001 Charter Holdings notes.
CCH
I Holdings, LLC Notes.
In
September 2005, CIH and CCH I Holdings Capital Corp. jointly issued $2.5 billion
total principal amount of 9.920% to 13.500% senior accreting notes due 2014
and
2015 in exchange for an aggregate amount of $2.4 billion of Charter Holdings
notes due 2011 and 2012, spread over six series of notes and with varying
interest rates. The notes are guaranteed by Charter Holdings. As of December31,2005, there was $2.5
billion
in total principal amount and accreted value outstanding and $2.1 billion in
accreted value for legal purposes and notes indentures purposes. Interest on
the
CIH notes is payable semi-annually in arrears as follows:
Start
Date
Semi-Annual
For
Interest
Interest
Payment
Payment
on
Maturity
Dates
Discount
Notes
Date
11.125%
senior notes due 2014
1/15
& 7/15
1/15/14
9.920%
senior discount notes due 2014
4/1
& 10/1
4/1/14
10.000%
senior notes due 2014
5/15
& 11/15
5/15/14
11.750%
senior discount notes due 2014
5/15
& 11/15
11/15/06
5/15/14
13.500%
senior discount notes due 2014
1/15
& 7/15
7/15/06
1/15/14
12.125%
senior discount notes due 2015
1/15
& 7/15
7/15/07
1/15/15
The
CIH
notes are senior debt obligations of CIH and CCH I Holdings Capital Corp. They
rank equally with all other current and future unsecured, unsubordinated
obligations of CIH and CCH I Holdings Capital Corp. The CIH notes are
structurally subordinated to all obligations of subsidiaries of CIH, including
the CCH I notes, the CCH II notes, the CCO Holdings notes, the Renaissance
notes, the Charter Operating notes and the Charter Operating credit
facilities.
The
CIH
notes may not be redeemed at the option of the issuers until September 30,2007.
On or after such date, the CIH notes may be redeemed at any time, in each case
at a premium. The optional redemption price declines to 100% of the respective
series’ principal amount, plus accrued and unpaid interest, on or after varying
dates in 2009 and 2010.
In
the
event that a specified change of control event happens, CIH and CCH I Holdings
Capital Corp. must offer to repurchase any outstanding notes at a price equal
to
the sum of the accreted value of the notes plus accrued and unpaid interest
plus
a premium that varies over time.
CCH
I, LLC Notes.
In
September 2005, CCH I and CCH I Capital Corp. jointly issued $3.5 billion total
principal amount of 11.000% senior secured notes due October 2015 in exchange
for an aggregate amount of $4.2 billion of certain Charter Holdings notes.
The
notes are guaranteed by Charter Holdings and are secured by a pledge of 100%
of
the equity interest of CCH I’s wholly owned direct subsidiary, CCH II. Such
pledge is subject to significant limitations as described in the related pledge
agreement. Interest on the CCH I notes accrues at 11% per annum and is payable
semi-annually in arrears on each April 1 and October 1, commencing on April1,2006. As of December 31, 2005, there was $3.5 billion in total principal amount
outstanding, $3.7 billion in accreted value outstanding and $3.5 billion in
accreted value for legal purposes and notes indentures purposes.
The
CCH I
notes are senior debt obligations of CCH I and CCH I Capital Corp. To the extent
of the value of the collateral, they rank senior to all of CCH I’s future
unsecured senior indebtedness. The CCH I notes are structurally subordinated
to
all obligations of subsidiaries of CCH I, including the CCH II notes, CCO
Holdings notes, the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
CCH
I and
CCH I Capital Corp. may, prior to October 1, 2008 in the event of a qualified
equity offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the CCH I notes at a redemption price of 111% of the
principal amount plus accrued and unpaid interest. Aside from this provision,
CCH I and CCH I Capital Corp. may not redeem at their option any of the notes
prior to October 1, 2010. On or after October 1, 2010, CCH I and CCH I Capital
Corp. may redeem, in whole or in part, CCH I notes at anytime, in each case
at a
premium. The optional redemption price declines to 100% of the principal amount,
plus accrued and unpaid interest, on or after October 1, 2013.
If
a
change of control occurs, each holder of the CCH I notes will have the right
to
require the repurchase of all or any part of that holder’s CCH I notes at 101%
of the principal amount plus accrued and unpaid interest.
CCH
II Notes. In
September 2003, CCH II and CCH II Capital Corp. jointly issued $1.6 billion
total principal amount of 10.25% senior notes due 2010 and in January 2006,
they
issued an additional $450 million principal amount of these notes. The CCH
II
notes are general unsecured obligations of CCH II and CCH II Capital Corp.
They
rank equally with all other current or future unsubordinated obligations of
CCH
II and CCH II Capital Corp. The CCH II notes are structurally subordinated
to
all obligations of subsidiaries of CCH II, including the CCO Holdings notes,
the
Renaissance notes, the Charter Operating notes and the Charter Operating
credit
facilities.
Interest
on the CCH II notes accrues at 10.25% per annum and is payable semi-annually
in
arrears on each March 15 and September 15.
At
any
time prior to September 15, 2006, the issuers of the CCH II notes may redeem
up
to 35% of the total principal amount of the CCH II notes on a pro rata basis
at
a redemption price equal to 110.25% of the principal amount of CCH II notes
redeemed, plus any accrued and unpaid interest.
On
or
after September 15, 2008, the issuers of the CCH II notes may redeem all or
a
part of the notes at a redemption price that declines ratably from the initial
redemption price of 105.125% to a redemption price on or after September 15,2009 of 100.0% of the principal amount of the CCH II notes redeemed, plus,
in
each case, any accrued and unpaid interest.
In
the
event of specified change of control events, CCH II must offer to purchase
the
outstanding CCH II notes from the holders at a purchase price equal to 101%
of
the total principal amount of the notes, plus any accrued and unpaid
interest.
The
indenture governing the CCH II notes contains restrictive covenants that limit
certain transactions or activities by CCH II and its restricted subsidiaries.
Substantially all of CCH II’s direct and indirect subsidiaries are currently
restricted subsidiaries.
CCO
Holdings Notes.
8
¾%
Senior Notes due 2013
In
November 2003 and August 2005, CCO Holdings and CCO Holdings Capital Corp.
jointly issued $500 million and $300 million, respectively, total principal
amount of 8¾% senior notes due 2013. The CCO Holdings notes are general
unsecured obligations of CCO Holdings and CCO Holdings Capital Corp. They rank
equally with all other current or future unsubordinated obligations of CCO
Holdings and CCO Holdings Capital Corp. The CCO Holdings notes are structurally
subordinated to all obligations of CCO Holdings’ subsidiaries, including the
Renaissance notes, the Charter Operating notes and the Charter Operating
credit
facilities.
As
of
December 31, 2005, there was $800 million in total principal amount outstanding
and $794 million in accreted value outstanding.
Interest
on the CCO Holdings senior notes accrues at 8¾% per year and is payable
semi-annually in arrears on each May 15 and November 15.
At
any
time prior to November 15, 2006, the issuers of the CCO Holdings senior notes
may redeem up to 35% of the total principal amount of the CCO Holdings senior
notes to the extent of public equity proceeds they have received on a pro rata
basis at a redemption price equal to 108.75% of the principal amount of CCO
Holdings senior notes redeemed, plus any accrued and unpaid interest.
On
or
after November 15, 2008, the issuers of the CCO Holdings senior notes may redeem
all or a part of the notes at a redemption price that declines ratably from
the
initial redemption price of 104.375% to a redemption price on or after November15, 2011 of 100.0% of the principal amount of the CCO Holdings senior notes
redeemed, plus, in each case, any accrued and unpaid interest.
In
the
event of specified change of control events, CCO Holdings must offer to purchase
the outstanding CCO Holdings senior notes from the holders at a purchase price
equal to 101% of the total principal amount of the notes, plus any accrued
and
unpaid interest.
Senior
Floating Rate Notes Due 2010
In
December 2004, CCO Holdings and CCO Holdings Capital Corp. jointly issued $550
million total principal amount of senior floating rate notes due 2010.
The
CCO
Holdings notes are general unsecured obligations of CCO Holdings and CCO
Holdings Capital Corp. They rank equally with all other current or future
unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. The
CCO Holdings notes are structurally subordinated to all obligations of CCO
Holdings’ subsidiaries, including the Renaissance notes, the Charter Operating
notes and the Charter Operating credit
facilities.
Interest
on the CCO Holdings senior floating rate notes accrues at the LIBOR rate (4.53%
and 2.56% as of December 31, 2005 and 2004, respectively) plus 4.125% annually,
from the date interest was most recently paid. Interest is reset and payable
quarterly in arrears on each March 15, June 15, September 15 and December 15.
At
any
time prior to December 15, 2006, the issuers of the senior floating rate notes
may redeem up to 35% of the notes in an amount not to exceed the amount of
proceeds of one or more public equity offerings at a redemption price equal
to
100% of the principal amount, plus a premium equal to the interest rate per
annum applicable to the notes on the date notice of redemption is given, plus
accrued and unpaid interest, if any, to the redemption date, provided that
at
least 65% of the original aggregate principal amount of the notes issued remains
outstanding after the redemption.
The
issuers of the senior floating rate notes may redeem the notes in whole or
in
part at the issuers’ option from December 15, 2006 until December 14, 2007 for
102% of the principal amount, from December 15, 2007 until December 14, 2008
for
101% of the principal amount and from and after December 15, 2008, at par,
in
each case, plus accrued and unpaid interest.
The
indentures governing the CCO Holdings senior notes contain restrictive covenants
that limit certain transactions or activities by CCO Holdings and its restricted
subsidiaries. Substantially all of CCO Holdings’ direct and indirect
subsidiaries are currently restricted subsidiaries.
In
the
event of specified change of control events, CCO Holdings must offer to purchase
the outstanding CCO Holdings senior notes from the holders at a purchase price
equal to 101% of the total principal amount of the notes, plus any accrued
and
unpaid interest.
Charter
Operating Notes.
On April27, 2004, Charter Operating and Charter Communications Operating Capital Corp.
jointly issued $1.1 billion of 8% senior second-lien notes due 2012 and $400
million of 8 3/8%
senior
second-lien notes due 2014, for total gross proceeds of $1.5 billion. In March
and June 2005, Charter Operating consummated exchange transactions with a small
number of institutional holders of Charter Holdings 8.25% senior notes due
2007
pursuant to which Charter Operating issued, in private placement transactions,
approximately $333 million principal amount of its 8 3/8% senior second-lien
notes due 2014 in exchange for approximately $346 million of the Charter
Holdings 8.25% senior notes due 2007. Interest
on the Charter Operating notes is payable semi-annually in arrears on each
April
30 and October 30.
The
Charter Operating notes were sold in a private transaction that was not subject
to the registration requirements of the Securities Act of 1933. The Charter
Operating notes are not expected to have the benefit of any exchange or other
registration rights, except in specified limited circumstances. On the issue
date of the Charter Operating notes, because of restrictions contained in the
Charter Holdings indentures, there were no Charter Operating note guarantees,
even though Charter Operating's immediate parent, CCO Holdings, and certain
of
the Company’s subsidiaries were obligors and/or guarantors under the Charter
Operating credit facilities. Upon the occurrence of the guarantee and pledge
date (generally, the fifth business day after the Charter Holdings leverage
ratio was certified to be below 8.75 to 1.0), CCO Holdings and those
subsidiaries of Charter Operating that were then guarantors of, or otherwise
obligors with respect
to,
indebtedness under the Charter Operating credit facilities and related
obligations were required to guarantee the Charter Operating notes. The note
guarantee of each such guarantor is:
·
a
senior obligation of such
guarantor;
·
structurally
senior to the outstanding CCO Holdings notes (except in the case
of CCO
Holdings' note guarantee, which is structurally pari
passu with
such senior notes), the outstanding CCH II notes, the outstanding
CCH I
notes, the outstanding CIH notes, the outstanding Charter Holdings
notes
and the outstanding Charter convertible senior notes (but subject
to
provisions in the Charter Operating indenture that permit interest
and,
subject to meeting the 4.25 to 1.0 leverage ratio test, principal
payments
to be made thereon); and
·
senior
in right of payment to any future subordinated indebtedness of such
guarantor.
As
a
result of the above leverage ratio test being met, CCO Holdings and certain
of
its subsidiaries provided the additional guarantees described above during
the
first quarter of 2005.
All
the
subsidiaries of Charter Operating (except CCO NR Sub, LLC, and certain other
subsidiaries that are not deemed material and are designated as nonrecourse
subsidiaries under the Charter Operating credit facilities) are restricted
subsidiaries of Charter Operating under the Charter Operating notes.
Unrestricted subsidiaries generally will not be subject to the restrictive
covenants in the Charter Operating indenture.
In
the
event of specified change of control events, Charter Operating must offer to
purchase the Charter Operating notes at a purchase price equal to 101% of the
total principal amount of the Charter Operating notes repurchased plus any
accrued and unpaid interest thereon.
The
indenture governing the Charter Operating senior notes contains restrictive
covenants that limit certain transactions or activities by Charter Operating
and
its restricted subsidiaries. Substantially all of Charter Operating’s direct and
indirect subsidiaries are currently restricted subsidiaries.
Renaissance
Notes.In
connection with the acquisition of Renaissance in April 1999, the Company
assumed $163 million principal amount at maturity of 10.000% senior
discount notes due 2008 of which $49 million was repurchased in May 1999.
The Renaissance notes bear interest, payable semi-annually, on April 15 and
October 15. The Renaissance notes are due on April 15, 2008. As of
December 31, 2005, there was $114 million in total principal amount outstanding
and $115 million in accreted value outstanding.
CC
V Holdings Notes.These
notes were redeemed on March 14, 2005 and are therefore no longer outstanding.
High-Yield
Restrictive Covenants; Limitation on Indebtedness.The
indentures governing the notes of the Company’s subsidiaries contain certain
covenants that restrict the ability of Charter Holdings, Charter Capital, CIH,
CIH, Capital Corp., CCH I, CCH I Capital Corp., CCH II, CCH II Capital Corp.,
CCO Holdings, CCO Holdings Capital Corp., Charter Operating, Charter
Communications Operating Capital Corp., Renaissance Media Group, and all of
their restricted subsidiaries to:
·
incur
additional debt;
·
pay
dividends on equity or repurchase
equity;
·
make
investments;
·
sell
all or substantially all of their assets or merge with or into other
companies;
·
sell
assets;
·
enter
into sale-leasebacks;
·
in
the case of restricted subsidiaries, create or permit to exist dividend
or
payment restrictions with respect to the bond issuers, guarantee
their
parent companies debt, or issue specified equity interests;
·
engage
in certain transactions with affiliates;
and
The
Charter Operating credit facilities were amended and restated concurrently
with
the sale of $1.5 billion senior second-lien notes in April 2004, among other
things, to defer maturities and increase availability under these facilities
and
to enable Charter Operating to acquire the interests of the lenders under the
CC
VI Operating, CC VIII Operating and Falcon credit facilities, thereby
consolidating all credit facilities under one amended and restated Charter
Operating credit agreement.
The
Charter Operating credit facilities provide borrowing availability of up to
$6.5
billion as follows:
· two
term
facilities:
(i)
a
Term A facility with a total principal amount of $2.0 billion, of
which
12.5% matures in 2007, 30% matures in 2008, 37.5% matures in 2009
and 20%
matures in 2010; and
(ii)
a
Term B facility with a total principal amount of $3.0 billion, which
shall
be repayable in 27 equal quarterly installments aggregating in each
loan
year to 1% of the original amount of the Term B facility, with the
remaining balance due at final maturity in 2011;
and
·
a
revolving credit facility, in a total amount of $1.5 billion, with
a
maturity date in 2010.
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate (4.06% to
4.50% as of December 31, 2005 and 2.07% to 2.28% as of December 31, 2004),
as
defined, plus a margin for Eurodollar loans of up to 3.00% for the Term A
facility and revolving credit facility, and up to 3.25% for the Term B facility,
and for base rate loans of up to 2.00% for the Term A facility and revolving
credit facility, and up to 2.25% for the Term B facility. A quarterly commitment
fee of up to .75% is payable on the average daily unborrowed balance of the
revolving credit facilities.
The
obligations of our subsidiaries under the Charter Operating credit facilities
(the "Obligations") are guaranteed by Charter Operating’s immediate parent
company, CCO Holdings, and the subsidiaries of Charter Operating, except for
immaterial subsidiaries and subsidiaries precluded from guaranteeing by reason
of the provisions of other indebtedness to which they are subject (the
"non-guarantor subsidiaries," primarily Renaissance and its subsidiaries).
The
Obligations are also secured by (i) a lien on all of the assets of Charter
Operating and its subsidiaries (other than assets of the non-guarantor
subsidiaries), to the extent such lien can be perfected under the Uniform
Commercial Code by the filing of a financing statement, and (ii) a pledge by
CCO
Holdings of the equity interests owned by it in Charter Operating or any of
Charter Operating’s subsidiaries, as well as intercompany obligations owing to
it by any of such entities.
Upon
the
Charter Holdings Leverage Ratio (as defined in the indenture governing the
Charter Holdings senior notes and senior discount notes) being under 8.75 to
1.0, the Charter Operating credit facilities required that the 11.875% notes
due
2008 issued by CC V Holdings, LLC be redeemed. Because such Leverage Ratio
was
determined to be under 8.75 to 1.0, CC V Holdings, LLC redeemed such notes
in
March 2005, and CC V Holdings, LLC and its subsidiaries (other than
non-guarantor subsidiaries) became guarantors of the Obligations and have
granted a lien on all of their assets as to which a lien can be perfected under
the Uniform Commercial Code by the filing of a financing statement.
As
of
December 31, 2005, outstanding borrowings under the Charter Operating credit
facilities were approximately $5.7 billion and the unused total potential
availability was approximately $553 million, none of which was limited by
covenant restrictions.
Charter
Operating Credit Facilities — Restrictive Covenants
The
Charter Operating credit facilities contain representations and warranties,
and
affirmative and negative covenants customary for financings of this type. The
financial covenants measure performance against standards set for leverage,
debt
service coverage, and interest coverage, tested as of the end of each quarter.
The maximum
allowable
leverage ratio is 4.25 to 1.0 until maturity, tested as of the end of each
quarter beginning September 30, 2004. Additionally, the Charter Operating credit
facilities contain provisions requiring mandatory loan prepayments under
specific circumstances, including when significant amounts of assets are sold
and the proceeds are not reinvested in assets useful in the business of the
borrower within a specified period, and upon the incurrence of certain
indebtedness when the ratio of senior first lien debt to operating cash flow
is
greater than 2.0 to 1.0.
The
Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the Charter Operating
senior second-lien notes, the CIH notes, the CCH I notes, the CCH II senior
notes, the CCO Holdings senior notes, the Charter convertible senior notes,
the
CCHC notes and the Charter Holdings senior notes, provided that, among other
things, no default has occurred and is continuing under the Charter Operating
credit facilities. Conditions to future borrowings include absence of a default
or an event of default under the Charter Operating credit facilities and the
continued accuracy in all material respects of the representations and
warranties, including the absence since December 31, 2003 of any event,
development or circumstance that has had or could reasonably be expected to
have
a material adverse effect on our business.
The
events of default under the Charter Operating credit facilities include, among
other things:
·
the
failure to make payments when due or within the applicable grace
period,
·
the
failure to comply with specified covenants, including but not limited
to a
covenant to deliver audited financial statements with an unqualified
opinion from our independent
auditors,
·
the
failure to pay or the occurrence of events that cause or permit the
acceleration of other indebtedness owing by CCO Holdings, Charter
Operating or Charter Operating’s subsidiaries in amounts in excess of $50
million in aggregate principal
amount,
·
the
failure to pay or the occurrence of events that result in the acceleration
of other indebtedness owing by certain of CCO Holdings’ direct and
indirect parent companies in amounts in excess of $200 million in
aggregate principal amount,
·
Paul
Allen and/or certain of his family members and/or their exclusively
owned
entities (collectively, the "Paul Allen Group") ceasing to have the
power,
directly or indirectly, to vote at least 35% of the ordinary voting
power
of Charter Operating,
·
the
consummation of any transaction resulting in any person or group
(other
than the Paul Allen Group) having power, directly or indirectly,
to vote
more than 35% of the ordinary voting power of Charter Operating,
unless
the Paul Allen Group holds a greater share of ordinary voting power
of
Charter Operating,
·
certain
of Charter Operating’s indirect or direct parent companies having
indebtedness in excess of $500 million aggregate principal amount
which
remains undefeased three months prior to the final maturity of such
indebtedness, and
·
Charter
Operating ceasing to be a wholly-owned direct subsidiary of CCO Holdings,
except in certain very limited
circumstances.
CCO
Holdings Bridge Loan
In
October 2005, CCO Holdings and CCO Holdings Capital Corp., as guarantor
thereunder, entered into the Bridge Loan) with JPMorgan Chase Bank, N.A., Credit
Suisse, Cayman Islands Branch and Deutsche Bank AG Cayman Islands Branch (the
"Lenders") whereby the Lenders committed to make loans to CCO Holdings in an
aggregate amount of $600 million. In January 2006, upon the issuance of $450
million of CCH II notes discussed above, the commitment under the bridge loan
agreement was reduced to $435 million. CCO Holdings may draw upon the facility
between January 2, 2006 and September 29, 2006 and the loans will mature on
the
sixth anniversary of the first borrowing under the Bridge Loan.
Beginning
on the first anniversary of the first date that CCO Holdings borrows under
the
Bridge Loan and at any time thereafter, any Lender will have the option to
receive "exchange notes" (the terms of which are described below, the "Exchange
Notes") in exchange for any loan that has not been repaid by that date. Upon
the
earlier of (x) the date that at least a majority of all loans that have been
outstanding have been exchanged for Exchange Notes and
(y)
the
date that is 18 months after the first date that CCO Holdings borrows under
the
Bridge Loan, the remainder of loans will be automatically exchanged for Exchange
Notes.
As
conditions to each draw, (i) there shall be no default under the Bridge Loan,
(ii) all the representations and warranties under the bridge loan shall be
true
and correct in all material respects and (iii) all conditions to borrowing
under
the Charter Operating credit facilities (with certain exceptions) shall be
satisfied.
The
aggregate unused commitment will be reduced by 100% of the net proceeds from
certain asset sales, to the extent such net proceeds have not been used to
prepay loans or Exchange Notes. However, asset sales that generate net proceeds
of less than $75 million will not be subject to such commitment reduction
obligation, unless the aggregate net proceeds from such asset sales exceed
$200
million, in which case the aggregate unused commitment will be reduced by the
amount of such excess.
CCO
Holdings will be required to prepay loans (and redeem or offer to repurchase
Exchange Notes, if issued) from the net proceeds from (i) the issuance of equity
or incurrence of debt by Charter and its subsidiaries, with certain exceptions,
and (ii) certain asset sales (to the extent not used for purposes permitted
under the bridge loan).
The
covenants and events of default applicable to CCO Holdings under the Bridge
Loan
are similar to the covenants and events of default in the indenture for the
senior secured notes of CCH I.
The
Exchange Notes will mature on the sixth anniversary of the first borrowing
under
the Bridge Loan. The Exchange Notes will bear interest at a rate equal to the
rate that would have been borne by the loans. The same mandatory redemption
provisions will apply to the Exchange Notes as applied to the loans, except
that
CCO Holdings will be required to make an offer to redeem upon the occurrence
of
a change of control at 101% of principal amount plus accrued and unpaid
interest.
The
Exchange Notes will, if held by a person other than an initial lender or an
affiliate thereof, be (a) non-callable for the first three years after the
first
borrowing date and (b) thereafter, callable at par plus accrued interest plus
a
premium equal to 50% of the coupon in effect on the first anniversary of the
first borrowing date, which premium shall decline to 25% of such coupon in
the
fourth year and to zero thereafter. Otherwise, the Exchange Notes will be
callable at any time at 100% of the amount thereof plus accrued and unpaid
interest.
Based
upon outstanding indebtedness as of December 31, 2005, the amortization of
term
loans, scheduled reductions in available borrowings of the revolving credit
facilities, and the maturity dates for all senior and subordinated notes and
debentures, total future principal payments on the total borrowings under all
debt agreements as of December 31, 2005, are as follows:
Year
Amount
2006
$
50
2007
385
2008
744
2009
2,326
2010
3,455
Thereafter
12,376
$
19,336
For
the
amounts of debt scheduled to mature during 2006, it is management’s intent to
fund the repayments from borrowings on the Company’s revolving credit facility.
The accompanying consolidated balance sheet reflects this intent by presenting
all debt balances as long-term while the table above reflects actual debt
maturities as of the stated date.
In
October 2005, Charter, acting through a Special Committee of Charter’s Board of
Directors, and Mr. Allen, settled a dispute that had arisen between the parties
with regard to the ownership of CC VIII. As part of that settlement, CCHC issued
a subordinated exchangeable note (the "CCHC Note") to Charter
Investment, Inc. ("CII").
The
CCHC Note has a 15-year maturity. The CCHC Note has an initial accreted value
of
$48 million accreting at 14% compounded quarterly, except that from and after
February 28, 2009, CCHC may pay any increase in the accreted value of the CCHC
Note in cash and the accreted value of the CCHC Note will not increase to the
extent such amount is paid in cash. The CCHC Note is exchangeable at CII’s
option, at any time, for Charter Holdco Class A Common units at a rate equal
to
the then accreted value, divided by $2.00 (the "Exchange Rate"). Customary
anti-dilution protections have been provided that could cause future changes
to
the Exchange Rate. Additionally, the Charter Holdco Class A Common units
received will be exchangeable by the holder into Charter common stock in
accordance with existing agreements between CII, Charter and certain other
parties signatory thereto. Beginning February 28, 2009, if the closing price
of
Charter common stock is at or above the Exchange Rate for a certain period
of
time as specified in the Exchange Agreement, Charter Holdco may require the
exchange of the CCHC Note for Charter Holdco Class A Common units at the
Exchange Rate. Additionally, CCHC has the right to redeem the CCHC Note
under certain circumstances for cash in an amount equal to the then accreted
value, such amount, if redeemed prior to February 28, 2009, would also include
a
make whole up to the accreted value through February 28, 2009. CCHC must redeem
the CCHC Note at its maturity for cash in an amount equal to the initial stated
value plus the accreted return through maturity. The accreted value of the
CCHC
Note as of December 31, 2005 is $49 million.
11.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 $863
million and $990 million at December 31, 2005 and 2004, respectively, of 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. Minority
interest on the Company’s consolidated balance sheets as of December 31, 2005
and 2004 primarily represents preferred membership interests in CC VIII, LLC
("CC VIII"), an indirect subsidiary of Charter Holdco, of $188 million and
$656
million, respectively. As more fully described in Note 25, this preferred
interest arises from the approximately $630 million of preferred membership
units issued by CC VIII in connection with an acquisition in February 2000
and
was the subject of a dispute between Charter and Mr. Allen, Charter’s Chairman
and controlling shareholder that was settled October 31, 2005. In conjunction
with the settlement, the Company adjusted minority interest for $467 million,
of
which $418 million was reclassified from minority interest to equity in the
fourth quarter of 2005. Beginning in the fourth quarter of 2005, approximately
5.6% of CC VIII’s income is allocated to minority interest.
Minority
interest historically included the portion of Charter Holdco’s member’s equity
not owned by Charter. However, members’ deficit of Charter Holdco was $4.8
billion, $4.4 billion and $57 million as of December 31, 2005, 2004 and 2003,
respectively, thus minority interest in Charter Holdco has been eliminated.
Minority interest was 52%, 53% and 54% as of December 31, 2005, 2004 and 2003,
respectively. Reported losses allocated to minority interest on the consolidated
statement of operations are limited to the extent of any remaining minority
interest on the balance sheet related to Charter Holdco. Additionally, minority
interest includes the proportionate share of changes in fair value of interest
rate risk derivative agreements. Such amounts are temporary as they are
contractually scheduled to reverse over the life of the underlying instrument.
Because minority interest in Charter Holdco was substantially eliminated at
December 31, 2003, beginning in 2004, the Company began to absorb substantially
all losses before income taxes that otherwise would have been allocated to
minority interest. This resulted in an additional $454 million and $2.4 billion
of net loss for the year ended December 31, 2005 and 2004, respectively. Subject
to any changes in Charter Holdco’s capital structure, future losses will
continue to be absorbed by Charter. Changes to minority interest consist of
the
following for the periods presented:
On
August 31, 2001, in connection with its acquisition of Cable USA, Inc. and
certain cable system assets from affiliates of Cable USA, Inc., the Company
issued 505,664 shares of Series A Convertible Redeemable Preferred Stock
(the "Preferred Stock") valued at and with a liquidation preference of
$51 million. Holders of the Preferred Stock have no voting rights but are
entitled to receive cumulative cash dividends at an annual rate of 5.75%,
payable quarterly. If for any reason Charter fails to pay the dividends on
the
Preferred Stock on a timely basis, the dividend rate on each share increases
to
an annual rate of 7.75% until the payment is made. The Preferred Stock is
redeemable by Charter at its option on or after August 31, 2004 and must be
redeemed by Charter at any time upon a change of control, or if not previously
redeemed or converted, on August 31, 2008. The Preferred Stock is
convertible, in whole or in part, at the option of the holders from
April 1, 2002 through August 31, 2008, into shares of common stock at
an initial conversion rate equal to a conversion price of $24.71 per share
of
common stock, subject to certain customary adjustments. The redemption price
per
share of Preferred Stock is the Liquidation Preference of $100, subject to
certain customary adjustments. In the first quarter of 2003, the Company issued
39,595 additional shares of preferred stock valued at and with a liquidation
preference of $4 million.
In
November 2005, Charter repurchased 508,546 shares of its Series A Convertible
Redeemable Preferred Stock for an aggregate purchase price of approximately
$31
million (or $60 per share). The shares had liquidation preference of
approximately $51 million and had accrued but unpaid dividends of approximately
$3 million resulting in a gain of approximately $23 million recorded in gain
(loss) on extinguishment of debt and preferred stock. Following the repurchase,
36,713 shares of preferred stock remained outstanding.
In
connection with the repurchase, the holders of Preferred Stock consented to
an
amendment to the Certificate of Designation governing the Preferred Stock that
will eliminate the quarterly dividends on all of the outstanding Preferred
Stock
and will provide that the liquidation preference for the remaining shares
outstanding will be $105.4063 per share, which amount shall accrete from
September 30, 2005 at an annual rate of 7.75%, compounded quarterly. Certain
holders of Preferred Stock also released Charter from various threatened claims
relating to their acquisition and ownership of the Preferred Stock, including
threatened claims for breach of contract.
The
Company's Class A common stock and Class B common stock are identical except
with respect to certain voting, transfer and conversion rights. Holders of
Class
A common stock are entitled to one vote per share and holder of Class B common
stock is entitled to ten votes for each share of Class B common stock held
and
for each Charter Holdco membership unit held. The Class B common stock is
subject to significant transfer restrictions and is convertible on a share
for
share basis into Class A common stock at the option of the holder. Charter
Holdco membership units are exchangeable on a one-for-one basis for shares
of
Class A common stock.
14.Share
Lending Agreement
In
2005,
Charter issued 94.9 million shares of Class A common stock in a public
offering, which was effected pursuant to an effective registration statement
that initially covered the issuance and sale of up to 150 million shares of
Class A common stock. The shares were issued pursuant to the share lending
agreement, pursuant to which Charter had previously agreed to loan up to
150 million shares to Citigroup Global Markets Limited ("CGML"). Because
less than the full 150 million shares covered by the share lending
agreement were sold in the offering, Charter as of December 31, 2005 was
obligated to issue, at CGML’s request, up to an additional 55.1 million
loaned shares in subsequent registered public offerings pursuant to the share
lending agreement. In February 2006, an additional 22.0 million shares were
issued under the share lending agreement.
This
offering of Charter’s Class A common stock was conducted to facilitate
transactions by which investors in Charter’s 5.875% convertible senior notes due
2009, issued on November 22, 2004, hedged their investments in the
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 lends
to
CGML.
The
issuance of up to a total of 150 million shares of common stock (of which 94.9
million were issued in 2005) pursuant to a share lending agreement executed
by
Charter in connection with the issuance of the 5.875% convertible senior notes
in November 2004 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 94.9 million
shares lent in 2005 is approximately $116 million as of December 31, 2005.
However, the net effect on shareholders’ deficit of the shares lent in July
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.
15.Comprehensive
Loss
Certain
marketable equity securities are classified as available-for-sale and reported
at market value with unrealized gains and losses recorded as accumulated other
comprehensive loss on the accompanying consolidated balance sheets.
Additionally, the Company reports changes in the fair value of interest rate
agreements designated as hedging the variability of cash flows associated with
floating-rate debt obligations, that meet the effectiveness criteria of SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities,
in
accumulated other comprehensive loss, after giving effect to the minority
interest share of such gains and losses. Comprehensive loss for the years ended
December 31, 2005, 2004 and 2003 was $961 million, $4.3 billion and $219
million, respectively.
16.Accounting
for Derivative Instruments and Hedging Activities
The
Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs.
The Company’s policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest
rate
swap
agreements, the Company has agreed to exchange, at specified intervals through
2007, the difference between fixed and variable interest amounts calculated
by
reference to an agreed-upon notional principal amount. Interest rate collar
agreements are used to limit the Company’s exposure to and benefits from
interest rate fluctuations on variable rate debt to within a certain range
of
rates.
The
Company does not hold or issue derivative instruments for trading purposes.
The
Company does, however, have certain interest rate derivative instruments that
have been designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments
into
fixed payments. For qualifying hedges, SFAS No. 133 allows derivative gains
and losses to offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented, designated and
assessed the effectiveness of transactions that receive hedge accounting. For
the years ended December 31, 2005, 2004 and 2003, net gain on derivative
instruments and hedging activities includes gains of $3 million, $4 million
and
$8 million, respectively, which represent cash flow hedge ineffectiveness on
interest rate hedge agreements arising from differences between the critical
terms of the agreements and the related hedged obligations. Changes in the
fair
value of interest rate agreements designated as hedging instruments of the
variability of cash flows associated with floating-rate debt obligations that
meet the effectiveness criteria SFAS No. 133 are reported in accumulated other
comprehensive loss. For the years ended December 31, 2005, 2004 and 2003, a
gain
of $16 million, $42 million and $48 million, respectively, related to derivative
instruments designated as cash flow hedges, was recorded in accumulated other
comprehensive loss and minority interest. The amounts are subsequently
reclassified into interest expense as a yield adjustment in the same period
in
which the related interest on the floating-rate debt obligations affects
earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do
not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative instruments not
designated as hedges are marked to fair value, with the impact recorded as
gain
(loss) on derivative instruments and hedging activities in the Company’s
consolidated statement of operations.
For the
years ended December 31, 2005, 2004 and 2003, net
gain
on derivative instruments and hedging activities includes gains of $47 million,
$65 million and $57 million, respectively, for interest rate derivative
instruments not designated as hedges.
As
of
December 31, 2005, 2004 and 2003, the Company had outstanding $1.8 billion,
$2.7 billion and $3.0 billion and $20 million, $20 million and $520
million, respectively, in notional amounts of interest rate swaps and collars,
respectively. The notional amounts of interest rate instruments do not represent
amounts exchanged by the parties and, thus, are not a measure of exposure to
credit loss. The amounts exchanged are determined by reference to the notional
amount and the other terms of the contracts.
17.Fair
Value of Financial Instruments
The
Company has estimated the fair value of its financial instruments as of
December 31, 2005 and 2004 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 Company is exposed to market price risk volatility with respect
to investments in publicly traded and privately held entities.
The
fair
value of interest rate agreements represents the estimated amount the Company
would receive or pay upon termination of the agreements. Management believes
that the sellers of the interest rate agreements will be able to meet their
obligations under the agreements. In addition, some of the interest rate
agreements are with certain of the participating banks under the Company’s
credit facilities, thereby reducing the exposure to credit loss. The Company
has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance
by
the
counterparties is not anticipated nor would it have a material adverse effect
on
the Company’s consolidated financial condition or results of operations.
The
estimated fair value of the Company’s notes and interest rate agreements at
December 31, 2005 and 2004 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 and related interest
rate agreements at December 31, 2005 and 2004 is as follows:
2005
2004
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Debt
Charter
convertible notes
$
863
$
647
$
990
$
1,127
Charter
Holdings debt
1,746
1,145
8,579
7,669
CIH
debt
2,472
1,469
--
--
CCH
I debt
3,683
2,959
--
--
CCH
II debt
1,601
1,592
1,601
1,698
CCO
Holdings debt
1,344
1,299
1,050
1,064
Charter
Operating debt
1,833
1,820
1,500
1,563
Credit
facilities
5,731
5,719
5,515
5,502
Other
115
114
229
236
Interest
Rate Agreements
Assets
(Liabilities)
Swaps
(4
)
(4
)
(69
)
(69
)
Collars
--
--
(1
)
(1
)
The
weighted average interest pay rate for the Company’s interest rate swap
agreements was 9.51% and 8.07% at December 31, 2005 and 2004, respectively.
18.Revenues
Revenues
consist of the following for the years presented:
Components
of selling expense are included in general and administrative and marketing
expense.
21.Stock
Compensation Plans
The
Company grants stock options, restricted stock and other incentive compensation
pursuant to the 2001 Stock Incentive Plan of Charter (the "2001 Plan"). Prior
to
2001, options were granted under the 1999 Option Plan of Charter Holdco (the
"1999 Plan").
The
1999
Plan provided for the grant of options to purchase membership units in Charter
Holdco to current and prospective employees and consultants of Charter Holdco
and its affiliates and current and prospective non-employee directors of
Charter. Options granted generally vest over five years from the grant date,
with 25% vesting 15 months after the anniversary of the grant date and
ratably thereafter. Options not exercised accumulate and are exercisable, in
whole or in part, in any subsequent period, but not later than 10 years from
the
date of grant. Membership units received upon exercise of the options are
automatically exchanged into Class A common stock of Charter on a
one-for-one basis.
The
2001
Plan provides 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 (not to exceed
20,000,000), as each term is defined in the 2001 Plan. Employees, officers,
consultants and directors of the Company and its subsidiaries and affiliates
are
eligible to receive grants under the 2001 Plan. Options granted generally vest
over four years from the grant date, with 25% vesting on the anniversary of
the
grant date and ratably thereafter. Generally, options expire 10 years from
the grant date.
The
2001
Plan allows for the issuance of up to a total of 90,000,000 shares of Charter
Class A common stock (or units convertible into Charter Class A common
stock). The total shares available reflect a July 2003 amendment to the 2001
Plan approved by the board of directors and the shareholders of Charter to
increase available shares by 30,000,000 shares. In 2001, any shares covered
by
options that terminated under the 1999 Plan were transferred to the 2001 Plan,
and no new options can be granted under the 1999 Plan.
In
the
years ended December 31, 2005, 2004 and 2003, certain directors were awarded
a
total of 492,225, 182,932 and 80,603 shares, respectively, of restricted Class
A
common stock of which 44,121 shares had been cancelled as of December 31, 2005.
The shares vest one year from the date of grant. In 2005, 2004 and 2003, in
connection with new employment agreements, certain officers were awarded
2,987,500, 50,000 and 50,000 shares, respectively, of restricted Class A common
stock of which 68,750 shares had been cancelled as of December 31, 2005. The
shares vest annually over a one to three-year period beginning from the date
of
grant. As of December 31, 2005, deferred compensation remaining to be recognized
in future period totaled $2 million.
A
summary
of the activity for the Company’s stock options, excluding granted shares of
restricted Class A common stock, for the years ended December 31,2005, 2004 and 2003, is as follows (amounts in thousands, except per share
data):
2005
2004
2003
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
Options
outstanding, beginning of period
24,835
$
6.57
47,882
$
12.48
53,632
$
14.22
Granted
10,810
1.36
9,405
4.88
7,983
3.53
Exercised
(17
)
1.11
(839
)
2.02
(165
)
3.96
Cancelled
(6,501
)
7.40
(31,613
)
15.16
(13,568
)
14.10
Options
outstanding, end of period
29,127
$
4.47
24,835
$
6.57
47,882
$
12.48
Weighted
average remaining contractual life
8
years
8
years
8
years
Options
exercisable, end of period
9,999
$
7.80
7,731
$
10.77
22,861
$
16.36
Weighted
average fair value of options granted
$
0.65
$
3.71
$
2.71
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2005:
Options
Outstanding
Options
Exercisable
Weighted-
Weighted-
Average
Weighted-
Average
Weighted-
Remaining
Average
Remaining
Average
Range
of
Number
Contractual
Exercise
Number
Contractual
Exercise
Exercise
Prices
Outstanding
Life
Price
Exercisable
Life
Price
(in
thousands)
(in
thousands)
$
1.11
—
$
1.60
12,565
9
years
$
1.39
1,297
9
years
$
1.49
$
2.85
—
$
4.56
5,906
7
years
3.40
3,028
7
years
3.33
$
5.06
—
$
5.17
6,970
8
years
5.15
2,187
8
years
5.13
$
9.13
—
$
13.68
1,712
6
years
10.96
1,513
6
years
11.10
$
13.96
—
$
23.09
1,974
4
years
19.24
1,974
4
years
19.24
On
January 1, 2003, the Company adopted the fair value measurement provisions
of SFAS No. 123, under which the Company recognizes compensation expense of
a stock-based award to an employee over the vesting period based on the fair
value of the award on the grant date. Adoption of these provisions resulted
in
utilizing a preferable accounting method as the consolidated financial
statements present the estimated fair value of stock-based compensation in
expense consistently with other forms of compensation and other expense
associated with goods
and
services received for equity instruments. In accordance with SFAS No. 123,
the fair value method will be applied only to awards granted or modified after
January 1, 2003, whereas awards granted prior to such date will continue to
be accounted for under APB No. 25, unless they are modified or settled in
cash. The ongoing effect on consolidated results of operations or financial
condition will be dependent upon future stock based compensation awards granted.
The Company recorded $14 million, $31 million and $4 million of option
compensation expense for the years ended December 31, 2005, 2004 and 2003,
respectively.
In
January 2004, the Company began an option exchange program in which the Company
offered its employees the right to exchange all stock options (vested and
unvested) under the 1999 Charter Communications Option Plan and 2001 Stock
Incentive Plan that had an exercise price over $10 per share for shares of
restricted Charter Class A common stock or, in some instances, cash.
Based
on
a sliding exchange ratio, which varied depending on the exercise price of an
employees outstanding options, if an employee would have received more than
400
shares of restricted stock in exchange for tendered options, Charter issued
that
employee shares of restricted stock in the exchange. If, based on the exchange
ratios, an employee would have received 400 or fewer shares of restricted stock
in exchange for tendered options, Charter instead paid the employee cash in
an
amount equal to the number of shares the employee would have received multiplied
by $5.00. The
offer
applied to options (vested and unvested) to purchase a total of 22,929,573
shares of Class A common stock, or approximately 48% of the Company's 47,882,365
total options issued and outstanding as of December 31, 2003. Participation
by
employees was voluntary. Those members of the Company's board of directors
who
were not also employees of the Company or any of its subsidiaries were not
eligible to participate in the exchange offer.
In
the
closing of the exchange offer on February 20, 2004, the Company accepted for
cancellation eligible options to purchase approximately 18,137,664 shares of
its
Class A common stock. In exchange, the Company granted 1,966,686 shares of
restricted stock, including 460,777 performance shares to eligible employees
of
the rank of senior vice president and above, and paid a total cash amount of
approximately $4 million (which amount includes applicable withholding taxes)
to
those employees who received cash rather than shares of restricted stock. The
restricted stock was granted on February 25, 2004. Employees tendered
approximately 79% of the options eligible to be exchanged under the program.
The
cost
to the Company of the stock option exchange program was approximately $10
million, with a 2004 cash compensation expense of approximately $4 million
and a
non-cash compensation expense of approximately $6 million to be expensed ratably
over the three-year vesting period of the restricted stock in the
exchange.
In
January 2004, the Compensation Committee of the board of directors of Charter
approved Charter's Long-Term Incentive Program ("LTIP"), which is a program
administered under the 2001 Stock Incentive Plan. Under the LTIP, employees
of
Charter and its subsidiaries whose pay classifications exceeda
certain
level are eligible to receive stock options, and more senior level employees
are
eligible to receive stock options and performance shares. The stock options
vest
25% on each of the first four anniversaries of the date of grant. The
performance shares vest on the third anniversary of the grant date and shares
of
Charter Class A common stock are issued, conditional upon Charter's performance
against financial performance measures established by Charter’s management and
approved by its board of directors as of the time of the award. Charter granted
3.2 million and 6.9 million shares in 2005 and 2004, respectively, under this
program and recognized expense of $1 million and $8 million in the first three
quarters of 2005 and 2004, respectively. However, in the fourth quarter of
2005
and 2004, the Company reversed the entire $1 million and $8 million,
respectively, of expense based on the Company’s assessment of the probability of
achieving the financial performance measures established by Charter and required
to be met for the performance shares to vest. In February 2006, the Compensation
Committee approved a modification to the financial performance measures required
to be met for the performance shares to vest after which management believes
that a approximately 2.5 million of the performance shares are likely to vest.
As such, expense of approximately $3 million will be amortized over the
remaining two year service period.
Certain
of the Company’s cable systems in Louisiana suffered significant plant damage as
a result of hurricanes Katrina and Rita in September 2005. As a result, the
Company wrote off $19 million of its plants’ net book value in the third quarter
of 2005.
23.Special
Charges
In
the
fourth quarter of 2002, the Company began a workforce reduction program and
consolidation of its operations from three divisions and ten regions into five
operating divisions, eliminating redundant practices and streamlining its
management structure. The Company has recorded special charges as a result
of
reducing its workforce, executive severance and consolidating administrative
offices in 2003, 2004 and 2005. The activity associated with this initiative
is
summarized in the table below.
For
the
year ended December 31, 2003, the severance and lease costs were offset by
a $5
million settlement from the Internet service provider Excite@Home related to
the
conversion of high-speed Internet customers to Charter Pipeline service in
2001.
For the year ended December 31, 2004, special charges include approximately
$85
million, as part of a settlement of the consolidated federal class action and
federal derivative action lawsuits and approximately $10 million of litigation
costs related to the settlement of a 2004 national class action suit (see Note
26). For the year ended December 31, 2004, special charges were offset by $3
million received from a third party in settlement of a legal dispute. For the
year ended December 31, 2005, special charges also include approximately $1
million related to various legal settlements.
24.Income
Taxes
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are not
subject to income tax. However, certain of these subsidiaries are corporations
and are subject to income tax. All of the 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 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.
The
LLC
Agreement provides for certain special allocations of net tax profits and net
tax losses (such net tax profits and net tax losses being determined under
the
applicable federal income tax rules for determining capital accounts). Under
the
LLC Agreement, through the end of 2003, net tax losses of Charter Holdco that
would otherwise have
been
allocated to Charter based generally on its percentage ownership of outstanding
common units were allocated instead to membership units held by Vulcan Cable
and
CII (the "Special Loss Allocations") to the extent of their respective capital
account balances. After 2003, under the LLC Agreement, net tax losses of Charter
Holdco are to be allocated to Charter, Vulcan Cable and CII based generally
on
their respective percentage ownership of outstanding common units to the extent
of their respective capital account balances. Allocations of net tax losses
in
excess of the members’ aggregate capital account balances are allocated under
the rules governing Regulatory Allocations, as described below. Subject to
the
Curative Allocation Provisions described below, the LLC Agreement further
provides that, beginning at the time Charter Holdco generates net tax profits,
the net tax profits that would otherwise have been allocated to Charter based
generally on its percentage ownership of outstanding common membership units
will instead generally be allocated to Vulcan Cable and CII (the "Special Profit
Allocations"). The Special Profit Allocations to Vulcan Cable and CII will
generally continue until the cumulative amount of the Special Profit Allocations
offsets the cumulative amount of the Special Loss Allocations. The amount and
timing of the Special Profit Allocations are subject to the potential
application of, and interaction with, the Curative Allocation Provisions
described in the following paragraph. The LLC Agreement generally provides
that
any additional net tax profits are to be allocated among the members of Charter
Holdco based generally on their respective percentage ownership of Charter
Holdco common membership units.
Because
the respective capital account balance of each of Vulcan Cable and CII was
reduced to zero by December 31, 2002, certain net tax losses of Charter Holdco
that were to be allocated for 2002, 2003, 2004 and 2005,
to
Vulcan Cable and CII instead have been allocated to Charter (the "Regulatory
Allocations"). As a result of the allocation of net tax losses to Charter in
2005, Charter’s capital account balance was reduced to zero during 2005. The LLC
Agreement provides that once the capital account balances of all members have
been reduced to zero, net tax losses are to be allocated to Charter, Vulcan
Cable and CII based generally on their respective percentage ownership of
outstanding common units. Such allocations are also considered to be Regulatory
Allocations. The LLC Agreement further provides that, to the extent possible,
the effect of the Regulatory Allocations is to be offset over time pursuant
to
certain curative allocation provisions (the "Curative Allocation Provisions")
so
that, after certain offsetting adjustments are made, each member's capital
account balance is equal to the capital account balance such member would have
had if the Regulatory Allocations had not been part of the LLC Agreement. The
cumulative amount of the actual tax losses allocated to Charter as a result
of
the Regulatory Allocations through the year ended December 31, 2005 is
approximately $4.1 billion.
As
a
result of the Special Loss Allocations and the Regulatory Allocations referred
to above (and their interaction with the allocations related to assets
contributed to Charter Holdco with differences between book and tax basis),
the
cumulative amount of losses of Charter Holdco allocated to Vulcan Cable and
CII
is in
excess of the amount that would have been allocated to such entities if the
losses of Charter Holdco had been allocated among its members in proportion
to
their respective percentage ownership of Charter Holdco common membership
units.
The cumulative amount of such excess losses was approximately $977 million
through December 31, 2005.
In
certain situations, the Special Loss Allocations, Special Profit Allocations,
Regulatory Allocations and Curative Allocation Provisions described above could
result in Charter paying taxes in an amount that is more or less than if Charter
Holdco had allocated net tax profits and net tax losses among its members based
generally on the number of common membership units owned by such members. This
could occur due to differences in (i) the character of the allocated income
(e.g., ordinary versus capital), (ii) the allocated amount and timing of
tax depreciation and tax amortization expense due to the application of section
704(c) under the Internal Revenue Code, (iii) the potential interaction
between the Special Profit Allocations and the Curative Allocation Provisions,
(iv) the amount and timing of alternative minimum taxes paid by Charter, if
any,
(v) the apportionment of the allocated income or loss among the states in
which Charter Holdco does business, and (vi) future federal and state tax
laws. Further, in the event of new capital contributions to Charter Holdco,
it
is possible that the tax effects of the Special Profit Allocations, Special
Loss
Allocations, Regulatory Allocations and Curative Allocation Provisions will
change significantly pursuant to the provisions of the income tax regulations
or
the terms of a contribution agreement with respect to such contribution. Such
change could defer the actual tax benefits to be derived by Charter with respect
to the net tax losses allocated to it or accelerate the actual taxable income
to
Charter with respect to the net tax profits allocated to it. As a result, it
is
possible under certain circumstances, that Charter could receive future
allocations of
taxable
income in excess of its currently allocated tax deductions and available tax
loss carryforwards. The ability to utilize net operating loss carryforwards
is
potentially subject to certain limitations as discussed below.
In
addition, under their exchange agreement with Charter, Vulcan Cable and CII
may
exchange some or all of their membership units in Charter Holdco for Charter’s
Class B common stock, be merged with Charter, or be acquired by Charter in
a non-taxable reorganization. If such an exchange were to take place prior
to
the date that the Special Profit Allocation provisions had fully offset the
Special Loss Allocations, Vulcan Cable and CII could elect to cause Charter
Holdco to make the remaining Special Profit Allocations to Vulcan Cable and
CII
immediately prior to the consummation of the exchange. In the event Vulcan
Cable
and CII choose not to make such election or to the extent such allocations
are
not possible, Charter would then be allocated tax profits attributable to the
membership units received in such exchange pursuant to the Special Profit
Allocation provisions. Mr. Allen has generally agreed to reimburse Charter
for any incremental income taxes that Charter would owe as a result of such
an
exchange and any resulting future Special Profit Allocations to Charter. The
ability of Charter to utilize net operating loss carryforwards is potentially
subject to certain limitations as discussed below. If Charter were to become
subject to certain limitations (whether as a result of an exchange described
above or otherwise), and as a result were to owe taxes resulting from the
Special Profit Allocations, then Mr. Allen may not be obligated to reimburse
Charter for such income taxes.
For
the
years ended December 31, 2005, 2004 and 2003, the Company recorded deferred
income tax expense and benefits as shown below. The income tax expense is
recognized through increases in deferred tax liabilities related to our
investment in Charter Holdco, as well as through current federal and state
income tax expense and increases in the deferred tax liabilities of certain
of
our indirect corporate subsidiaries. The 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. In 2003, Charter received tax loss
allocations from Charter Holdco. Previously, the tax losses had been allocated
to Vulcan Cable and CII in accordance with the Special Loss Allocations provided
under the Charter Holdco limited liability company agreement. The Company does
not expect to recognize a similar benefit related to its investment in Charter
Holdco after 2003 due to limitations on its ability to offset future tax
benefits against the remaining deferred tax liabilities. However, the actual
tax
provision calculation in future periods will be the result of current and future
temporary differences, as well as future operating results.
Current
and deferred income tax benefit (expense) is as follows:
The
Company recorded the portion of the income tax benefit associated with the
adoption of EITF Topic D-108 as a $91 million reduction of the cumulative effect
of accounting change on the accompanying statement of operations for the year
ended December 31, 2004.
The
Company’s effective tax rate differs from that derived by applying the
applicable federal income tax rate of 35%, and average state income tax rate
of
5% for the years ended December 31, 2005, 2004 and 2003 as follows:
The
tax
effects of these temporary differences that give rise to significant portions
of
the deferred tax assets and deferred tax liabilities at December 31, 2005 and
2004 which are included in long-term liabilities are presented below.
As
of
December 31, 2005, the Company has deferred tax assets of $4.2 billion,
which primarily relate to financial and tax losses allocated to Charter from
Charter Holdco. The deferred tax assets include $2.4 billion of tax net
operating loss carryforwards (generally expiring in years 2006 through 2025)
of
Charter and its indirect corporate subsidiaries. Valuation allowances of $3.7
billion exist with respect to these deferred tax assets of which $1.8 billion
relate to the tax net operating loss carryforwards.
Realization
of any benefit from the Company’s tax net operating losses is dependent on: (1)
Charter and its indirect corporate subsidiaries’ ability to generate future
taxable income and (2) the absence of certain future "ownership changes" of
Charter's common stock. An "ownership change" 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
any future taxable income. Future transactions and the timing of such
transactions could cause an ownership change. Such transactions include
additional issuances of common stock by the Company (including but not limited
to the issuance of up to a total of 150 million shares of common stock (of
which
116.9 million were issued through 2006) under the share lending agreement),
the
issuance of shares of common stock upon future conversion of Charter’s
convertible senior notes and the issuance of common stock in the class action
settlement discussed in Note 26, reacquisition of the borrowed shares by
Charter, 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 upon 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 are beyond management’s control.
The
total
valuation allowance for deferred tax assets as of December 31, 2005 and
2004 was $3.7 billion and $3.5 billion, respectively. 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.
The
Company is currently under examination by the Internal Revenue Service for
the
tax years ending December 31, 2002 and 2003. The Company’s results (excluding
Charter and its indirect corporate subsidiaries) for these years are subject
to
this examination. Management does not expect the results of this examination
to
have a material adverse effect on the Company’s consolidated financial condition
or results of operations.
25.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 that each of the transactions described
below was on terms no less favorable to the Company than could have been
obtained from independent third parties.
Charter
is a holding company and its principal assets are its equity interest in Charter
Holdco and certain mirror notes payable by Charter Holdco to Charter and mirror
preferred units held by Charter, which have the same principal amount and terms
as those of Charter’s convertible senior notes and Charter’s outstanding
preferred stock. In 2004, Charter Holdco paid to Charter $49 million related
to
interest on the mirror notes, and Charter Holdco paid an additional $4 million
related to dividends on the mirror preferred membership units. Further, during
2004 Charter Holdco issued 7,252,818 common membership units to Charter in
cancellation of $30 million principal amount of mirror notes so as to mirror
the
issuance by Charter of Class A common stock in exchange for a like principal
amount of its outstanding convertible notes.
Charter
is a party to management arrangements with Charter Holdco and certain of its
subsidiaries. Under these agreements, Charter provides management services
for
the cable systems owned or operated by its subsidiaries. The management services
include such services as centralized customer billing services, data processing
and related support, benefits administration and coordination of insurance
coverage and self-insurance programs for medical, dental and workers’
compensation claims. Costs associated with providing these services are billed
and charged directly to the Company’s operating subsidiaries and are included
within operating costs in the accompanying consolidated statements of
operations. Such costs totaled $212 million, $202 million and $210 million
for
the years ended December 31, 2005, 2004 and 2003, respectively. All other
costs incurred on the behalf of Charter’s operating subsidiaries are considered
a part of the management fee and are recorded as a component of selling, general
and administrative expense, in the accompanying consolidated financial
statements. For the years ended December 31, 2005, 2004 and 2003, the
management fee charged to the Company’s operating subsidiaries approximated the
expenses incurred by Charter Holdco and Charter on behalf of the Company’s
operating subsidiaries. The credit facilities of the Company’s operating
subsidiaries prohibit payments of management fees in excess of 3.5% of revenues
until repayment of the outstanding indebtedness. In the event any portion of
the
management fee due and payable is not paid, it is deferred by Charter and
accrued as a liability of such subsidiaries.
Any
deferred amount of the management fee will bear interest at the rate of 10%
per
year, compounded annually, from the date it was due and payable until the date
it is paid.
Mr. Allen,
the controlling shareholder of Charter, and a number of his affiliates have
interests in various entities that provide services or programming to Charter’s
subsidiaries. Given the diverse nature of Mr. Allen’s investment activities
and interests, and to avoid the possibility of future disputes as to potential
business, Charter and Charter Holdco, under the terms of their respective
organizational documents, may not, and may not allow their subsidiaries to
engage in any business transaction outside the cable transmission business
except for certain existing approved investments. Should Charter or Charter
Holdco or any of their subsidiaries wish to pursue, or allow their subsidiaries
to pursue, a business transaction outside of this scope, it must first offer
Mr. Allen the opportunity to pursue the particular business transaction. If
he decides not to pursue the business transaction and consents to Charter or
its
subsidiaries engaging in the business transaction, they will be able to do
so.
The cable transmission business means the business of transmitting video, audio,
including telephone, and data over cable systems owned, operated or managed
by
Charter, Charter Holdco or any of their subsidiaries from time to time.
Mr. Allen
or his affiliates own or have owned equity interests or warrants to purchase
equity interests in various entities with which the Company does business or
which provides it with products, services or programming. Among these entities
are TechTV L.L.C. ("TechTV"), Oxygen Media Corporation ("Oxygen Media"), Digeo,
Inc., Click2learn, Inc., Trail Blazer Inc., Action Sports Cable Network ("Action
Sports") and Microsoft Corporation. In May 2004, TechTV was sold to an unrelated
third party. Mr. Allen owns 100% of the equity of Vulcan Ventures
Incorporated ("Vulcan Ventures") and Vulcan Inc. and is the president of Vulcan
Ventures. Ms. Jo Allen Patton is a director and the President and Chief
Executive Officer of Vulcan Inc. and is a director and Vice President of Vulcan
Ventures. Mr. Lance Conn is Executive Vice President of Vulcan Inc. and Vulcan
Ventures. Mr. Savoy was a vice president and a director of Vulcan Ventures
until
his resignation in September 2003 and he resigned as a director of Charter
in
April 2004. The various cable, media, Internet and telephone companies in which
Mr. Allen has invested may mutually benefit one another. The Company can
give no assurance, nor should you expect, that any of these business
relationships will be successful, that the Company will realize any benefits
from these relationships or that the Company will enter into any business
relationships in the future with Mr. Allen’s affiliated companies.
Mr. Allen
and his affiliates have made, and in the future likely will make, numerous
investments outside of the Company and its business. The Company cannot assure
that, in the event that the Company or any of its subsidiaries enter into
transactions in the future with any affiliate of Mr. Allen, such
transactions will be on terms as favorable to the Company as terms it might
have
obtained from an unrelated third party. Also, conflicts could arise with respect
to the allocation of corporate opportunities between the Company and
Mr. Allen and his affiliates. The Company has not instituted any formal
plan or arrangement to address potential conflicts of interest.
The
Company received or receives programming for broadcast via its cable systems
from TechTV (now G4), Oxygen Media and Trail Blazers Inc. The Company pays
a fee
for the programming service generally based on the number of customers receiving
the service. Such fees for the years ended December 31, 2005, 2004 and 2003
were each less than 1% of total operating expenses.
Tech
TV. The
Company received from TechTV programming for distribution via its cable system
pursuant to an affiliation agreement. The affiliation agreement provided, among
other things, that TechTV must offer Charter certain terms and conditions that
are no less favorable in the affiliation agreement than are given to any other
distributor that serves the same number of or fewer TechTV viewing customers.
Additionally, pursuant to the affiliation agreement, the Company was entitled
to
incentive payments for channel launches through December 31, 2003.
In
March
2004, Charter Holdco entered into agreements with Vulcan Programming and TechTV,
which provide for (i) Charter Holdco and TechTV to amend the affiliation
agreement which, among other things, revises the description of the TechTV
network content, provides for Charter Holdco to waive certain claims against
TechTV relating to alleged breaches of the affiliation agreement and provides
for TechTV to make payment of outstanding launch receivables due to Charter
Holdco under the affiliation agreement, (ii) Vulcan Programming to pay
approximately $10 million and purchase over a 24-month period, at fair market
rates, $2 million of advertising time
across
various cable networks on Charter cable systems in consideration of the
agreements, obligations, releases and waivers under the agreements and in
settlement of the aforementioned claims and (iii) TechTV to be a provider of
content relating to technology and video gaming for Charter's interactive
television platforms through December 31, 2006 (exclusive for the first year).
For the years ended December 31, 2005 and 2004, the Company recognized
approximately $1 million and $5 million, respectively, of the Vulcan Programming
payment as an offset to programming expense.
Oxygen.
Oxygen
Media LLC ("Oxygen") provides programming content aimed at the female audience
for distribution over cable systems and satellite. On July 22, 2002,
Charter Holdco entered into a carriage agreement with Oxygen whereby the Company
agreed to carry programming content from Oxygen. Under the carriage agreement,
the Company currently makes Oxygen programming available to approximately
5 million of its video customers. In August 2004, Charter Holdco and Oxygen
entered into agreements that amended and renewed the carriage agreement. The
amendment to the carriage agreement (a) revised the number of the Company's
customers to which Oxygen programming must be carried and for which the Company
must pay, (b) released Charter Holdco from any claims related to the failure
to
achieve distribution benchmarks under the carriage agreement, (c) required
Oxygen to make payment on outstanding receivables for launch incentives due
to
the Company under the carriage agreement; and (d) requires that Oxygen provide
its programming content to the Company on economic terms no less favorable
than
Oxygen provides to any other cable or satellite operator having fewer
subscribers than the Company. The renewal of the carriage agreement (a) extends
the period that the Company will carry Oxygen programming to its customers
through January 31, 2008, and (b) requires license fees to be paid based on
customers receiving Oxygen programming, rather than for specific customer
benchmarks. For the years ended December 31, 2005, 2004 and 2003, the Company
paid Oxygen approximately $9 million, $13 million and $9 million, respectively.
In addition, Oxygen pays the Company launch incentives for customers launched
after the first year of the term of the carriage agreement up to a total of
$4 million. The Company recorded approximately $0.1 million related to
these launch incentives as a reduction of programming expense for the year
ended
December 31, 2005 and $1 million for each of the years ended December 31,2004 and 2003, respectively.
In
August
2004, Charter Holdco and Oxygen also amended the equity issuance agreement
to
provide for the issuance of 1 million shares of Oxygen Preferred Stock with
a
liquidation preference of $33.10 per share plus accrued dividends to Charter
Holdco on February 1, 2005 in place of the $34 million of unregistered shares
of
Oxygen Media common stock required under the original equity issuance agreement.
Oxygen Media delivered these shares in March 2005. The preferred stock is
convertible into common stock after December 31, 2007 at a conversion ratio,
the
numerator of which is the liquidation preference and the denominator which
is
the fair market value per share of Oxygen Media common stock on the conversion
date.
The
Company recognized the guaranteed value of the investment over the life of
the
carriage agreement as a reduction of programming expense. For the years ended
December 31, 2005, 2004 and 2003, the Company recorded approximately $2 million,
$13 million, and $9 million, respectively, as a reduction of programming
expense. The carrying value of the Company’s investment in Oxygen was
approximately $33 million and $32 million as of December 31, 2005 and 2004,
respectively.
Digeo,
Inc.
In
March 2001, Charter Ventures and Vulcan Ventures Incorporated formed DBroadband
Holdings, LLC for the sole purpose of purchasing equity interests in Digeo.
In
connection with the execution of the broadband carriage agreement, DBroadband
Holdings, LLC purchased an equity interest in Digeo funded by contributions
from
Vulcan Ventures Incorporated. The equity interest is subject to a priority
return of capital to Vulcan Ventures up to the amount contributed by Vulcan
Ventures on Charter Ventures’ behalf. After Vulcan Ventures recovers its amount
contributed and any cumulative loss allocations, Charter Ventures has a 100%
profit interest in DBroadband Holdings, LLC. Charter Ventures is not required
to
make any capital contributions, including capital calls to Digeo. DBroadband
Holdings, LLC is therefore not included in the Company’s consolidated financial
statements. Pursuant to an amended version of this arrangement, in 2003, Vulcan
Ventures contributed a total of $29 million to Digeo, $7 million of
which was contributed on Charter Ventures’ behalf, subject to Vulcan Ventures’
aforementioned priority return. Since the formation of DBroadband Holdings,
LLC,
Vulcan Ventures has contributed approximately $56 million on Charter Ventures’
behalf.
On
September 27, 2001, Charter and Digeo Interactive amended the broadband
carriage agreement. According to the amendment, Digeo Interactive would provide
to Charter the content for enhanced "Wink" interactive television services,
known as Charter Interactive Channels ("i-channels"). In order to provide the
i-channels, Digeo Interactive sublicensed certain Wink technologies to Charter.
Charter is entitled to share in the revenues generated by the i-channels.
Currently, the Company’s digital video customers who receive i-channels receive
the service at no additional charge.
On
September 28, 2002, Charter entered into a second amendment to its
broadband carriage agreement with Digeo Interactive. This amendment superseded
the amendment of September 27, 2001. It provided for the development by
Digeo Interactive of future features to be included in the Basic i-TV service
to
be provided by Digeo and for Digeo’s development of an interactive "toolkit"
to enable Charter to develop interactive local content. Furthermore, Charter
could request that Digeo Interactive manage local content for a fee. The
amendment provided for Charter to pay for development of the Basic i-TV service
as well as license fees for customers who would receive the service, and for
Charter and Digeo to split certain revenues earned from the service. The Company
paid Digeo Interactive approximately $3 million, $3 million and $4 million
for
the years ended December 31, 2005, 2004 and 2003, respectively, for customized
development of the i-channels and the local content tool kit. This amendment
expired pursuant to its terms on December 31, 2003. Digeo Interactive is
continuing to provide the Basic i-TV service on a month-to-month
basis.
On
June30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for
the
purchase of 100,000 digital video recorder ("DVR"') units. The software for
these DVR units is being supplied by Digeo Interactive, LLC under a license
agreement entered into in April 2004. Under the license agreement Digeo
Interactive granted to Charter Holdco the right to use Digeo's proprietary
software for the number of DVR units that Charter deployed from a maximum of
10
headends through year-end 2004. This maximum number of headends restriction
was
expanded and eventually eliminated through successive agreement amendments
and
the date for entering into license agreements for units deployed was extended.
The license granted for each unit deployed under the agreement is valid for
five
years. In addition, Charter will pay certain other fees including a per-headend
license fee and maintenance fees. Maximum license and maintenance fees during
the term of the agreement are expected to be approximately $7 million. The
agreement provides that Charter is entitled to receive contract terms,
considered on the whole, and license fees, considered apart from other contract
terms, no less favorable than those accorded to any other Digeo customer.
Charter paid approximately $1 million in license and maintenance fees in
2005.
In
April
2004, the Company launched DVR service using units containing the Digeo software
in its Rochester, Minnesota market using a broadband media center that is an
integrated set-top terminal with a cable converter, DVR hard drive and
connectivity to other consumer electronics devices (such as stereos, MP3
players, and digital cameras).
In
May
2004, Charter Holdco entered into a binding term sheet with Digeo Interactive
for the development, testing and purchase of 70,000 Digeo PowerKey DVR units.
The term sheet provided that the parties would proceed in good faith to
negotiate, prior to year-end 2004, definitive agreements for the development,
testing and purchase of the DVR units and that the parties would enter into
a
license agreement for Digeo's proprietary software on terms substantially
similar to the terms of the license agreement described above. In November
2004,
Charter Holdco and Digeo Interactive executed the license agreement and in
December 2004, the parties executed the purchase agreement, each on terms
substantially similar to the binding term sheet. Product development and testing
has been completed. Total purchase price and license and maintenance fees during
the term of the definitive agreements are expected to be approximately $41
million. The definitive agreements are terminable at no penalty to Charter
in
certain circumstances. Charter paid approximately $10 million and $1 million
for
the years ended December 31, 2005 and 2004, respectively, in capital purchases
under this agreement.
CC
VIII. As
part
of the acquisition of the cable systems owned by Bresnan Communications Company
Limited Partnership in February 2000, CC VIII, LLC, Charter’s indirect limited
liability company subsidiary, issued, after adjustments, 24,273,943 Class A
preferred membership units (collectively, the "CC VIII interest") with a
value and an initial capital account of approximately $630 million to certain
sellers affiliated with AT&T Broadband, subsequently owned by Comcast
Corporation (the "Comcast sellers"). Mr. Allen granted the Comcast
sellers the
right
to
sell to him the CC VIII interest for approximately $630 million plus
4.5% interest annually from February 2000 (the "Comcast put right"). In April
2002, the Comcast sellers exercised the Comcast put right in full, and this
transaction was consummated on June 6, 2003. Accordingly, Mr. Allen
has become the holder of the CC VIII interest, indirectly through an
affiliate. In
the
event of a liquidation of CC VIII, Mr. Allen would be entitled to a priority
distribution with respect to a 2% priority return (which will continue to
accrete). Any remaining distributions in liquidation would be distributed to
CC
V Holdings, LLC and Mr. Allen in proportion to CC V Holdings, LLC's capital
account and Mr. Allen's capital account (which will equal the initial capital
account of the Comcast sellers of approximately $630 million, increased or
decreased by Mr. Allen's pro rata share of CC VIII’s profits or losses (as
computed for capital account purposes) after June 6, 2003).
An
issue
arose as to whether the documentation for the Bresnan transaction was correct
and complete with regard to the ultimate ownership of the CC VIII interest
following consummation of the Comcast put right. Thereafter, the board of
directors of Charter formed a Special Committee of independent directors to
investigate the matter and take any other appropriate action on behalf of
Charter with respect to this matter. After conducting an investigation of the
relevant facts and circumstances, the Special Committee determined that a
"scrivener’s error" had occurred in February 2000 in connection with the
preparation of the last-minute revisions to the Bresnan transaction documents
and that, as a result, Charter should seek the reformation of the Charter Holdco
limited liability company agreement, or alternative relief, in order to restore
and ensure the obligation that the CC VIII interest be automatically exchanged
for Charter Holdco units. The Special Committee further determined that, as
part
of such contract reformation or alternative relief, Mr. Allen should be
required to contribute the CC VIII interest to Charter Holdco in exchange
for 24,273,943 Charter Holdco membership units. The Special Committee also
recommended to the board of directors of Charter that, to the extent the
contract reformation is achieved, the board of directors should consider whether
the CC VIII interest should ultimately be held by Charter Holdco or Charter
Holdings or another entity owned directly or indirectly by them.
Mr. Allen
disagreed with the Special Committee’s determinations described above and so
notified the Special Committee. Mr. Allen contended that the transaction was
accurately reflected in the transaction documentation and contemporaneous and
subsequent company public disclosures. The Special Committee and Mr. Allen
determined to utilize the Delaware Court of Chancery's program for mediation
of
complex business disputes in an effort to resolve the CC VIII interest dispute.
As
of
October 31, 2005, Mr. Allen, the Special Committee, Charter, Charter Holdco
and
certain of their affiliates, agreed to settle the dispute, and execute certain
permanent and irrevocable releases pursuant to the Settlement Agreement and
Mutual Release agreement dated October 31, 2005 (the "Settlement"). Pursuant
to the Settlement, CII has retained 30% of its CC VIII interest (the "Remaining
Interests"). The Remaining Interests are subject to certain drag along, tag
along and transfer restrictions as detailed in the revised CC VIII Limited
Liability Company Agreement. CII transferred the other 70% of the CC VIII
interest directly and indirectly, through Charter Holdco, to a newly formed
entity, CCHC (a direct subsidiary of Charter Holdco and the direct parent of
Charter Holdings). Of the 70% of the CC VIII preferred interests, 7.4% has
been
transferred by CII to CCHC for a subordinated exchangeable note with an initial
accreted value of $48 million, accreting at 14%, compounded quarterly, with
a
15-year maturity (the "Note"). The remaining 62.6% has been transferred by
CII
to Charter Holdco, in accordance with the terms of the settlement for no
additional monetary consideration. Charter Holdco contributed the 62.6% interest
to CCHC.
As
part
of the Settlement, CC VIII issued approximately 49 million additional Class
B
units to CC V in consideration for prior capital contributions to CC VIII by
CC
V, with respect to transactions that were unrelated to the dispute in connection
with CII’s membership units in CC VIII. As a result, Mr. Allen’s pro rata share
of the profits and losses of CC VIII attributable to the Remaining Interests
is
approximately 5.6%.
The
Note
is exchangeable, at CII’s option, at any time, for Charter Holdco Class A Common
units at a rate equal to the then accreted value, divided by $2.00 (the
"Exchange Rate"). Customary anti-dilution protections have been provided that
could cause future changes to the Exchange Rate. Additionally, the Charter
Holdco Class A Common units received will be exchangeable by the holder into
Charter common stock in accordance with existing agreements between CII, Charter
and certain other parties signatory thereto. Beginning February 28, 2009, if
the
closing
price of Charter common stock is at or above the Exchange Rate for a certain
period of time as specified in the Exchange Agreement, Charter Holdco may
require the exchange of the Note for Charter Holdco Class A Common units at
the
Exchange Rate.
CCHC
has
the right to redeem the Note under certain circumstances, for cash in an amount
equal to the then accreted value, such amount, if redeemed prior to February28,2009, would also include a make whole up to the accreted value through February28, 2009. CCHC must redeem the Note at its maturity for cash in an amount equal
to the initial stated value plus the accreted return through maturity.
The
Board
of Directors has determined that the transferred CC VIII interests remain at
CCHC.
Helicon.
In
1999,
the Company purchased the Helicon cable systems. As part of that purchase,
Mr. Allen entered into a put agreement with a certain seller of the Helicon
cable systems that received a portion of the purchase price in the form of
a
preferred membership interest in Charter Helicon, LLC with a redemption price
of
$25 million plus accrued interest. Under the Helicon put agreement, such
holder had the right to sell any or all of the interest to Mr. Allen prior
to its mandatory redemption in cash on July 30, 2009. On August 31,2005, 40% of the preferred membership interest was put to Mr. Allen. The
remaining 60% of the preferred interest in Charter Helicon, LLC remained subject
to the put to Mr. Allen. Such preferred interest was recorded in other
long-term liabilities. On October 6, 2005, Charter Helicon, LLC redeemed all
of
the preferred membership interest for the redemption price of $25 million plus
accrued interest.
Certain
related parties, including members of the board of directors and officers,
hold
interests in the Company’s senior convertible debt and senior notes and discount
notes of the Company’s subsidiary of approximately $60 million of face value at
December 31, 2005.
26.Commitments
and Contingencies
Commitments
The
following table summarizes the Company’s payment obligations as of December 31,2005 for its contractual obligations.
Total
2006
2007
2008
2009
2010
Thereafter
Contractual
Obligations
Operating
and Capital Lease Obligations (1)
$
94
$
20
$
15
$
12
$
10
$
13
$
24
Programming
Minimum Commitments (2)
1,253
342
372
306
233
--
--
Other
(3)
301
146
49
21
21
21
43
Total
$
1,648
$
508
$
436
$
339
$
264
$
34
$
67
(1)
The
Company leases certain facilities and equipment under noncancelable operating
leases. Leases and rental costs charged to expense for the years ended
December 31, 2005, 2004 and 2003, were $23 million, $23 million and $30
million, respectively.
(2)
The
Company pays programming fees under multi-year contracts ranging from three
to
ten years typically based on a flat fee per customer, which may be fixed for
the
term or may in some cases, escalate over the term. Programming costs included
in
the accompanying statement of operations were $1.4 billion, $1.3 billion and
$1.2 billion for the years ended December 31, 2005, 2004 and 2003,
respectively. Certain of the Company’s programming agreements are based on a
flat fee per month or have guaranteed minimum payments. The table sets forth
the
aggregate guaranteed minimum commitments under the Company’s programming
contracts.
(3)
"Other"
represents other guaranteed minimum commitments, which consist primarily of
commitments to the Company’s billing services vendors.
The
following items are not included in the contractual obligation table due
to
various factors discussed below. However, the Company incurs these costs
as part
of its operations:
·
The
Company also rents utility poles used in its operations. Generally,
pole
rentals are cancelable on short notice, but the Company anticipates
that
such rentals will recur. Rent expense incurred for pole rental attachments
for the years ended December 31, 2005, 2004 and 2003, was $46
million, $43 million and $40 million, respectively.
·
The
Company pays franchise fees under multi-year franchise agreements
based on
a percentage of revenues earned from video service per year. The
Company
also pays other franchise related costs, such as public education
grants
under multi-year agreements. Franchise fees and other franchise-related
costs included in the accompanying statement of operations were $170
million, $164 million and $162 million for the years ended December31,2005, 2003 and 2002, respectively.
·
The
Company also has $165 million in letters of credit, primarily to
its
various worker’s compensation, property casualty and general liability
carriers as collateral for reimbursement of claims. These letters
of
credit reduce the amount the Company may borrow under its credit
facilities.
Litigation
Securities
Class Actions and Derivative Suits
In
2002
and 2003, the Company had a series of lawsuits filed against Charter and certain
of its former and present officers and directors (collectively the "Actions").
In general, the lawsuits alleged that Charter utilized misleading accounting
practices and failed to disclose these accounting practices and/or issued false
and misleading financial statements and press releases concerning Charter’s
operations and prospects.
Charter
and the individual defendants entered into a Memorandum of Understanding on
August 5, 2004 setting forth agreements in principle regarding settlement
of the Actions. Charter and various other defendants in those actions
subsequently entered into Stipulations of Settlement dated as of
January 24, 2005, setting forth a settlement of the Actions in a manner
consistent with the terms of the Memorandum of Understanding. On June 30,2005, the Court issued its final approval of the settlements. At the end of
September 2005, after the period for appeals of the settlements expired,
Stipulations of Dismissal were filed with the Eighth Circuit Court of Appeals
resulting in the dismissal of the two appeals with prejudice. Procedurally
therefore, the settlements are final.
As
amended, the Stipulations of Settlement provided that, in exchange for a release
of all claims by plaintiffs against Charter and its former and present officers
and directors named in the Actions, Charter would pay to the plaintiffs a
combination of cash and equity collectively valued at $144 million, which
was to include the fees and expenses of plaintiffs’ counsel. Of this amount,
$64 million was to be paid in cash (by Charter’s insurance carriers) and
the $80 million balance was to be paid in shares of Charter Class A
common stock having an aggregate value of $40 million and ten-year warrants
to purchase shares of Charter Class A common stock having an aggregate
warrant value of $40 million, with such values in each case being
determined pursuant to formulas set forth in the Stipulations of Settlement.
However, Charter had the right, in its sole discretion, to substitute cash
for
some or all of the aforementioned securities on a dollar for dollar basis.
Pursuant to that right, Charter elected to fund the $80 million obligation
with 13.4 million shares of Charter Class A common stock (having an
aggregate value of approximately $15 million pursuant to the formula set
forth in the Stipulations of Settlement) with the remaining balance (less an
agreed upon $2 million discount in respect of that portion allocable to
plaintiffs’ attorneys’ fees) to be paid in cash. In addition, Charter had agreed
to issue additional shares of its Class A common stock to its insurance
carrier having an aggregate value of $5 million; however, by agreement with
its carrier, Charter paid $4.5 million in cash in lieu of issuing such
shares. As a result in 2004, the Company recorded a $149 million litigation
liability within other long-term liabilities and a $64 million insurance
receivable as part of other non-current assets on its consolidated balance
sheet
and an $85 million special charge on its consolidated statement of
operations.
Charter delivered the settlement consideration to the claims administrator
on
July 8, 2005, and it was held in escrow pending resolution of the appeals.
Those appeals are now resolved.
In
October 2001 and 2002, two class action lawsuits were filed against Charter
alleging that Charter Holdco improperly charged them a wire maintenance fee
without request or permission. They also claimed that Charter Holdco improperly
required them to rent analog and/or digital set-top terminals even though their
television sets were "cable ready." In April 2004, the parties participated
in a
mediation which resulted in settlement of the lawsuits. As a result of the
settlement, we recorded a special charge of $9 million in our consolidated
statement of operations in 2004. In December 2004 the court entered a written
order formally approving that settlement.
Furthermore,
Charter is also party to, other lawsuits and claims that arose in the ordinary
course of conducting its business. In the opinion of management, after taking
into account recorded liabilities, the outcome of these other lawsuits and
claims are not expected to have a material adverse effect on the Company’s
consolidated financial condition, results of operations or its
liquidity.
Regulation
in the Cable Industry
The
operation of a cable system is extensively regulated by the Federal
Communications Commission ("FCC"), some state governments and most local
governments. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of
FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations. The 1996 Telecom Act altered the regulatory structure
governing the nation’s communications providers. It removed barriers to
competition in both the cable television market and the local telephone market.
Among other things, it reduced the scope of cable rate regulation and encouraged
additional competition in the video programming industry by allowing local
telephone companies to provide video programming in their own telephone service
areas.
Future
legislative and regulatory changes could adversely affect the Company’s
operations, including, without limitation, additional regulatory requirements
the Company may be required to comply with as it offers new services such as
telephone.
27.
Employee
Benefit Plan
The
Company’s employees may participate in the Charter Communications, Inc. 401(k)
Plan. Employees that qualify for participation can contribute up to 50% of
their
salary, on a pre-tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches 50% of the
first
5% of participant contributions. The Company made contributions to the 401(k)
plan totaling $6 million, $7 million and $7 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
28.Recently
Issued Accounting Standards
In
November 2004, the FASB issued SFAS No. 153, Exchanges
of Non-monetary Assets — An Amendment of APB No. 29.
This
statement eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for exchange
transactions that do not have commercial substance — that is, transactions that
are not expected to result in significant changes in the cash flows of the
reporting entity. We adopted this pronouncement effective April 1, 2005. The
exchange transaction discussed in Note 3 was accounted for under this standard.
In
December 2004, the FASB issued the revised SFAS No. 123, Share
— Based Payment,
which
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for (a) equity instruments of that
company or (b) liabilities that are based on the fair value of the company’s
equity instruments or that may be settled by the issuance of such equity
instruments. This statement will be effective for the Company beginning January1, 2006. Because Charter adopted the fair value recognition provisions of SFAS
No.
123
on January 1, 2003, the Company does not expect this revised standard to have
a
material impact on its financial statements.
In
March
2005, the FASB issued FIN 47, Accounting
for Conditional Asset Retirement Obligations.
This
interpretation clarifies that the term "conditional asset retirement obligation"
as used in FASB Statement No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event that may
or
may not be within the control of the entity. This pronouncement is effective
for
fiscal years ending after December 15, 2005. The adoption of this interpretation
did not have a material impact on our financial statements.
Charter
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
Company’s accompanying financial statements.
29.Parent
Company Only Financial Statements
As
the
result of limitations on, and prohibitions of, distributions, substantially
all
of the net assets of the consolidated subsidiaries are restricted from
distribution to Charter, the parent company. The following condensed parent-only
financial statements of Charter account for the investment in Charter Holdco
under the equity method of accounting. The financial statements should be read
in conjunction with the consolidated financial statements of the Company and
notes thereto.
Charter
Communications, Inc. (Parent Company Only)
Weighted-average
shares outstanding, basic and diluted
295,106,077
300,522,815
302,604,978
302,934,348
31.
Subsequent
Events
In
February 2006, the Company signed two separate definitive agreements to
sell
certain cable television systems serving a total of approximately 316,000
analog
video customers in West Virginia, Virginia, Illinois and Kentucky for a
total of
approximately $896 million. The closings of these transactions are expected
to
occur in the third quarter of 2006. Under the terms of the Bridge Loan,
bridge
availability will be reduced by the proceeds of asset
sales.
F-55
Dates Referenced Herein and Documents Incorporated by Reference
