CCI Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934
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For
the fiscal year ended December 31, 2006
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or
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
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For
the Transition Period From
to
Commission
File Number: 000-27927
Charter
Communications, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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43-1857213
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification Number)
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12405
Powerscourt Drive
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St.
Louis, Missouri 63131
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(314) 965-0555
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(Address
of principal executive offices including zip code)
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to section 12(b) of the Act:
Class A
Common Stock, $.001 Par Value
Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
þ
No
o
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. o
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, 2006 was
approximately $459 million, computed based on the closing sale price as quoted
on the NASDAQ Global 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 408,024,799 shares of Class A Common Stock outstanding as of January
31, 2007. There were 50,000 shares of Class B Common Stock outstanding as
of the same date.
Documents
Incorporated By Reference
Portions
of the Proxy Statement for the annual meeting of stockholders to be held on
June
12, 2007 are incorporated by reference into Part III.
CHARTER
COMMUNICATIONS, INC.
FORM
10-K — FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE
OF CONTENTS
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Page
No.
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PART
I
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Item 1
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Business
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1
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Item
1A
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Risk
Factors
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21
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Item
1B
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Unresolved
Staff Comments
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33
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Item 2
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Properties
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33
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Item 3
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Legal
Proceedings
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34
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Item 4
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Submission
of Matters to a Vote of Security Holders
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34
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PART
II
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Item 5
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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35
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Item 6
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Selected
Financial Data
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37
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Item 7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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38
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Item 7A
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Quantitative
and Qualitative Disclosure About Market Risk
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68
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Item 8
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Financial
Statements and Supplementary Data
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69
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Item 9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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69
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Item
9A
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Controls
and Procedures
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69
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Item
9B
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Other
Information
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70
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PART
III
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Item 10
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Directors,
Executive Officers and Corporate Governance
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71
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Item 11
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Executive
Compensation
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71
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Item 12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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71
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Item 13
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Certain
Relationships and Related Transactions, and Director
Independence
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71
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Item 14
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Principal
Accounting Fees and Services
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71
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PART
IV
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Item 15
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Exhibits
and Financial Statement Schedules
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72
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Signatures
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73
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Exhibit
Index
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74
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This
annual report on Form 10-K is for the year ended December 31, 2006.
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.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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 2007," 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," "aim," "on track,"
"target," "opportunity" and "potential," among others. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this annual report are set forth in this annual report
and
in other reports or documents that we file from time to time with the SEC,
and
include, but are not limited to:
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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;
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our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which could trigger a default of our
other
obligations under cross-default provisions;
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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;
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competition
from other video programming distributors, including incumbent telephone
companies, direct broadcast satellite operators, wireless broadband
providers and DSL providers; |
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unforeseen difficulties we may encounter in our
continued
introduction of our telephone services such as our ability to meet
heightened customer expectations for the reliability of voice services
compared to other services we provide and our ability to meet heightened
demand for installations and customer
service; |
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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;
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our
ability to obtain programming at reasonable prices or to pass programming
cost increases on to our customers;
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general
business conditions, economic uncertainty or slowdown;
and
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the
effects of governmental regulation, including but not limited to
local
franchise authorities, on our business.
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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.
PART
I
Introduction
Charter
Communications, Inc. ("Charter") is a broadband communications company operating
in the United States, with approximately 5.73 million customers at December
31,
2006. Through our hybrid fiber and coaxial cable network, 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 Charter OnDemandTM
video service ("OnDemand"), high definition television service,
and
digital video recorder (“DVR”) service) and, in many of our markets, telephone
service. See "Item
1.
Business —
Products and Services"
for
further description of these terms, including "customers."
At
December 31, 2006, we served approximately 5.43 million analog video customers,
of which approximately 2.81 million were also digital video customers. We also
served approximately 2.40 million high-speed Internet customers (including
approximately 268,900 who received only high-speed Internet services). We also
provided telephone service to approximately 445,800 customers (including
approximately 27,200 who received only telephone service).
At
December 31, 2006, our investment in cable properties, long-term debt,
accumulated deficit and total shareholders’ deficit were $14.4 billion, $19.1
billion, $11.5 billion and $6.2 billion, respectively. Our working capital
deficit was $959 million at December 31, 2006. For the year ended
December 31, 2006, our revenues, net loss applicable to common stock, and
net loss per common share were approximately $5.5 billion, $1.4 billion, and
$4.13, 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 combination of operating expenses and interest
expenses we incur because of our high level of debt and depreciation expenses
that we incur resulting from the capital investments we have made and continue
to make in our cable properties. We expect that these expenses will remain
significant.
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 an approximate 55% equity interest (52%
for
accounting purposes) and a 100% voting interest in Charter Communications
Holding Company, LLC (“Charter Holdco”), the direct parent of CCHC, LLC
(“CCHC”), 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 its limited liability company subsidiaries.
Paul
G.
Allen controls Charter through an as-converted common equity interest of
approximately 49% and a voting control interest of 91% as of December 31, 2006.
He also owns 45% of Charter Holdco through affiliated entities. His membership
units in Charter Holdco are convertible at any time for shares of our Class
B
common stock on a one-for-one basis, which shares are in turn convertible into
Class A common stock. Each share of Class A common stock is entitled to one
vote. Mr. Allen is entitled to ten votes for each share of Class B common stock
and for each membership unit in Charter Holdco held by him and his affiliates.
Our
principal executive offices are located at Charter Plaza, 12405 Powerscourt
Drive, St. Louis, Missouri 63131. 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.
Certain
Significant Developments in 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
and asset sales transactions in 2006, as follows:
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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;
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the
April 2006 refinancing of our credit
facilities;
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the
September 2006 exchange by our subsidiaries, Charter Holdings, CCH
I, LLC
(“CCH I”), CCH I Capital Corp., CCH II and CCH II Capital Corp., of
approximately $797 million in total principal amount of outstanding
debt
securities of Charter Holdings in a private placement for CCH I and
CCH II
new debt securities (the “Private Exchange”);
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·
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the
September 2006 exchange by us and our subsidiaries, CCHC, CCH II,
and CCH
II Capital Corp., of approximately $450 million in total principal
amount
of Charter’s 5.875% convertible senior notes due 2009 for cash, shares of
Charter’s Class A common stock and CCH II new debt securities;
and
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·
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the
third quarter 2006 sales of certain cable television systems serving
a
total of approximately 390,300 analog video customers for a total
sales
price of approximately $1.0
billion.
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Recent
Event
In
February 2007, we engaged J.P. Morgan Securities Inc., Banc of America
Securities LLC, and Citigroup Global Markets Inc. to arrange and syndicate
a
refinancing and expansion of our existing $6.85 billion senior secured credit
facilities. The proposed transaction includes $8.35 billion of senior
secured credit facilities, consisting of a $1.5 billion revolving credit
facility, a $1.5 billion new term facility, and a $5.0 billion refinancing
term
loan facility at Charter Communications Operating, LLC and a $350 million third
lien term loan at CCO Holdings, LLC, (collectively, the “Transaction”).
We
expect
to use a portion of the additional proceeds from the Transaction to redeem
up to
$550 million of our subsidiary, CCO Holdings, LLC’s outstanding floating rate
notes due 2010 and up to $187 million of Charter Holdings' outstanding 8.625%
senior notes due 2009 in addition to other general corporate purposes. We expect
that we will enter into the credit facilities in March 2007. Upon
completion of the Transaction, we expect to have adequate liquidity to fund
our
operations and service our debt through 2008.
Focus
for 2007
We
strive
to provide value to our customers by offering a high-quality suite of services
including video, high-speed Internet, and telephone service as well as advanced
offerings including OnDemand video service, high-definition television service,
and DVR service. We offer our services to encourage customers to subscribe
to a
combination of services known as a bundle. We offer a two-services bundle,
which
is a combination of two of our service offerings; but our main focus is
marketing our three-services bundle, also called “Triple Play.” With a bundle,
the customer receives a lower total price than the sum of the price of
individual services, along with the convenience of a single bill. By continually
focusing on the needs of our customers - raising customer service levels and
investing in products and services they desire - our goal is to be the premier
provider of in-home entertainment and communications services in the communities
we serve.
In
2007,
we expect to continue with the strategic priorities identified in 2006, which
were to:
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improve
the end-to-end customer experience and increase customer
loyalty;
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grow
sales and retention for all our products and services;
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drive
operating and capital effectiveness; and
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continue
an opportunistic approach to enhancing liquidity, extending maturities,
and reducing debt.
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We
strive
to continually improve our customers’ experiences and, in doing so, to increase
customer loyalty by instilling a service-oriented culture throughout our care
centers, field service operations, and corporate support organization.
Charter
markets its service offerings by employing a segmented, targeted marketing
approach. We determine which marketing and sales programs are the most effective
using campaign management tools that track, analyze, and report the results
of
our marketing campaigns.
We
believe that customers value our ability to combine video, high-speed Internet,
and telephone services into attractively priced bundled offerings that
distinguish us from the competition. Bundling of services, by combining two
or
more Charter services for one value-based price, is fundamental to our marketing
strategy because we believe bundled offerings increase customer acceptance
of
our services, and improve customer retention and satisfaction. We will pursue
further growth in our customer base through targeted marketing of bundled
services and continually improving the end-to-end customer experience.
During
2006, we extended the deployment of our telephone capabilities to approximately
3.9 million additional homes passed, to reach a total of approximately 6.8
million homes passed across our network, and we plan to extend to additional
homes passed in 2007. During 2007, we plan to focus our marketing and sales
efforts to attract additional customers to our telephone service, primarily
through bundled offers with our video and high-speed Internet services.
In
addition to serving and growing our residential customer base, we will increase
efforts to make video, high-speed Internet and telephone services available
to
the business community. We believe that small businesses will find our bundled
service offerings provide value and convenience, and that we can continue to
grow this portion of our business.
We
expect
to continue a disciplined approach to managing capital expenditures by directing
resources to initiatives and opportunities offering the highest expected
returns. We anticipate placing a priority on supporting deployment of telephone
service to residential and small business customers.
Our
asset
sales and operational initiatives in 2006 have improved the density of our
geographic service areas and provided a more efficient operating platform.
We
operate an integrated customer care system to serve our customers. We are
deploying telephone service capability to the majority of our systems to more
effectively leverage the capability of our broadband network, and are making
a
series of service improvement initiatives related to our technical operations.
We expect our continuous improvement initiatives to further enhance the
operating effectiveness and efficiencies of our operating platform. We
will also continue to evaluate our geographic service areas for opportunities
to
improve operating and capital efficiencies, through sales, exchanges
of systems with other providers, and/or acquisitions of cable
systems.
In
2007,
we will continue to evaluate potential financial transactions that can enhance
our liquidity, extend debt maturities, and/or reduce our debt.
We
believe our focus on these strategic priorities will enable us to provide
greater value to our customers and thereby generate future growth opportunities
for us.
Corporate
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, 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. Indebtedness amounts shown below are accreted values
for financial reporting purposes as of December 31, 2006. See “Item 8. Financial
Statements and Supplementary Data,” which also includes the principal amount of
the indebtedness described below.
(1)
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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 “Item 1. Business — Corporate Organizational Structure —
Charter Communications, Inc.” below.
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(2)
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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 B common stock, which
in
turn are exchangeable into Charter Class A common
stock.
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(3)
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The
percentages shown in this table reflect the 39.8 million shares of
Class A common stock outstanding as of December 31, 2006
issued
pursuant to the share lending agreement.
However, for accounting purposes, Charter’s common equity interest in
Charter Holdco is 52%, and Paul G. Allen’s ownership of Charter
Holdco through CII and Vulcan Cable III Inc. is 48%. These percentages
exclude the 39.8 million mirror membership units outstanding as of
December
31, 2006 issued pursuant to the share lending agreement.
See
Note 13 to the accompanying consolidated financial statements contained
in
“Item 8. Financial Statements and Supplementary Data.”
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(4)
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Represents
preferred membership interests in CC VIII, LLC (“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 Note 10 to
the
accompanying consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary
Data.”
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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 are an approximate
55% common equity interest (52% for accounting purposes) 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 its limited liability company
subsidiaries. In addition, Charter also provides management services to Charter
Holdco and its subsidiaries under a management services agreement.
The
following table sets forth information as of December 31, 2006 with respect
to
the shares of common stock of Charter on an actual outstanding, “as converted”
and “fully diluted” basis:
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Charter
Communications, Inc.
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Assuming
Exchange of
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Actual
Shares Outstanding (a)
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Charter
Holdco Membership Units (b)
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Fully
Diluted Shares Outstanding (c)
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Number
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Percentage
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Number
of
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Percentage
of
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of
Fully
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of
Fully
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Number
of
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Percentage
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As
Converted
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As
Converted
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Diluted
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Diluted
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Common
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of
Common
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Common
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Common
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Common
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Common
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Shares
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Shares
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Voting
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Shares
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Shares
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Shares
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Shares
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Outstanding
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Outstanding
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Percentage
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Outstanding
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Outstanding
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Outstanding
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Outstanding
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Class A
Common Stock
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407,994,585
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99.99%
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9.99%
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407,994,585
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54.61%
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407,994,585
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41.94%
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Class B
Common Stock
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50,000
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0.01%
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90.01%
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50,000
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0.01%
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50,000
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*
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Total
Common Shares
Outstanding
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408,044,585
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100.00%
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100.00%
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One-for-One
Exchangeable Equity in Subsidiaries:
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Charter
Investment, Inc.
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|
|
222,818,858
|
|
29.82%
|
|
222,818,858
|
|
22.91%
|
Vulcan
Cable III Inc.
|
|
|
|
|
|
|
116,313,173
|
|
15.56%
|
|
116,313,173
|
|
11.96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
As Converted Shares Outstanding
|
|
|
|
|
|
|
747,176,616
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Convertible Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock (d)
|
|
|
|
|
|
|
|
|
|
|
148,575
|
|
0.02%
|
Convertible
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
Convertible Senior
Notes
(e)
|
|
|
|
|
|
|
|
|
|
|
170,454,545
|
|
17.52%
|
Employee,
Director and
Consultant
Stock Options (f)
|
|
|
|
|
|
|
|
|
|
|
26,692,468
|
|
2.74%
|
CCHC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14%
Exchangeable Accreting
Note
(g)
|
|
|
|
|
|
|
|
|
|
|
28,300,595
|
|
2.91%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
Diluted Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
972,772,799
|
|
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
Class B common stock, which are in turn convertible into Class A
common
stock) and beneficially controls approximately 91% 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.
|
|
|
|
(b)
|
|
Assumes
only the exchange of Charter Holdco membership units held by Mr.
Allen and
his affiliates for shares of Charter Class B common stock on a
one-for-one basis pursuant to exchange agreements between the holders
of
such units and Charter, which shares are in turn convertible into
Class A
common stock. 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
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 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 5.875% convertible
senior notes ($413 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.
|
|
|
|
(f)
|
|
The
weighted average exercise price of outstanding stock options was
$3.88 as
of December 31, 2006.
|
|
|
|
(g)
|
|
Mr.
Allen, through his wholly owned subsidiary CII, holds an accreting
note
(the “CCHC note”) that as of December 31, 2006 is exchangeable for 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, which are exchangeable into
shares of
Charter Class B common stock, which shares are in turn convertible
into
Class A common stock, at a rate equal to the then accreted value,
divided
by $2.00. See Note 10 to our accompanying consolidated financial
statements contained in “Item 8. Financial Statements and
Supplementary Data.”
|
Charter
Communications Holding Company, LLC. Charter
Holdco, a Delaware limited liability company formed on May 25, 1999, is the
direct 100% parent of CCHC. The common membership units of Charter Holdco are
owned approximately 55% by Charter, 15% by Vulcan Cable III Inc. and 30% 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 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.
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
5.875% mirror convertible notes of Charter Holdco that automatically convert
into common membership units upon the conversion of any Charter 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.
CCHC,
LLC.
CCHC, 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.
Interim
Holding Company Debt Issuers.
As
indicated in the organizational chart above, our interim holding company debt
issuers indirectly own the subsidiaries that own or operate all of our cable
systems, subject to a CC VIII minority interest held by Mr. Allen and CCH I
as
described below. For a description of the debt issued by these issuers please
see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Description of Our Outstanding Debt.”
Preferred
Equity in CC VIII, LLC.
CII owns
30% of the CC VIII preferred membership interests. CCH I, a direct subsidiary
of
CCH I Holdings, LLC (“CIH”), directly owns the remaining 70% of these preferred
interests. The common membership interests in CC VIII are indirectly owned
by
Charter Operating. See Notes 11 and 22 to our accompanying consolidated
financial statements contained in “Item 8. Financial Statements and
Supplementary Data.”
Products
and Services
We
sell
video services, high-speed Internet services, and in many areas, telephone
services utilizing our cable system. Our video services include traditional
cable video services (analog and digital) and in some areas advanced broadband
services such as high definition television, OnDemand, and DVR. Our telephone
services are primarily provided using voice over Internet protocol (“VoIP”), to
transmit digital voice signals over our systems. Our video, high-speed Internet,
and telephone services are offered to residential and commercial customers.
We
sell our video services, high-speed Internet, and telephone 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” or on
an individual basis, and the equipment necessary to receive the services, with
some variation in prices depending on geographic location.
The
following table summarizes our customer statistics for analog and digital video,
residential high-speed Internet and residential telephone approximate as of
December 31, 2006 and 2005.
|
|
Approximate
as of
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
(a)
|
|
2005
(a)
|
|
|
|
|
|
|
|
Video
Services:
|
|
|
|
|
|
|
|
Analog
Video:
|
|
|
|
|
|
|
|
Residential
(non-bulk) analog video customers (b)
|
|
|
5,172,300
|
|
|
5,616,300
|
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
261,000
|
|
|
268,200
|
|
Total
analog video customers (b)(c)
|
|
|
5,433,300
|
|
|
5,884,500
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
2,808,400
|
|
|
2,796,600
|
|
|
|
|
|
|
|
|
|
Non-Video
Services:
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,402,200
|
|
|
2,196,400
|
|
Residential
telephone customers (f)
|
|
|
445,800
|
|
|
121,500
|
|
After
giving effect to the acquisition of cable systems in January 2006 and the sales
of certain non-strategic cable systems in the third quarter of 2006, December
31, 2005 analog video customers, digital video customers, high-speed Internet
customers and telephone customers would have been 5,506,800, 2,638,500,
2,097,700 and 136,000, 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, 2006
and
2005, “customers” include approximately 35,700 and 50,500 persons whose
accounts were over 60 days past due in payment, approximately 6,000
and
14,300 persons, whose accounts were over 90 days past due in payment
and
approximately 2,700 and 7,400 of which were over 120 days past due
in
payment, respectively.
|
|
(b)
|
“Analog
video customers” include all customers who receive video
services.
|
|
(c)
|
Included
within “video customers” are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit (“EBU”) basis.
EBU is calculated for a system by dividing the bulk price charged
to
accounts in an area by the most prevalent price charged to non-bulk
residential customers in that market for the comparable tier of service.
The EBU method of estimating analog video customers is consistent
with the
methodology used in determining costs paid to programmers and has
been
used consistently.
|
|
(d)
|
“Digital
video customers” include all households that have one or more digital
set-top boxes or cable cards deployed.
|
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers
who
subscribe to our high-speed Internet service.
|
|
(f)
|
“Residential
telephone customers” include all residential customers receiving telephone
service.
|
Video
Services
In
2006,
video services represented 61% of our total revenues. 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
9
and 30 channels.
|
|
|
|
|
|
•
|
|
Expanded
Basic Video. This
expanded programming level includes a package of satellite-delivered
or
non-broadcast channels and generally has between 20 and 60 channels
in
addition to the basic channel line-up.
|
|
|
|
|
|
•
|
|
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 box or cable card, an interactive electronic programming
guide, an
expanded menu of pay-per-view channels, and the option to also receive
digital packages which range generally from 3 to 45 additional video
channels. We also offer our customers certain digital packages with
one or
more premium channels that give customers access to several alternative
genres of certain premium channels (for example, HBO Family® and HBO
Comedy®). 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 OnDemand and high definition television. Other digital packages
bundle digital television with our advanced services, such as high-speed
Internet services and telephone services.
|
|
|
|
|
|
•
|
|
Premium
Channels. These
channels provide original programming, 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 digital video channel packages and premium channel
packages, and we offer premium channels bundled with our advanced
services.
|
|
|
|
|
|
•
|
|
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.
|
|
|
|
|
|
•
|
|
OnDemand
and Subscription OnDemand.
OnDemand
service allows customers to access hundreds of movies and other
programming at any time with digital picture quality. In some systems
we
also offer subscription OnDemand for a monthly fee or included in
a
digital tier premium channel subscription.
|
|
|
|
|
|
•
|
|
High
Definition Television.
High definition television offers our digital customers certain video
programming at a higher resolution to improve picture quality versus
standard analog or digital video images.
|
|
|
|
|
|
•
|
|
Digital
Video Recorder.
DVR service enables customers to digitally record programming and
to pause
and rewind live programming.
|
High-Speed
Internet Services
In
2006,
residential high-speed Internet services represented 19% of our total revenues.
We offer several tiers of high-speed Internet services to our residential
customers primarily via cable modems attached to personal computers. We also
offer home networking gateways to these customers.
Telephone
Services
In
2006,
telephone services represented 2% of our total revenues. We provide voice
communications services primarily using VoIP, to transmit digital voice signals
over our systems. At December 31, 2006, telephone service was available to
approximately 6.8 million homes passed, and we were marketing these services
to
approximately 93% of those homes. We will continue to prepare additional markets
for telephone launches in 2007.
Commercial
Services
In
2006,
commercial services represented 6% of our total revenues. 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
have
begun to introduce telephone services.
Sale
of Advertising
In
2006,
sale of advertising represented 6% of our total revenues. 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 40 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, 2006,
2005
and 2004, we had advertising revenues from programmers of approximately $17
million, $15 million, and $16 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 customers pay for the
services we offer. We typically charge a one-time installation fee which is
sometimes waived or discounted during certain promotional periods. The prices
we
charge for our products and services vary based on the level of service the
customer chooses and the geographic market. Most of our pricing is reviewed
throughout the year and adjusted on an annual basis.
In
accordance with the Federal Communications Commission’s (“FCC”) rules, the
prices we charge for video cable-related equipment, such as set-top boxes and
remote control devices, and for installation services, are based on actual
costs
plus a permitted rate of return in regulated markets.
Although
our broadband service offerings vary across the markets we serve because of
various factors including competition, regulatory factors, and service
availability, our services are typically offered at monthly prices, excluding
franchise fees and other taxes.
We
offer
reduced-price service for promotional periods in order to attract new customers
and to promote the bundling of two or more services. There is no assurance
that
these customers will remain as customers when the promotional pricing service
expires. When customers bundle services, they enjoy prices that are lower per
service than if they had only purchased a single service.
Our
Network Technology
We
employ
the hybrid fiber coaxial cable (“HFC”) architecture for our systems. HFC
architecture combines the use of fiber optic cable with coaxial cable. 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 signal quality. The design also
provides reserve capacity for the addition of future services.
HFC
architecture benefits include:
|
•
|
|
bandwidth
capacity to enable traditional and two-way video and broadband
services;
|
|
|
|
|
|
•
|
|
dedicated
bandwidth for two-way services, which avoids reverse signal interference
problems that can occur with two-way communication capability;
and
|
|
|
|
|
|
•
|
|
clean
signal quality and high service
reliability.
|
The
following table sets forth the technological capacity of our systems as of
December 31, 2006 based on a percentage of homes passed:
Less
than 550
|
|
|
|
750
|
|
860/870
|
|
Two-way
|
megahertz
|
|
550
megahertz
|
|
megahertz
|
|
megahertz
|
|
activated
|
|
|
|
|
|
|
|
|
|
7%
|
|
5%
|
|
41%
|
|
47%
|
|
93%
|
Approximately
93% 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, telephone service and other advanced
services.
We
have
reduced the number of headends that serve our customers from 1,138 at
January 1, 2001 to 553 at December 31, 2006. 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. As of December 31, 2006, approximately 88% of our customers were
served by headends serving at least 10,000 customers. After completion of the
sale of certain cable systems in January 2007, we further reduced the number
of
headends that serve our customers to 393.
As
of
December 31, 2006, our cable systems consisted of approximately 205,500
strand and trench miles of coax, and approximately 54,300 strand and trench
miles of fiber optic cable, passing approximately 11.8 million households and
serving approximately 5.7 million customers. After completion of the sale of
certain cable systems in January 2007, our cable systems consisted of
approximately 201,700 strand and trench miles of coax, and approximately 54,100
strand and trench miles of fiber optic cable, passing approximately 11.7 million
households and serving approximately 5.7 million customers.
Management
of Our Systems
The
corporate office, which includes employees of Charter and Charter Holdco, is
responsible for coordinating and overseeing overall operations including
establishing company wide policies and procedures. The corporate office performs
certain financial and administrative functions on a centralized basis such
as
accounting, cash management, taxes, billing, finance, human resources, risk
management, telephone, payroll, information system design and support, internal
audit, legal, purchasing, customer care, marketing and programming contract
administration and Internet service, network and circuits administration and
oversight and coordination of external auditors and consultants. The corporate
office performs these services on a cost reimbursement basis pursuant to a
management services agreement. Our field operations are managed within three
divisions. Each division has a divisional president and is supported by
operational, financial, legal, customer care, marketing and engineering
functions.
Customer
Care
Our
customer care centers are managed centrally, with the deployment and execution
of care strategies and initiatives conducted on a company-wide basis. As a
result of facilities consolidations that occurred in 2006, we have seven
customer care locations, compared to the thirteen locations at December 31,
2005
and have launched technology and procedures resulting in the seven locations
being able to function as an integrated system. We believe that consolidation
and integration of our care centers will allow us to improve service delivery
and customer satisfaction.
We
provide service to 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 that through continued
optimization of our care network we will be able to improve complaint
resolution, equipment troubleshooting, sales of new and additional services,
and
customer retention.
We
are
committed to making further improvements in the area of customer care to
increase customer retention and satisfaction. Accordingly, we have certain
initiatives underway targeted at gaining new customers and retaining existing
ones. We have increased efforts to focus management attention on instilling
a
customer service oriented culture throughout our organization, and to give
the
customer service areas of our operations resources for staffing, training,
and
financial incentives for employee performance.
We
have
agreements with three third party call center service providers. We believe
these relationships further our service objectives and support marketing
activities by providing additional capacity to respond to 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. Our customers may also obtain support through our
on-line chat and email functionality.
Sales
and Marketing
In
2006,
our primary strategic direction was to accelerate the rate of revenue growth
by
increasing our investments in marketing, sustaining these higher investments
throughout the year, and implementing targeted marketing programs designed
to
offer appropriate bundles of products to the appropriate existing and potential
customers. Marketing expenditures increased by $38 million, or 27%, over the
year ended December 31, 2005 to $180 million for the year ended December 31,
2006. We expect to continue to invest in targeted marketing efforts in 2007.
Our
marketing organization 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 certain marketing programs will
be
implemented. We monitor customer perception, competition, pricing, and
service preferences, among other factors, to increase our responsiveness to
our
customers. Our coordinated marketing activities involve door-to-door,
telemarketing, media advertising, e-marketing, direct mail, and retail
locations. In 2006, we increased our focus on migrating existing single service
customers into multiple service bundles and launching our telephone service.
Programming
General
We
believe that offering a wide variety of programming 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 written contracts.
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 generally subject to annual cost escalations and 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, including high-definition
and
OnDemand programming, being provided to customers. In particular, sports
programming costs have increased significantly over the past several years.
In
addition, contracts to purchase sports programming sometimes provide for
optional additional programming to be available on a surcharge basis during
the
term of the contract.
Federal
law allows commercial television broadcast stations to make an election between
“must-carry” rights and an alternative “retransmission-consent” regime. When a
station opts for the retransmission-consent regime, we are not allowed to carry
the station’s signal without the station’s permission. Future demands by owners
of broadcast stations for carriage of other services or cash payments to those
broadcasters in exchange for retransmission consent could further increase
our
programming costs or require us to cease carriage of popular programming,
potentially leading to a loss of customers in affected markets.
Over
the
past several years, we have not been able to increase prices sufficiently to
fully offset increased programming costs, and with the impact of competition
and
other marketplace factors, we do not expect to be able to do so in the
foreseeable future. In
addition, our inability
to fully pass these programming cost increases on to our customers has had
and
is expected in the future to have an adverse impact on our cash flow and
operating margins. In
order
to mitigate reductions of our operating margins due to rapidly increasing
programming costs, we are reviewing our pricing and programming packaging
strategies, and 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 only be part of an elective
digital tier package offered to our customers for an additional fee. As a
result, we expect that the customer base upon which we pay programming fees
will
proportionately decrease, and the overall expense for providing that service
will likewise decrease. However, reductions in the size of certain programming
customer bases may result in the loss of specific volume discount benefits.
We
have
programming contracts that have expired and others that will expire at or before
the end of 2007. We
plan
to seek to renegotiate the terms of these agreements as they 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 have been, and may
in
the future be, forced to remove such programming channels from our line-up,
which may result in a loss of customers.
Franchises
As
of
December 31, 2006, our systems operated pursuant to a total of
approximately 3,600 franchises, permits, and similar authorizations issued
by
local and state governmental authorities. Such governmental authorities 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 generally 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, such as building out
certain of the franchise areas at various levels of service requirements and
allowing for public access channels. 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 12% of our franchises, covering approximately 15% of our analog
video customers were expired at December 31, 2006. Approximately 8% of
additional franchises, covering approximately 11% of additional analog video
customers will expire on or before December 31, 2007, if not renewed prior
to
expiration. We expect to renew all or substantially all of these
franchises.
Legislative
proposals have been introduced in the United States Congress and in some state
legislatures to streamline cable franchising. This legislation is intended
to
facilitate entry by new competitors, particularly local telephone companies.
See
“— Regulation and Legislation — Video
Services — Franchise
Matters.”
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”) and our principal competitor for high-speed
Internet
services is digital subscriber line (“DSL”) provided by telephone companies. 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 upgrades of their networks, they will likely
become increasingly more significant competitors for both high-speed Internet
and video customers. We do not consider other cable operators to be significant
competitors in our overall market, as overbuilds are infrequent and
geographically spotty (although in any particular market, a cable operator
overbuilder would likely be a significant competitor at the local level).
Although
cable operators tend not to be direct competitors, 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 more advantageous 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 dish antenna. Furthermore,
EchoStar and DirecTV both have entered into joint marketing agreements with
major telecommunications companies to offer bundled packages combining
telephone, including wireless, as well as high-speed Internet 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 2006, 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 $50 for the closest comparable package offered by us 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. However, we believe
that cable-delivered OnDemand and Subscription OnDemand services 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 services, particularly bundled premium
packages, are price-competitive with DBS packages, and that many consumers
prefer our ability to economically bundle video packages with high-speed
Internet 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 services differentiates us from DBS competitors and could enable
us to
win back 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.
Telephone
Companies and Utilities
The
competitive environment has been significantly affected by technological
developments and regulatory changes enacted under the Telecommunication Act
of
1996 (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 obtain the right to lawfully enter the cable television business
and some telephone companies have been extensively upgrading their networks
to
provide video services, as well as telephone and Internet access service.
Two
major
local telephone companies, AT&T Inc. (“AT&T”) and Verizon
Communications, Inc. (“Verizon”), have both announced that they intend to invest
in upgrading their networks. Some upgraded portions of these networks are or
will be capable of carrying two-way video services that are technically
comparable to ours, high-speed Internet services that operate at speeds as
high
as or higher than those we make available to customers in these areas, and
digital voice services that are similar to ours. In addition, these companies
continue to offer their traditional telephone services, as well as bundles
that
include wireless voice services provided by affiliated companies. We believe
that AT&T’s and Verizon’s upgrades have been completed in systems
representing approximately 1% of our homes passed as of December 31,
2006.
Additional upgrades in markets in which we operate are expected.
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.
DSL
service allows Internet access to subscribers at data transmission speeds
greater than those available over conventional telephone lines. DSL service
therefore is more competitive with high-speed Internet access over cable systems
than conventional dial-up. 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 has 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 high-speed Internet services,
particularly as we enter the telephone business and telephone companies
aggressively bundle DSL with telephone service to discourage their customers
from switching to cable company services. In addition, the continuing deployment
of fiber into telephone companies’ networks will enable them to provide higher
bandwidth Internet service than provided over traditional DSL
lines.
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
and/or telephone services, and prefer the higher Internet speeds we have made
more generally available. 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.
Charter
offers telephone service in a majority of its service areas. Charter also
provides traditional circuit-switched telephone 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. Because
we offer voice services, we are 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, strong 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 telephone 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 telephone
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 may 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 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 cable 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 with equal or better service quality, 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, 2006, we are aware of traditional overbuild situations
impacting approximately 7% of our total homes passed and potential traditional
overbuild situations in areas servicing approximately an additional 4% of our
total homes passed. Additional overbuild situations may occur.
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 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.
Other
Competitors
Local
wireless Internet services have recently begun to operate in many markets using
available unlicensed radio spectrum. Some cellular phone service operators
are
also marketing PC cards offering wireless broadband access to their cellular
networks. These service options offer 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.
Regulation
and Legislation
The
following summary addresses the key regulatory and legislative developments
affecting the cable industry and our three primary services: video service,
high-speed Internet service, and telephone service. Cable system operations
are
extensively regulated by the FCC, certain 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
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. 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.
Video Service
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 (and order rate reductions and refunds),
but they retain the right to do so, 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 become rate deregulated in many of our
communities.
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 operators to offer
historically bundled programming services on an à
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 Communications Act uniform pricing requirements 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 “must carry” regulations require cable
systems to carry local broadcast television stations upon the request of the
local broadcaster. 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.
Broadcast stations must elect “must carry” or “retransmission consent” every
three years, with the next election to be made prior to September 15, 2008.
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 are 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 appeal to our customers
and generate revenues. The FCC issued a decision in 2005 confirming an earlier
ruling against mandating either dual carriage or multicast carriage. However,
the FCC could reverse its own ruling or Congress could legislate additional
carriage obligations. Federal law has established 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 and/or
make further operating and capital investments 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. The FCC has recently
announced its intention to conduct a rulemaking aimed at increasing the use
of
commercial leased access channels. Increased activity in this area could further
burden the channel capacity of our cable systems, and potentially limit the
amount of services we are able to offer and may necessitate further investments
to expand our network capacity.
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
have been either 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 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.
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 Communications Act specifies
that significantly higher rates apply if the cable plant is providing
telecommunications services. 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. We are a defendant in at
least one lawsuit where the utility company claims that we should pay an
increased rate on its poles. An adverse outcome would likely lead to higher
pole
attachment costs in certain states.
Cable
Equipment. In
1996,
Congress enacted a statute seeking to promote the “competitive availability of
navigational devices” by allowing cable subscribers to use set-top boxes
obtained from third parties, including third-party retailers. The FCC has
undertaken several steps to implement this statute designed 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 boxes from third parties, and has 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, whereby cable operators are providing
“CableCard” security modules and support to customer-owned digital televisions
and similar devices equipped with built-in set-top box functionality compatible
with CableCards. A prohibition on cable operators leasing digital set-top boxes
that integrate security and basic navigation functions is scheduled to go into
effect as of July 1, 2007.
There
have been many requests for waiver of the integrated security ban filed with
the
FCC. Charter has petitioned the FCC to waive the prohibition as applied to
our
least expensive digital set-top boxes, and the National Cable and
Telecommunications Association filed a request with the FCC that the prohibition
be waived for all cable operators, for all set-top boxes, until a downloadable
security solution is available, or until December 31, 2009, whichever is
earlier. We cannot predict whether the FCC will grant these or any other
requests.
It
is
possible that our vendors will be unable to deliver all of the necessary set-top
boxes that we will require in time for us to comply with the FCC regulation,
which could subject us to FCC penalties. In addition, our vendors will attempt
to pass on costs associated with the design and manufacture of the new set-top
boxes, which we may not be able to recover from our customers.
The
cable
and consumer electronics industries have been attempting to negotiate an
agreement that would establish additional specifications for two-way digital
televisions. It is unclear how this process will develop and how it will affect
our offering of cable equipment and our relationship with our
customers.
Privacy Regulation.
The
Communications Act limits our ability to collect and disclose subscribers’
personally identifiable information for our video, telephone, and high-speed
Internet services, as well as provides requirements to safeguard such
information. Charter is subject to additional Federal, State, and local laws
and
regulations that may also impose additional subscriber and employee privacy
restrictions. Further, the FCC, FTC, and many states now regulate the
telemarketing practices of cable operators, including telemarketing and online
marketing efforts.
Other
FCC Regulatory Matters. FCC
regulations cover a variety of additional areas, including, among other things:
(1) equal employment opportunity obligations; (2) customer service standards;
(3) technical service standards; (4) MDU access rights for potential
competitions; (5) mandatory blackouts of certain network, syndicated and sports
programming; (6) restrictions on political advertising; (7) restrictions on
advertising in children's programming; (8) restrictions on origination
cablecasting; (9) restrictions on carriage of lottery programming; (10)
sponsorship identification obligations; (11) closed captioning of video
programming; (12) licensing of systems and facilities; (13) maintenance of
public files; and
(14)
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.
Copyright.
Cable
systems are subject to a federal copyright compulsory license 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 how the compulsory copyright license should apply to newly
offered digital broadcast signals.
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, certain federal
protections benefit cable operators. 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.
Legislative
proposals have been introduced in the United States Congress and in 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 passed in several states, including states
where
we have significant operations. Although certain of these states have provided
some regulatory relief for incumbent cable operators, these proposals are
generally viewed as being more favorable to new entrants due to a number of
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. At least two additional states where we have cable systems have issued
regulations that will facilitate telephone company provision of video services
by eliminating or reducing the application of franchising requirements to the
telephone companies. A proceeding is pending at the FCC 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.
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 their networks 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
is unlikely the FCC will regulate Internet service to the same extent as cable
or telecommunications services. However, the FCC has concluded that the
Communications Assistance for Law Enforcement Act (CALEA) does apply to
facilities-based broadband Internet access providers, setting a deadline of
May
14, 2007 for broadband providers to accommodate law enforcement requests for
electronic surveillance pursuant to court order or other lawful authority.
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. Additionally, the FCC and Congress
are considering subjecting high-speed Internet access services to the Universal
Service funding requirements. This would impose significant new costs on our
high-speed Internet service. 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.
Telephone
Service
The
1996
Telecom 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
providers of traditional telecommunications services can 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 telephone
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
(we use VoIP technology for our telephone service), 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. Also, the
FCC
and Congress are considering whether, and to what extent, VoIP service will
have
interconnection rights with local telephone companies. The FCC has already
determined that providers of telephone 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 telephone service.
Employees
As
of
December 31, 2006, we had approximately 15,500 full-time equivalent employees.
At December 31, 2006, approximately 100 of our employees were represented by
collective bargaining agreements. We have never experienced a work stoppage.
Item
1A. Risk
Factors.
Risks
Related to Significant Indebtedness of Us and Our
Subsidiaries
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.
We
and
our subsidiaries have a significant amount of debt and may (subject to
applicable restrictions in our debt instruments) incur additional debt in the
future. As of December 31, 2006, our total debt was approximately $19.1 billion,
our shareholders' deficit was approximately $6.2 billion and the deficiency
of
earnings to cover fixed charges for the year ended December 31, 2006 was $1.2
billion.
As
of
December 31, 2006, approximately $413 million aggregate principal amount of
Charter's convertible notes was outstanding; which matures in 2009. We will
need
to raise additional capital and/or receive distributions or payments from our
subsidiaries in order to satisfy this debt obligation. An additional $450
million aggregate principal amount of Charter’s convertible notes was held by
CCHC.
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 their parent companies is subject to
availability of funds and restrictions under our subsidiaries' applicable debt
instruments and under applicable law. 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 in the case of a recapitalization or other similar
transaction, our noteholders might not receive principal and interest payments
to which they are contractually entitled.
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 make payments on our debt, reducing 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 compared to our competitors that have proportionately
less debt;
|
· |
make
us vulnerable to interest rate increases, because approximately 22%
of our
borrowings are, and will continue to be, at variable rates of
interest;
|
· |
expose
us to increased interest expense to the extent we refinance existing
debt
with higher cost debt;
|
· |
adversely
affect our relationship with customers and
suppliers;
|
· |
limit
our ability to borrow additional funds in the future, due to applicable
financial and restrictive covenants in our debt;
|
· |
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;
and
|
· |
limit
future increases in the value, or cause a decline in the value of
our
equity, which could limit our ability to raise additional capital
by
issuing equity.
|
A
default
by one of our subsidiaries under its debt obligations could result in the
acceleration of those obligations, which in turn could trigger cross defaults
under other agreements governing our long-term indebtedness. 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 interest in our subsidiaries, and exercise
other rights of secured creditors. Any default under those credit facilities
or
the indentures governing our convertible notes or our subsidiaries’ debt could
adversely affect our growth, our financial condition, our results of operations,
and our ability to make payments on our convertible notes, Charter Operating’s
credit facilities, and other debt of our subsidiaries, and could force us to
seek the protection of the bankruptcy laws. We and our subsidiaries may incur
significant 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 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 significantly
affect our liquidity, and therefore could adversely affect our results of
operations. These covenants will restrict, among other things, our and our
subsidiaries' ability to:
· |
repurchase
or redeem equity interests and
debt;
|
· |
make
certain investments or
acquisitions;
|
· |
pay
dividends or make other
distributions;
|
· |
dispose
of assets or merge;
|
· |
enter
into related party transactions; and
|
· |
grant
liens and pledge assets.
|
The
breach of any covenants or obligations in the foregoing indentures or credit
facilities, not otherwise waived or amended, could result in a default under
the
applicable debt obligations and could trigger acceleration of those obligations,
which in turn could trigger cross defaults under other agreements governing
our
long-term indebtedness. 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 or the indentures governing our
convertible notes or our subsidiaries' debt could adversely affect our growth,
our financial condition, our results of operations and our ability to make
payments on our convertible notes, Charter Operating's credit facilities, and
other debt of our subsidiaries, and could force us to seek the protection of
the
bankruptcy laws.
Charter
Operating may not be able to access funds under its credit facilities 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 $1.3 billion as of
December 31, 2006, although the actual availability at that time was only $1.1
billion because of limits imposed by covenant restrictions. There can be no
assurance that actual availability under our credit facilities will not be
limited by covenant restrictions in the future.
One
of
the conditions to the availability of funding under Charter Operating's credit
facilities is the absence of a default under such facilities, including as
a
result of any failure to comply with the covenants under the facilities. Among
other covenants, the facilities require Charter Operating to maintain specific
financial ratios. The facilities also provide that Charter Operating has to
obtain an unqualified audit opinion from its independent accountants for each
fiscal year. There can be no assurance that Charter Operating will be able
to
continue to comply with these or any other of the covenants under the credit
facilities.
An
event
of default under the credit facilities or indentures, if not waived, could
result in the acceleration of those debt obligations and, consequently, could
trigger cross defaults under other agreements governing our long-term
indebtedness. 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 interest in
our
subsidiaries, and exercise other rights of secured creditors. Any default under
those credit facilities or the indentures governing our convertible notes or
our
subsidiaries’ debt could adversely affect our growth, our financial condition,
our results of operations, and our ability to make payments on our convertible
notes, Charter Operating’s credit facilities, and other debt of our
subsidiaries, 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.
We
depend on generating sufficient cash flow and having access to additional
external liquidity sources to fund our debt obligations, capital expenditures,
and ongoing operations.
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. Our ability to generate cash
flow is dependent on many factors, including:
· |
competition
from other video programming distributors, including incumbent telephone
companies, direct broadcast satellite operators, wireless broadband
providers and DSL providers;
|
· |
unforeseen
difficulties we may encounter in our continued introduction of our
telephone services such as our ability to meet heightened customer
expectations for the reliability of voice services compared to other
services we provide, and our ability to meet heightened demand for
installations and customer service;
|
· |
our
ability to sustain and grow revenues 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.
|
Some
of
these factors are beyond our control. If we are unable to generate sufficient
cash flow 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 we and
our
subsidiaries have been able to raise funds through issuances of debt in the
past, we may not be able to access additional sources of external liquidity
on
similar terms, if at all. We expect that cash on hand, cash flows from operating
activities, and the amounts available under our credit facilities will be
adequate to meet our cash needs through 2007. We believe that cash flows from
operating activities and amounts available under our credit facilities may
not
be sufficient to fund our operations and satisfy our interest and principal
repayment obligations in 2008 and will not be sufficient to fund
such
needs in 2009 and beyond. See “Part II. Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our subsidiaries.
Restrictions in our subsidiaries' debt instruments and under applicable law
limit their ability to provide funds to us or our various debt
issuers.
Our
sole
assets are our equity interests in our subsidiaries. Our operating subsidiaries
are separate and distinct legal entities and are not obligated to make funds
available to us for payments on our notes or other obligations in the form
of
loans, distributions, or otherwise. Our subsidiaries' ability to make
distributions to us or the applicable debt issuers to service debt obligations
is subject to their compliance with the terms of their credit facilities and
indentures, and restrictions under applicable law. See “Part II. Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations —
Liquidity and Capital Resources — Limitations on Distributions” and “— Debt
Covenants.” Under
the
Delaware Limited Liability Company Act, our subsidiaries may only make
distributions if they have “surplus” as defined in the act. Under fraudulent
transfer laws, our subsidiaries may not pay dividends if they are insolvent
or
are rendered insolvent thereby. The measures of insolvency for purposes of
these
fraudulent transfer laws vary depending upon the law applied in any proceeding
to determine whether a fraudulent transfer has occurred. Generally, however,
an
entity would be considered insolvent if:
· |
the
sum of its debts, including contingent liabilities, was greater than
the
fair saleable value of all its
assets;
|
· |
the
present fair saleable value of its assets was less than the amount
that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature;
or
|
· |
it
could not pay its debts as they became
due.
|
While
we
believe that our relevant subsidiaries currently have surplus and are not
insolvent, there can be no assurance that these subsidiaries will be permitted
to make distributions in the future in compliance with these restrictions in
amounts needed to service our indebtedness. Our direct or indirect subsidiaries
include the borrowers and guarantors under the Charter Operating credit
facilities. Several of our subsidiaries are also obligors and guarantors under
other senior high yield notes. Our convertible notes are structurally
subordinated in right of payment to all of the debt and other liabilities of
our
subsidiaries. As of December 31, 2006, our total debt was approximately $19.1
billion, of which approximately $18.7 billion was structurally senior to our
convertible notes.
In
the
event of bankruptcy, liquidation, or dissolution of one or more of our
subsidiaries, that subsidiary's assets would first be applied to satisfy its
own
obligations, and following such payments, such subsidiary may not have
sufficient assets remaining to make payments to its parent company as an equity
holder or otherwise. In that event:
· |
the
lenders under Charter Operating's credit facilities, whose interests
are
secured by substantially all of our operating assets, will have the
right
to be paid in full before us from any of our subsidiaries' assets;
and
|
· |
the
holders of preferred membership interests in our subsidiary, CC VIII,
would have a claim on a portion of its assets that may reduce the
amounts
available for repayment to holders of our outstanding
notes.
|
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 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 credit facilities would result in
a
default under those credit facilities. Because such credit facilities and our
subsidiaries' notes are obligations of our subsidiaries, the credit facilities
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 subsidiaries
to make a change of control offer or repay the amounts accelerated under their
notes and credit facilities 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.
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 and other
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. The
two
largest DBS providers are DIRECTV and Echostar Communications. Competition
from
DBS, including intensive marketing efforts with aggressive pricing and exclusive
programming such as the “NFL Sunday Ticket,” has had an adverse impact on our
ability to retain customers. DBS has grown rapidly over the last several years.
The cable industry, including us, has lost a significant number of video
customers to DBS competition, and we face serious challenges in this area in
the
future. In some areas, DBS operators have entered into co-marketing arrangements
with other of our competitors to offer service bundles combining video services
provided by the DBS operator and DSL and traditional telephone service offered
by the telephone companies. These service bundles resemble our bundles and
result in a single bill to the customer. 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 certain 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. Two major
local telephone companies, AT&T and Verizon, have both announced that they
intend to make upgrades of their networks. Some upgraded portions of these
networks are or will be capable of carrying two-way video services that are
technically comparable to ours, high-speed data services that operate at speeds
as high or higher than those we make available to customers in these areas
and
digital voice services that are similar to ours. In addition, these companies
continue to offer their traditional telephone services as well as bundles that
include wireless voice services provided by affiliated companies. We believe
that AT&T and Verizon’s upgrades have been completed in systems representing
approximately 1% of our homes passed as of December 31, 2006. Additional
upgrades in markets in which we operate are expected.
In areas
where they have launched video services, these parties are aggressively
marketing video, voice and data bundles at entry level prices similar to those
we use to market our bundles. Certain telephone companies have begun more
extensive upgrades 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 under terms and conditions
more
favorable than those imposed on us.
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 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 boxes. 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.
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.
In
addition to the various competitive factors discussed above, our business is
subject to risks relating to increasing competition for the leisure and
entertainment time of consumers. Our business competes with all other sources
of
entertainment and information delivery, including broadcast television, movies,
live events, radio broadcasts, home video products, console games, print media,
and the Internet. Technological advancements, such as video-on-demand, new
video
formats, and Internet streaming and downloading, have increased the number
of
entertainment and information delivery choices available to consumers, and
intensified the challenges posed by audience fragmentation. The increasing
number of choices available to audiences could negatively impact not only
consumer demand for our products and services, but also advertisers’ willingness
to purchase advertising from us. If we do not respond appropriately to further
increases in the leisure and entertainment choices available to consumers,
our
competitive position could deteriorate, and our financial results could suffer.
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.
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 combination of operating expenses and interest expenses
we
incur because of our high level of debt and the depreciation expenses that
we
incur resulting from the capital investments we have made in our cable
properties. We expect that these expenses will remain significant. We reported
net losses applicable to common stock of $1.4 billion, $970 million, and $4.3
billion for the years ended December 31, 2006, 2005, and 2004, respectively.
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 annual
increases imposed by programmers and additional programming, including high
definition television, and OnDemand
programming, being provided to customers. 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. We have programming contracts that have expired
or that will expire at or before the end of 2007. 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 could result in a further loss of customers.
Increased
demands by owners of some broadcast stations for carriage of other services
or
payments to those broadcasters for retransmission consent could further increase
our programming costs. Federal law allows commercial television broadcast
stations to make an election between “must-carry” rights and an alternative
“retransmission-consent” regime. When a station opts for the latter, cable
operators are not allowed to carry the station’s signal without the station’s
permission. In some cases, we carry stations under short-term arrangements
while
we attempt to negotiate new long-term retransmission agreements. If negotiations
with these programmers prove unsuccessful, they could require us to cease
carrying their signals, possibly for an indefinite period. Any loss of stations
could make our video service less attractive to customers, which could result
in
less subscription and advertising revenue. In retransmission-consent
negotiations, broadcasters often condition consent with respect to one station
on carriage of one or more other stations or programming services in which
they
or their affiliates have an interest. Carriage of these other services may
increase our programming expenses and diminish the amount of capacity we have
available to introduce new services, which could have an adverse effect on
our
business and financial results.
If
our required capital expenditures in 2007, 2008 and beyond 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, 2006, we spent approximately $1.1 billion on capital
expenditures. During 2007, we expect capital expenditures to be approximately
$1.2 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 in 2007, 2008, and beyond 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, proceeds from
asset sales or other sources, our growth, financial condition, and results
of
operations could suffer materially.
We
face risks inherent to our telephone business.
We
may
encounter unforeseen difficulties as we introduce our telephone service in
new
operating areas and as we increase the scale of our telephone service offerings
in areas in which they have already been launched. First, we face heightened
customer expectations for the reliability of telephone services, as compared
with our video and high-speed data services. We have undertaken significant
training of customer service representatives and technicians, and we will
continue to need a highly trained workforce. To ensure reliable service, we
may
need to increase our expenditures, including spending on technology, equipment
and personnel. If the service is not sufficiently reliable or we otherwise
fail
to meet customer expectations, our telephone business could be adversely
affected. Second, the competitive landscape for telephone services is intense;
we face competition from providers of Internet telephone services, as well
as
incumbent local telephone companies, cellular telephone service providers,
and
others. Third, we depend on interconnection and related services provided by
certain third parties. As a result, our ability to implement changes as the
service grows may be limited. Finally, we expect advances in communications
technology, as well as changes in the marketplace and the regulatory and
legislative environment. Consequently, we are unable to predict the effect
that
ongoing or future developments in these areas might have on our telephone
business and operations.
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, some of which are bandwidth-intensive. We cannot
assure you that we will be able to fund the capital expenditures necessary
to
keep pace with technological developments, or that we will successfully
anticipate the demand of our customers for products and services requiring
new
technology or bandwidth beyond our expectations. 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 affect
our ability to attract and retain customers. Consequently, our growth, financial
condition and results of operations could suffer materially.
We
depend on third party suppliers and licensors; thus, if we are unable to procure
the necessary equipment, software or licenses on reasonable terms and on a
timely basis, our ability to offer services could be impaired, and our growth,
operations, business, financial results and financial condition could be
materially adversely affected.
We
depend
on third party suppliers and licensors to supply some of the hardware, software
and operational support necessary to provide some of our services. We obtain
these materials from a limited number of vendors, some of which do not have
a
long operating history. Some of our hardware, software and operational support
vendors represent our sole source of supply or have, either through contract
or
as a result of intellectual property rights, a position of some exclusivity.
If
demand exceeds these vendors’ capacity or if these vendors experience operating
or financial difficulties, or are otherwise unable to provide the equipment
we
need in a timely manner and at reasonable prices, our ability to provide some
services might be materially adversely affected, or the need to procure or
develop alternative sources of the affected materials or services might delay
our ability to serve our customers. These events could materially and adversely
affect our ability to retain and attract customers, and have a material negative
impact on our operations, business, financial results and financial condition.
A
limited number of vendors of key technologies can lead to less product
innovation and higher costs. For these reasons, we generally endeavor to
establish alternative vendors for materials we consider critical, but may not
be
able to establish these relationships or be able to obtain required materials
on
favorable terms.
For
example, each of our systems currently purchases set-top boxes from a limited
number of vendors, because each of our cable systems uses one or two proprietary
conditional access security schemes, which allow us to regulate subscriber
access to some services, such as premium channels. We believe that the
proprietary nature of these conditional access schemes makes other manufacturers
reluctant to produce set-top boxes. Future innovation in set-top boxes may
be
restricted until these issues are resolved. In addition, we believe that the
general lack of compatibility among set-top box operating systems has slowed
the
industry’s development and deployment of digital set-top box applications.
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 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
|
· |
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.
For
tax purposes, there is significant risk that we will experience an ownership
change resulting in a material limitation on the use of a substantial amount
of
our existing net operating loss carryforwards.
As
of
December 31, 2006, we had approximately $6.7 billion of tax net operating
losses, resulting in a gross deferred tax asset of approximately $2.7 billion,
expiring in the years
2007
through 2026. 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.
However, 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 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.
Future
transactions and the timing of such transactions could cause an ownership change
for income tax purposes. 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), the return to us of the
borrowed shares loaned by us in connection with the issuance of the 5.875%
convertible senior notes, 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 B common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond our control.
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 (a) Mr. Allen,
(b) his estate, spouse, immediate family members and heirs and (c) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners or other owners of which consist exclusively of Mr. Allen or such
other
persons referred to in (b) above or a combination thereof 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
the interests of the other holders of our Class A common
stock.
Mr.
Allen
has the ability to control us. Through his control, as of December 31, 2006,
of
approximately 91% 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 other holders of our Class A common stock. For example,
if
Mr. Allen were to elect to exchange his Charter Holdco membership units for
our
Class B common stock pursuant to our existing exchange agreement with him,
such
a transaction would result in an ownership change for income tax purposes,
as
discussed above. See “—
For
tax
purposes, there is significant risk that we will experience an ownership change
resulting in a material limitation on the use of a substantial amount of our
existing net operating loss carryforwards.” 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.
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 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 CII. The purpose of these special tax allocation provisions was to allow
Mr.
Allen to take advantage, for tax purposes, of 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 “Part II. Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations —
Critical
Accounting Policies and Estimates —
Income
Taxes.”
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:
· |
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
and regulations relating to provision of voice
communications;
|
· |
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 system franchises 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 12% of our franchises, covering approximately 15% of our analog
video customers, were expired as of December 31, 2006. Approximately 8% of
additional franchises, covering approximately an additional 11% of our analog
video customers, will expire on or before December 31, 2007, 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 system franchises 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
system franchises are non-exclusive. 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.
Legislative
proposals have been introduced in the United States Congress and in 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 passed in several states, including states
where
we have significant operations. Although certain of these states have provided
some regulatory relief for incumbent cable operators, these proposals are
generally viewed as being more favorable to new entrants due to a number of
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. At least two additional states where we have cable systems have issued
regulations that will facilitate telephone company provision of video services
by eliminating or reducing the application of franchising requirements to the
telephone companies. A proceeding is pending at the FCC 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. We are not yet 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, 2006, we are aware of traditional overbuild
situations impacting approximately 7% of our estimated homes passed, and
potential traditional 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
generally 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 utility 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. The favorable pole attachment rates
afforded cable operators under federal law can be increased by utility companies
if the operator provides telecommunications services, in addition to cable
service, over cable wires attached to utility poles. To date, VoIP service
has
not been classified as either a telecommunications service or cable service
under the Communications Act. If VoIP were classified as a telecommunications
service under the Communications Act by the FCC, a state Public Utility
Commission, or an appropriate court, it might result in significantly increased
pole attachment costs for us, which could adversely affect our financial
condition and results of operations. We are a defendant in at least one lawsuit
where the utility company claims that we should pay an increased rate on its
poles. Any significant increased pole attachment 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 (“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 2005 ruling, commonly referred to as
Brand X
, the
Supreme Court upheld an FCC decision making it 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.”
Notwithstanding
Brand X,
there
has been increasing advocacy by certain internet content providers and consumer
groups for new federal laws or regulations to adopt so-called “net
neutrality”
principles limiting the ability of broadband network owners (like Charter)
to
manage and control their own networks. The proposals might prevent network
owners, for example, from charging bandwidth intensive content providers, such
as certain online gaming, music, and video service providers, an additional
fee
to ensure quality delivery of the services to consumers. If we were required
to
allocate a portion of our bandwidth capacity to other Internet service
providers, or were prohibited from charging heavy bandwidth intensive services
a
fee for use of our networks, we believe that it could 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 is subject to a petition for reconsideration which is pending.
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 develop and deploy VoIP services. 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 state and local
regulation of VoIP services is not yet clear. Expanding our offering of these
services may require us to obtain certain authorizations, including federal
and
state 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. The FCC has extended certain traditional
telecommunications requirements, such as E911 and Universal Service
requirements, to many VoIP providers, such as Charter. The FCC has also required
that these VoIP providers comply with obligations applied to traditional
telecommunications carriers to ensure their networks can accommodate law
enforcement wiretaps by May 2007. Telecommunications companies generally are
subject to other significant regulation which could also be extended to VoIP
providers. If additional telecommunications regulations are applied to our
VoIP
service, it could cause us to incur additional costs.
Item
1B. Unresolved
Staff Comments.
None.
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 premise 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 15% and have decreased our annual operating lease costs by
approximately 28%. In addition, Charter has sold over $34 million worth of
land
and buildings since early 2003. We plan to continue to reduce operating costs
and improve utilization 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.
Item 3.
Legal
Proceedings.
We
are a
defendant or co-defendant in several unrelated lawsuits claiming infringement
of
various patents relating to various aspects of our businesses. Other industry
participants are also defendants in certain of these cases, and, in many cases,
we expect that any potential liability would be the responsibility of our
equipment vendors pursuant to applicable contractual indemnification provisions.
In the event that a court ultimately determines that we infringe on any
intellectual property rights, we may be subject to substantial damages and/or
an
injunction that could require us or our vendors to modify certain products
and
services we offer to our subscribers. While we believe the lawsuits are without
merit, and intend to defend the actions vigorously, the lawsuits could be
material to our consolidated results of operations of any one period, and no
assurance can be given that any adverse outcome would not be material to our
consolidated financial condition, results of operations or
liquidity.
We
are a
party to other lawsuits and claims that arise in the ordinary course of
conducting our business. The ultimate outcome of these other legal matters
pending against us or our subsidiaries cannot be predicted, and although such
lawsuits and claims are not expected individually to have a material adverse
effect on our consolidated financial condition, results of operations or
liquidity, such lawsuits could have, in the aggregate, a material adverse effect
on our consolidated financial condition, results of operations or
liquidity.
No
matters were submitted to a vote of security holders during the fourth quarter
of the year ended December 31, 2006.
PART
II
(A)
Market Information
Our
Class
A common stock is quoted on the NASDAQ Global 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
Global 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
|
|
2006
|
|
|
|
|
|
|
First
quarter
|
|
$
|
1.25
|
|
$
|
0.94
|
Second
quarter
|
|
|
1.38
|
|
|
1.03
|
Third
quarter
|
|
|
1.56
|
|
|
1.11
|
Fourth
quarter
|
|
|
3.36
|
|
|
1.47
|
(B)
Holders
As
of
December 31, 2006, there were 4,326 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)
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following information is provided as of December 31, 2006 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
|
|
26,403,200
|
(1)
|
|
|
$
3.88
|
|
34,327,388
|
Equity
compensation plans not
approved
by security holders
|
|
289,268
|
(2)
|
|
|
$
3.91
|
|
--
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
26,692,468
|
|
|
|
$
3.88
|
|
34,327,388
|
(1)
|
This
total does not include 2,572,267 shares issued pursuant to restricted
stock grants made under our 2001 Stock Incentive Plan, which were
or are
subject to vesting based on continued employment or 12,184,749 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.
|
For
information regarding securities issued under our equity compensation plans,
see
Note 20 to our accompanying consolidated financial statements contained in
“Item 8. Financial Statements and Supplementary Data.”
(E)
Performance Graph
The
graph
below shows the cumulative total return on our Class A common stock for the
period from December 31, 2001 through December 31, 2006, in comparison
to the cumulative total return on Standard & Poor’s 500 Index and a
peer group consisting of the four national cable operators that are most
comparable to us in terms of size and nature of operations. The Company’s peer
group consists of Cablevision Systems Corporation, Comcast Corporation, Insight
Communications, Inc. (through third quarter 2005) and Mediacom Communications
Corp. The results shown assume that $100 was invested on December 31, 2001
and that all dividends were reinvested. These indices are included for
comparative purposes only and do not reflect whether it is management’s opinion
that such indices are an appropriate measure of the relative performance of
the
stock involved, nor are they intended to forecast or be indicative of future
performance of the Class A common stock.
(F) Recent
Sales of Unregistered Securities
During
2006, there were no unregistered sales of securities of the registrant other
than those previously reported on a Form 10-Q or Form 8-K.
The
following table presents selected consolidated financial data for the periods
indicated (dollars in millions, except share data):
|
|
Charter
Communications, Inc.
|
|
|
|
Year
Ended December 31, (a)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,504
|
|
$
|
5,033
|
|
$
|
4,760
|
|
$
|
4,616
|
|
$
|
4,377
|
|
Operating
income (loss) from continuing operations
|
|
|
367
|
|
|
304
|
|
|
(1,942
|
)
|
|
484
|
|
|
(3,914
|
)
|
Interest
expense, net
|
|
$
|
(1,887
|
)
|
$
|
(1,789
|
)
|
$
|
(1,670
|
)
|
$
|
(1,557
|
)
|
$
|
(1,503
|
)
|
Loss
from continuing operations before cumulative effect of accounting
change
|
|
$
|
(1,586
|
)
|
$
|
(1,003
|
)
|
$
|
(3,441
|
)
|
$
|
(241
|
)
|
$
|
(2,104
|
)
|
Net
loss applicable to common stock
|
|
$
|
(1,370
|
)
|
$
|
(970
|
)
|
$
|
(4,345
|
)
|
$
|
(242
|
)
|
$
|
(2,514
|
)
|
Basic
and diluted loss from continuing operations before cumulative effect
of
accounting change per common share
|
|
$
|
(4.78
|
)
|
$
|
(3.24
|
)
|
$
|
(11.47
|
)
|
$
|
(0.83
|
)
|
$
|
(7.15
|
)
|
Basic
and diluted loss per common share
|
|
$
|
(4.13
|
)
|
$
|
(3.13
|
)
|
$
|
(14.47
|
)
|
$
|
(0.82
|
)
|
$
|
(8.55
|
)
|
Weighted-average
shares outstanding, basic and diluted
|
|
|
331,941,788
|
|
|
310,209,047
|
|
|
300,341,877
|
|
|
294,647,519
|
|
|
294,490,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in cable properties
|
|
$
|
14,440
|
|
$
|
15,666
|
|
$
|
16,167
|
|
$
|
20,694
|
|
$
|
21,406
|
|
Total
assets
|
|
$
|
15,100
|
|
$
|
16,431
|
|
$
|
17,673
|
|
$
|
21,364
|
|
$
|
22,384
|
|
Long-term
debt
|
|
$
|
19,062
|
|
$
|
19,388
|
|
$
|
19,464
|
|
$
|
18,647
|
|
$
|
18,671
|
|
Note
payable - related party
|
|
$
|
57
|
|
$
|
49
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Minority
interest (b)
|
|
$
|
192
|
|
$
|
188
|
|
$
|
648
|
|
$
|
689
|
|
$
|
1,050
|
|
Preferred
stock — redeemable
|
|
$
|
4
|
|
$
|
4
|
|
$
|
55
|
|
$
|
55
|
|
$
|
51
|
|
Shareholders’
equity (deficit)
|
|
$
|
(6,219
|
)
|
$
|
(4,920
|
)
|
$
|
(4,406
|
)
|
$
|
(175
|
)
|
$
|
41
|
|
(a)
|
In
2006, we sold certain cable television systems in West Virginia and
Virginia
to
Cebridge Connections, Inc.
We
determined that the West Virginia and Virginia cable systems comprise
operations and cash flows that for financial reporting purposes meet
the
criteria for discontinued operations. Accordingly, the results of
operations for the West Virginia and Virginia cable systems have
been
presented as discontinued operations, net of tax for the year ended
December 31, 2006 and all prior periods presented herein have been
reclassified to conform to the current
presentation.
|
(b)
|
Minority
interest represents preferred
membership interests in our indirect subsidiary, CC VIII, and since
June 6, 2003, the pro rata share of the profits and losses of CC
VIII. This preferred membership interest arises from approximately
$630 million of preferred membership units issued by CC VIII in
connection with an acquisition in February 2000. As part of the Private
Exchange, CCHC contributed its 70% interest in the 24,273,943
Class A preferred membership units (collectively, the "CC VIII
interest")
to
CCH I. See
Note 22 to our accompanying consolidated financial statements contained
in
“Item 8. Financial Statements and Supplementary Data.” 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. Under
our
existing capital structure, Charter will continue to absorb all future
losses for GAAP purposes.
|
Comparability
of the above information from year to year is affected by acquisitions and
dispositions completed by us. See 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.”
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, 2006, 2005 and 2004.
Overview
Charter
is a broadband communications company operating in the United States, with
approximately 5.73 million customers at December 31, 2006. Through our hybrid
fiber and coaxial cable network, 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 OnDemand,
high definition television service and DVR) and, in many of our markets,
telephone service. See "Item 1. Business —
Products and Services"
for
further description of these terms, including "customers."
Approximately
88% of our revenues for each of the years ended December 31, 2006 and 2005,
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 12% 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 OnDemand 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.
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. In addition, DBS competition combined with increasingly
limited opportunities to expand our customer base, now that approximately 52%
of
our analog video customers subscribe to our digital video service, has resulted
in decreased growth rates for digital video customers. Competition from DSL
providers has resulted in decreased growth rates for high-speed Internet
customers. In the recent past, we have grown revenues by offsetting analog
video
customer losses with price increases and sales of incremental services such
as
high-speed Internet, OnDemand, DVR, high definition television, and telephone.
We expect to continue to grow revenues through price increases, increases in
the
number of our customers who purchase bundled services, and through sales of
incremental video services including high definition television, OnDemand and
DVR service. In addition, we expect to increase revenues by expanding the sales
of our services to our commercial customers.
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 and franchise
fees. Selling, general and administrative expenses primarily include salaries
and benefits, rent expense, billing costs, call center costs, internal network
costs, bad debt expense and property taxes. Controlling our expenses impacts
our
ability to improve margins. 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 growth and increasing size in
purchasing activities. In addition, we are reviewing our pricing and programming
packaging strategies. See “Item 1. Business — Programming” for more details.
Our
operating income from continuing operations increased to $367 million for the
year ended December 31, 2006 from $304 million for the year ended December
31,
2005. We had positive operating margins (defined as operating income from
continuing operations divided by revenues) of 7% and 6% for the years ended
December 31, 2006 and 2005, respectively. The improvement in operating income
from continuing operations and operating margin for the year ended December
31,
2006 is principally due to an increase in revenue over expenses as a result
of
increased customers for high-speed Internet, digital video, and advanced
services, as well as overall rate increases. Operating loss from continuing
operations was $1.9 billion for the year ended December 31, 2004. We had a
negative operating margin of 40% for the year ended December 31, 2004. The
increase in operating income from continuing operations and positive operating
margin for the year ended December 31, 2005 was principally due to the
impairment of franchises of $2.3 billion recorded in the third quarter of 2004,
which did not recur in 2005.
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 combination of operating expenses and interest
expenses we incur because of our high level of debt and the depreciation
expenses that we incur resulting from the capital investments we have made
and
continue to make in our cable properties. We expect that these expenses will
remain significant.
Beginning
in 2004 and continuing through January 2007, we sold several cable systems
which
reflects
our strategy to divest geographically non-strategic assets to allow for more
efficient operations, while also increasing our liquidity. In
2004,
we sold cable systems representing a total of approximately 228,500 analog
video
customers. In 2005, we closed the sale of certain cable systems representing
a
total of approximately 33,000 analog video customers, and in 2006, we sold
cable
systems serving a total of approximately 390,300 analog video customers. In
January 2007, we completed the sale of additional cable systems representing
approximately 34,400 analog video customers. As a result of these sales we
have
improved our geographic footprint by reducing our number of headends, increasing
the number of customers per headend, and reducing the number of states in which
the majority of our customers reside.
In
2006,
we determined that the West Virginia and Virginia cable systems, which were
part
of the system sales disclosed above, comprised operations and cash flows
that
for financial reporting purposes met the criteria for discontinued operations.
Accordingly, the results of operations for the West Virginia and Virginia
cable
systems (including a gain on sale of approximately $200 million recorded
in the
third quarter of 2006), have been presented as discontinued operations, net
of
tax, for the year ended December 31, 2006, and all prior periods presented
herein have been reclassified to conform to the current presentation. Tax
expense of $18 million associated with this gain on sale was recorded in
the
fourth quarter of 2006.
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;
|
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, 2006 and 2005, the net carrying amount of
our property, plant and equipment (consisting primarily of cable network assets)
was approximately $5.2 billion (representing 35% of total assets) and $5.8
billion (representing 36% of total assets), respectively. Total capital
expenditures for the years ended December 31, 2006, 2005, and 2004 were
approximately $1.1 billion, $1.1 billion, and $924 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.
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 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
box.
|
Judgment
is required to determine the extent to which overhead costs incurred result
from
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 dispatchers, who 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 $204 million, $190 million and $164 million, respectively, for the years
ended December 31, 2006, 2005, and 2004. Capitalized internal direct labor
and overhead costs have increased in 2005 and 2006 as compared to 2004 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, 2006 of approximately $168 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, 2006 of approximately
$131
million.
Depreciation
expense related to property, plant and equipment totaled $1.3 billion, $1.4
billion, and $1.4 billion, representing approximately 26%, 30%, and 21% of
costs
and expenses, for the years ended December 31, 2006, 2005, and 2004,
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
|
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, 2006 and 2005 was approximately $9.2 billion
(representing 61% of total assets) and $9.8 billion (representing 60% of total
assets), respectively. Furthermore, our noncurrent assets include approximately
$61 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 likelihood of franchise renewals, the expected costs of franchise
renewals, and the technological state of the associated cable systems, with
a
view to whether or not we are in compliance with any technology upgrading
requirements specified in a franchise agreement. We have concluded that as
of
December 31, 2006, 2005, and 2004 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 $2 million, $4 million, and
$3
million for the years ended December 31, 2006, 2005, and 2004,
respectively. We expect that amortization expense on franchise assets will
be
approximately $1 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, 2006, 2005, or 2004, however, approximately
$159
million and $39 million of impairment on assets held for sale was recorded
for
the years ended December 31, 2006 and 2005, respectively. We are also required
to evaluate the recoverability of our indefinite-life franchises, as well as
goodwill, on an annual basis or more frequently as deemed necessary.
Under
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; and 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.
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 (less the
anticipated customer churn) and the new services added to those customers in
future periods. The sum of the present value of the franchises’ after-tax cash
flow in years 1 through 10 and the continuing value of the after-tax cash flow
beyond year 10 yields the fair value of the franchise. 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
(less the anticipated customer churn), and are calculated by projecting future
after-tax cash flows from these customers, including the right to deploy and
market additional services 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.
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. At October 1, 2006, a 10% and 5% decline in the estimated fair value
of
our franchise assets in each of our asset groupings would have resulted in
an
impairment charge of approximately $60 million and $0,
respectively.
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 in prior years. See “Item 1.
Business — Competition.”
The
valuations completed at October 1, 2006 and 2005 showed franchise values in
excess of book value, and thus resulted in no impairment.
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. 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 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 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 balances of each of Vulcan Cable and CII were
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, 2006 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
$1 billion through December 31, 2006.
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 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 and CII
have
the right at anytime to exchange some or all of their membership units in
Charter Holdco for Charter’s Class B common stock, be merged with Charter
in exchange for Charter’s Class B common stock, or be acquired by Charter in a
non-taxable reorganization in exchange for Charter’s Class B common stock. 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
(see
“Risk Factors — For tax purposes, there is significant risk that we will
experience an ownership change resulting in a material limitation on the use
of
a substantial amount of our existing 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. Further, Mr. Allen’s
obligation to reimburse Charter for taxes attributable to the Special Profit
Allocation to Charter ceases upon a subsequent change of control of
Charter.
As
of
December 31, 2006 and 2005, we have recorded net deferred income tax
liabilities of $514 million and $325 million, respectively. Additionally,
as of December 31, 2006 and 2005, we have deferred tax assets of
$4.6 billion and $4.2 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
$4.2 billion and $3.7 billion at December 31, 2006 and 2005,
respectively.
Charter
Holdco is currently under examination by the Internal Revenue Service for the
tax years ending December 31, 2002 and 2003. In addition, one of our
indirect corporate subsidiaries is under examination by the Internal Revenue
Service for the tax year ended December 31, 2004. Our results (excluding Charter
and our indirect corporate subsidiaries, with the exception of the indirect
corporate subsidiary under examination) for these years are subject to these
examinations. Management does not expect the results of these examinations
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.
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):
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,504
|
|
|
100%
|
|
$
|
5,033
|
|
|
100%
|
|
$
|
4,760
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
2,438
|
|
|
44%
|
|
|
2,203
|
|
|
44%
|
|
|
1,994
|
|
|
42%
|
|
Selling,
general and administrative
|
|
|
1,165
|
|
|
21%
|
|
|
1,012
|
|
|
20%
|
|
|
965
|
|
|
20%
|
|
Depreciation
and amortization
|
|
|
1,354
|
|
|
25%
|
|
|
1,443
|
|
|
29%
|
|
|
1,433
|
|
|
30%
|
|
Impairment
of franchises
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,297
|
|
|
48%
|
|
Asset
impairment charges
|
|
|
159
|
|
|
3%
|
|
|
39
|
|
|
1%
|
|
|
--
|
|
|
--
|
|
Other
operating expenses, net
|
|
|
21
|
|
|
--
|
|
|
32
|
|
|
--
|
|
|
13
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,137
|
|
|
93%
|
|
|
4,729
|
|
|
94%
|
|
|
6,702
|
|
|
140%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from continuing operations
|
|
|
367
|
|
|
7%
|
|
|
304
|
|
|
6%
|
|
|
(1,942)
|
|
|
(40)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,887)
|
|
|
|
|
|
(1,789)
|
|
|
|
|
|
(1,670)
|
|
|
|
Gain
(loss) on extinguishment of debt and preferred stock
|
|
|
101
|
|
|
|
|
|
521
|
|
|
|
|
|
(31)
|
|
|
|
Other
income, net
|
|
|
20
|
|
|
|
|
|
73
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
and
cumulative effect of accounting change
|
|
|
(1,399)
|
|
|
|
|
|
(891)
|
|
|
|
|
|
(3,575)
|
|
|
|
Income
tax benefit (expense)
|
|
|
(187)
|
|
|
|
|
|
(112)
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effect
of accounting change
|
|
|
(1,586)
|
|
|
|
|
|
(1,003)
|
|
|
|
|
|
(3,441)
|
|
|
|
Income
(loss) from discontinued operations,
net
of tax
|
|
|
216
|
|
|
|
|
|
36
|
|
|
|
|
|
(135)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of accounting change
|
|
|
(1,370)
|
|
|
|
|
|
(967)
|
|
|
|
|
|
(3,576)
|
|
|
|
Cumulative
effect of accounting change, net of tax
|
|
|
--
|
|
|
|
|
|
--
|
|
|
|
|
|
(765)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,370)
|
|
|
|
|
|
(967)
|
|
|
|
|
|
(4,341)
|
|
|
|
Dividends
on preferred stock - redeemable
|
|
|
--
|
|
|
|
|
|
(3)
|
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(1,370)
|
|
|
|
|
$
|
(970)
|
|
|
|
|
$
|
(4,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before cumulative effect of accounting
change
|
|
$
|
(4.78)
|
|
|
|
|
$
|
(3.24)
|
|
|
|
|
$
|
(11.47)
|
|
|
|
Net
loss
|
|
$
|
(4.13)
|
|
|
|
|
$
|
(3.13)
|
|
|
|
|
$
|
(14.47)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
331,941,788
|
|
|
|
|
|
310,209,047
|
|
|
|
|
|
300,341,877
|
|
|
|
Revenues.
Average
monthly revenue per analog video customer, measured on an annual basis, has
increased from $67 in 2004 to $74 in 2005 and $82 in 2006. 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. Revenue growth in 2006 and 2005 primarily reflects increases
in the number of customers, price increases, and incremental video revenues
from
OnDemand, DVR and high-definition television services. Cable
system sales, net of acquisitions, in 2004, 2005, and 2006 reduced the increase
in revenues in 2006 as compared to 2005 by approximately $24 million, and in
2005 as compared to 2004 by approximately $30 million.
Revenues
by service offering were as follows (dollars in millions):
|
|
Year
Ended December 31,
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
over 2005
|
|
|
2005
over 2004
|
|
|
Revenues
|
|
%
of Revenues
|
|
|
Revenues
|
|
%
of Revenues
|
|
|
Revenues
|
|
%
of Revenues
|
|
|
Change
|
|
%
Change
|
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
$
|
3,349
|
|
61%
|
|
$
|
3,248
|
|
65%
|
|
$
|
3,217
|
|
68%
|
|
$
|
101
|
|
3%
|
|
$
|
31
|
|
1%
|
High-speed
Internet
|
|
1,051
|
|
19%
|
|
|
875
|
|
17%
|
|
|
712
|
|
15%
|
|
|
176
|
|
20%
|
|
|
163
|
|
23%
|
Telephone
|
|
135
|
|
2%
|
|
|
36
|
|
1%
|
|
|
18
|
|
--
|
|
|
99
|
|
275%
|
|
|
18
|
|
100%
|
Advertising
sales
|
|
319
|
|
6%
|
|
|
284
|
|
6%
|
|
|
279
|
|
6%
|
|
|
35
|
|
12%
|
|
|
5
|
|
2%
|
Commercial
|
|
305
|
|
6%
|
|
|
266
|
|
5%
|
|
|
227
|
|
5%
|
|
|
39
|
|
15%
|
|
|
39
|
|
17%
|
Other
|
|
345
|
|
6%
|
|
|
324
|
|
6%
|
|
|
307
|
|
6%
|
|
|
21
|
|
6%
|
|
|
17
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,504
|
|
100%
|
|
$
|
5,033
|
|
100%
|
|
$
|
4,760
|
|
100%
|
|
$
|
471
|
|
9%
|
|
$
|
273
|
|
6%
|
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Analog video customers decreased
by
210,700 and 79,100 customers in 2006 and 2005, respectively, of which 137,200
in
2006 was related to system sales, net of acquisitions. Digital video customers
increased by 127,800 and 124,600 customers in 2006 and 2005, respectively.
The
increase in 2006 was reduced by the sale, net of acquisitions, of 42,100 digital
customers. The increases in video revenues are attributable to the following
(dollars in millions):
|
|
2006
compared to 2005
|
|
2005
compared to 2004
|
|
|
|
|
|
|
|
Increases
related to price increases and incremental video services
|
|
$
|
102
|
|
$
|
119
|
|
Increases
related to increase in digital video customers
|
|
|
58
|
|
|
18
|
|
Decreases
related to decrease in analog video customers
|
|
|
(34
|
)
|
|
(76
|
)
|
Increase
related to acquisition
|
|
|
6
|
|
|
--
|
|
Decreases
related to system sales
|
|
|
(31
|
)
|
|
(21
|
)
|
Hurricane
impact
|
|
|
--
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
101
|
|
$
|
31
|
|
High-speed
Internet customers grew by 283,600 and 306,000 customers in 2006 and 2005,
respectively, of which 20,900 in 2006 was related to system sales, net of
acquisitions. The increases in high-speed Internet revenues from our
non-commercial customers are attributable to the following (dollars in
millions):
|
|
2006
compared to 2005
|
|
2005
compared to 2004
|
|
|
|
|
|
|
|
Increases
related to increases in high-speed Internet customers
|
|
$
|
146
|
|
$
|
135
|
|
Increases
related to price increases
|
|
|
31
|
|
|
34
|
|
Increase
related to acquisition
|
|
|
3
|
|
|
--
|
|
Decreases
related to system sales
|
|
|
(4
|
)
|
|
(3
|
)
|
Hurricane
impact
|
|
|
--
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
176
|
|
$
|
163
|
|
Revenues
from telephone services increased primarily as a result of an increase of
324,300 telephone customers in 2006, of which 14,500 was related to
acquisitions, and 76,100 telephone customers in 2005. Approximately $6 million
of the increase in 2006 telephone revenue compared to 2005 is related to an
acquisition.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. In 2006, advertising sales revenues
increased primarily as a result of an increase in local and national advertising
sales, including political advertising. In 2005, advertising sales revenues
increased primarily as a result of an increase in local advertising sales,
and
were offset by a decline in national advertising sales. In addition, the
increases were offset by a decrease of $1 million in 2006 and $1 million in
2005
as a result of system sales. For the
years
ended December 31, 2006, 2005, and 2004, we received $17 million, $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 increases were reduced by approximately $1 million in 2006 and $3 million
in
2005 as a result of system 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 years ended December
31, 2006, 2005, and 2004, franchise fees represented approximately 52%, 54%,
and
52%, respectively, of total other revenues. The increase in other revenues
was
primarily the result of increases in franchise fees as a result of increases
in
revenues upon which the fees apply, and increases in installation revenues.
The
increases were reduced by approximately $2 million in 2006 and $2 million in
2005 as a result of system sales.
Operating
expenses.
The
increases in operating expenses are attributable to the following (dollars
in
millions):
|
|
2006
compared to 2005
|
|
2005
compared to 2004
|
|
|
|
|
|
|
|
Increases
in programming costs
|
|
$
|
143
|
|
$
|
104
|
|
Increases
in labor costs
|
|
|
32
|
|
|
24
|
|
Increases
in costs of providing high-speed Internet and telephone
services
|
|
|
25
|
|
|
26
|
|
Increases
in maintenance costs
|
|
|
15
|
|
|
24
|
|
Increases
in advertising sales costs
|
|
|
14
|
|
|
4
|
|
Increases
in franchise costs
|
|
|
11
|
|
|
10
|
|
Other
increases, net
|
|
|
2
|
|
|
29
|
|
Increase
related to acquisition
|
|
|
13
|
|
|
--
|
|
Decreases
related to system sales
|
|
|
(20
|
)
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
235
|
|
$
|
209
|
|
Programming
costs were approximately $1.5 billion, $1.4 billion, and $1.3 billion,
representing 61%, 62%, and 63% of total operating expenses for the years
ended
December 31, 2006, 2005, and 2004, respectively. Programming costs consist
primarily of costs paid to programmers for analog, premium, digital and
pay-per-view programming. The increases in programming costs are primarily
a
result of rate increases, particularly in sports programming, and in 2005
were
offset by a decrease in analog video customers. In addition, programming
costs
increased as a result of reductions in the amounts of amortization of payments
received from programmers in support of launches of new channels. Amounts
amortized against programming expenses were $32 million, $41 million, and
$59
million in 2006, 2005, and 2004, respectively. We expect programming expenses
to
continue to increase due to a variety of factors, including annual increases
imposed by programmers, and additional programming, including high-definition
and OnDemand programming, being provided to customers. Labor costs increased
due
to an increase in headcount to support improved service levels and telephone
deployment.
Selling,
general and administrative expenses. The
increases in selling, general and administrative expenses are attributable
to
the following (dollars in millions):
|
|
2006
compared to 2005
|
|
2005
compared to 2004
|
|
|
|
|
|
|
|
Increases
(decreases) in customer care costs
|
|
$
|
56
|
|
$
|
(2
|
)
|
Increases
in marketing costs
|
|
|
38
|
|
|
23
|
|
Increases
in employee costs
|
|
|
32
|
|
|
28
|
|
Increases
(decreases) in bad debt and collection costs
|
|
|
19
|
|
|
(20
|
)
|
Increases
(decreases) in property and casualty costs
|
|
|
17
|
|
|
(6
|
)
|
Increases
(decreases) in professional service costs
|
|
|
(26
|
)
|
|
31
|
|
Other
increases (decreases), net
|
|
|
21
|
|
|
(3
|
)
|
Decreases
related to system sales
|
|
|
(9
|
)
|
|
(4
|
)
|
Increase
related to acquisition
|
|
|
5
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
$
|
153
|
|
$
|
47
|
|
Depreciation
and amortization. Depreciation
and amortization expense decreased by $89 million in 2006 and increased by
$10
million in 2005. During 2006, the decrease in depreciation was primarily the
result of systems sales and certain assets becoming fully depreciated. During
2005, the increase in depreciation was related to an increase in capital
expenditures, which was partially offset by lower depreciation as the result
of
systems sales and certain assets becoming fully depreciated.
Impairment
of franchises.
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
December 31, 2004. Our annual assessments in 2006 and 2005 did not result in
impairment.
Asset
impairment charges.
Asset
impairment charges for the years ended December 31, 2006 and 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.”
Other
operating expenses, net. The
increases (decreases) in other operating expenses, net are attributable to
the
following (dollars in millions):
|
|
2006
compared to 2005
|
|
2005
compared to 2004
|
|
|
|
|
|
|
|
Increases
in losses on sales of assets
|
|
$
|
2
|
|
$
|
92
|
|
Hurricane
asset retirement loss
|
|
|
(19
|
)
|
|
19
|
|
Increases
(decreases) in special charges, net
|
|
|
6
|
|
|
(97
|
)
|
Decreases
in unfavorable contracts and other settlements
|
|
|
--
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11
|
)
|
$
|
19
|
|
For
more
information, see Note 17 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary
Data.”
Interest
expense, net. Net
interest expense increased by $98 million in 2006 and by $119 million in 2005.
The increase in net interest expense was a result of an increase in our average
borrowing rate from 8.7% in 2004 to 9.0% in 2005 to 9.5% in 2006, and an
increase in average debt outstanding from $18.6 billion in 2004 to $19.3 billion
in 2005 to $19.4 billion in 2006. The increase in 2006 was coupled with $10
million of losses related to embedded derivatives in Charter’s 5.875%
convertible senior notes. The increase in 2005 was partially offset by $29
million of gains related to embedded derivatives in Charter’s 5.875% convertible
senior notes. See Note 3 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Gain
(loss) on extinguishment of debt and preferred stock.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Charter
Holdings debt exchanges
|
|
$
|
108
|
|
$
|
500
|
|
$
|
--
|
|
Charter
Operating credit facility refinancing
|
|
|
(27
|
)
|
|
--
|
|
|
(21
|
)
|
Charter
convertible note repurchases / exchanges
|
|
|
20
|
|
|
3
|
|
|
(10
|
)
|
Charter
preferred stock repurchase
|
|
|
--
|
|
|
23
|
|
|
--
|
|
CC
V Holdings notes repurchase
|
|
|
--
|
|
|
(5
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101
|
|
$
|
521
|
|
$
|
(31
|
)
|
For
more
information, see Note 9 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary
Data.”
Other
income, net. The
increases in other income, net are attributable to the following (dollars in
millions):
|
|
2006
compared
to
2005
|
|
2005
compared
to
2004
|
|
|
|
|
|
|
|
Decreases
in gain on derivative instruments and
hedging
activities, net
|
|
$
|
(44
|
)
|
$
|
(19
|
)
|
Decreases
in minority interest
|
|
|
(5
|
)
|
|
(18
|
)
|
Increase
(decreases) in investment income
|
|
|
(6
|
)
|
|
18
|
|
Loss
on debt to equity conversions
|
|
|
--
|
|
|
23
|
|
Other,
net
|
|
|
2
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(53
|
)
|
$
|
5
|
|
For
more
information, see Note 19 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Income
tax benefit (expense). Income
tax expense in 2006 and 2005 was 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. Income tax
expense was offset by deferred tax benefits of $30 million related to asset
impairment charges recorded in the year ended December 31, 2006. 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.
Income
(loss) from discontinued operations, net of tax.
Income
from discontinued operations, net of tax increased in 2006 compared to 2005
due
to a gain of $182 million (net of $18 million of tax recorded in the fourth
quarter of 2006) recognized in 2006 on the sale of the West Virginia and
Virginia systems. Income
from discontinued operations, net of tax increased in 2005 compared to a loss
from discontinued operations, net of tax in 2004, primarily
due to the impairment of franchises recognized in 2004 described
above.
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. The
impact to net loss in 2006
and 2005
of asset impairment charges, extinguishment of debt, and gain on discontinued
operations, was to decrease net loss by approximately $124 million and
$482 million, respectively. The impact to net loss in 2004 of the
impairment of franchises and cumulative effect of accounting change was to
increase net loss by approximately $3.0 billion.
Preferred
stock dividends. On
August
31, 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.
Loss
per common share. During
2006 and 2005, net loss per common share increased by $1.00 and decreased by
$11.34, or 32% and 78%, respectively, as a result of the factors described
above.
Liquidity
and Capital Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
Overview
of Our Debt and Liquidity
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, proceeds from 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, 2006, we generated $323
million of net cash flows from operating activities after paying cash interest
of $1.7 billion. In
addition, we received proceeds from the sale of assets of approximately $1.0
billion and used $1.1 billion for purchases of property, plant and equipment.
Finally,
we had net cash flows used in financing activities of $219 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 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 will be adequate to meet our cash needs
in
2007. We believe that cash flows from operating activities and amounts available
under our credit facilities may not be sufficient to fund our operations and
satisfy our interest and principal repayment obligations in 2008, and will
not
be sufficient to fund such needs in 2009 and beyond. We continue to work with
our financial advisors concerning our approach to addressing liquidity, debt
maturities and our overall balance sheet leverage.
We
have a
significant level of debt. As of December 31, 2006, the accreted value of
our total debt was approximately $19.1 billion, as summarized below (dollars
in
millions):
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
Semi-Annual
|
|
|
|
|
Principal
|
|
Accreted
|
|
Interest
Payment
|
|
Maturity
|
|
|
Amount
|
|
Value(a)
|
|
Dates
|
|
Date(b)
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due 2009(c)
|
|
$
|
413
|
|
$
|
408
|
|
|
5/16
& 11/16
|
|
|
11/16/09
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.250%
senior notes due 2007
|
|
|
105
|
|
|
105
|
|
|
4/1
& 10/1
|
|
|
4/1/07
|
|
|
8.625%
senior notes due 2009
|
|
|
187
|
|
|
187
|
|
|
4/1
& 10/1
|
|
|
4/1/09
|
|
|
10.000%
senior notes due 2009
|
|
|
105
|
|
|
105
|
|
|
4/1
& 10/1
|
|
|
4/1/09
|
|
|
10.750%
senior notes due 2009
|
|
|
71
|
|
|
71
|
|
|
4/1
& 10/1
|
|
|
10/1/09
|
|
|
9.625%
senior notes due 2009
|
|
|
52
|
|
|
52
|
|
|
5/15
& 11/15
|
|
|
11/15/09
|
|
|
10.250%
senior notes due 2010
|
|
|
32
|
|
|
32
|
|
|
1/15
& 7/15
|
|
|
1/15/10
|
|
|
11.750%
senior discount notes due 2010
|
|
|
21
|
|
|
21
|
|
|
1/15
& 7/15
|
|
|
1/15/10
|
|
|
11.125%
senior notes due 2011
|
|
|
52
|
|
|
52
|
|
|
1/15
& 7/15
|
|
|
1/15/11
|
|
|
13.500%
senior discount notes due 2011
|
|
|
62
|
|
|
62
|
|
|
1/15
& 7/15
|
|
|
1/15/11
|
|
|
9.920%
senior discount notes due 2011
|
|
|
63
|
|
|
63
|
|
|
4/1
& 10/1
|
|
|
4/1/11
|
|
|
10.000%
senior notes due 2011
|
|
|
71
|
|
|
71
|
|
|
5/15
& 11/15
|
|
|
5/15/11
|
|
|
11.750%
senior discount notes due 2011
|
|
|
55
|
|
|
55
|
|
|
5/15
& 11/15
|
|
|
5/15/11
|
|
|
12.125%
senior discount notes due 2012
|
|
|
91
|
|
|
91
|
|
|
1/15
& 7/15
|
|
|
1/15/12
|
CIH
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due 2014
|
|
|
151
|
|
|
151
|
|
|
1/15
& 7/15
|
|
|
1/15/14
|
|
|
13.500%
senior discount notes due 2014
|
|
|
581
|
|
|
581
|
|
|
1/15
& 7/15
|
|
|
1/15/14
|
|
|
9.920%
senior discount notes due 2014
|
|
|
471
|
|
|
471
|
|
|
4/1
& 10/1
|
|
|
4/1/14
|
|
|
10.000%
senior notes due 2014
|
|
|
299
|
|
|
299
|
|
|
5/15
& 11/15
|
|
|
5/15/14
|
|
|
11.750%
senior discount notes due 2014
|
|
|
815
|
|
|
815
|
|
|
5/15
& 11/15
|
|
|
5/15/14
|
|
|
12.125%
senior discount notes due 2015
|
|
|
217
|
|
|
216
|
|
|
1/15
& 7/15
|
|
|
1/15/15
|
CCH
I (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.00%
senior notes due 2015
|
|
|
3,987
|
|
|
4,092
|
|
|
4/1
& 10/1
|
|
|
10/1/15
|
CCH
II (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due 2010
|
|
|
2,198
|
|
|
2,190
|
|
|
3/15
& 9/15
|
|
|
9/15/10
|
10.250%
senior notes due 2013
|
|
|
250
|
|
|
262
|
|
|
4/1
& 10/1
|
|
|
10/1/13
|
CCO
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
floating notes due 2010
|
|
|
550
|
|
|
550
|
|
|
3/15,
6/15,
9/15
& 12/15
|
|
|
12/15/10
|
8
3/4% senior notes due 2013
|
|
|
800
|
|
|
795
|
|
|
5/15
& 11/15
|
|
|
11/15/13
|
Charter
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8%
senior second-lien notes due 2012
|
|
|
1,100
|
|
|
1,100
|
|
|
4/30
& 10/30
|
|
|
4/30/12
|
|
|
8
3/8% senior second-lien notes due 2014
|
|
|
770
|
|
|
770
|
|
|
4/30
& 10/30
|
|
|
4/30/14
|
|
|
Credit
Facilities
|
|
|
5,395
|
|
|
5,395
|
|
|
|
|
|
varies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,964
|
|
$
|
19,062
|
(d)
|
|
|
|
|
|
(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. Certain of the CIH notes, CCH I notes, and CCH II notes issued
in
exchange for Charter Holdings notes and Charter convertible notes in
2005
and 2006 are recorded for financial reporting purposes at values different
from the current accreted value for legal purposes and notes indenture
purposes (the amount that is currently payable if the debt becomes
immediately due). As of December 31, 2006, 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
in 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
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 413.2231 shares per $1,000 principal
amount of notes, which is equivalent to a price of $2.42 per share.
Certain anti-dilutive provisions cause adjustments to occur automatically
upon the occurrence of specified events. Additionally, the conversion
ratio may be adjusted by us under certain circumstances.
|
(d)
|
Not
included within total long-term debt is the $57 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.”
|
In
2007,
$130 million of our debt matures, and in 2008, an additional $50 million
matures. In 2009 and beyond, significant additional amounts will become due
under our remaining long-term debt obligations. The following table summarizes
our payment obligations as of December 31, 2006 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)
|
$
|
18,964
|
|
$
|
130
|
|
$
|
928
|
|
$
|
3,599
|
|
$
|
14,307
|
Long-Term
Debt Interest Payments (2)
|
|
11,811
|
|
|
1,768
|
|
|
3,543
|
|
|
3,097
|
|
|
3,403
|
Payments
on Interest Rate Instruments (3)
|
|
1
|
|
|
--
|
|
|
1
|
|
|
--
|
|
|
--
|
Capital
and Operating Lease Obligations (4)
|
|
95
|
|
|
20
|
|
|
32
|
|
|
25
|
|
|
18
|
Programming
Minimum Commitments (5)
|
|
854
|
|
|
349
|
|
|
505
|
|
|
--
|
|
|
--
|
Other
(6)
|
|
423
|
|
|
284
|
|
|
69
|
|
|
48
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
32,148
|
|
$
|
2,551
|
|
$
|
5,078
|
|
$
|
6,769
|
|
$
|
17,750
|
(1)
|
|
The
table presents maturities of long-term debt outstanding as of
December 31, 2006. Refer to Notes 9 and 23 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. Does not include
the
$57 million CCHC accreting note which is included in note payable
-
related party. If not redeemed prior to maturity in 2020, $380 million
would be due under this note.
|
|
|
|
(2)
|
|
Interest
payments on variable debt are estimated using amounts outstanding
at
December 31, 2006 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, 2006.
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, 2006.
|
|
|
|
(4)
|
|
The
Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for
the years
ended December 31, 2006, 2005, and 2004, were $23 million, $22 million,
and $22 million, respectively.
|
|
|
|
(5)
|
|
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 approximately
$1.5 billion, $1.4 billion, and $1.3 billion, for the years ended
December 31, 2006, 2005, and 2004, 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.
|
|
|
|
(6)
|
|
“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
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, 2006, 2005, and 2004, was $44 million, $44
million, and $42 million, respectively.
|
|
·
|
We
pay franchise fees under multi-year franchise agreements based on
a
percentage of revenues generated 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 $175 million,
$165 million, and $159 million for the years ended December 31, 2006,
2005, and 2004, respectively.
|
|
·
|
We
also have $147 million in letters of credit, primarily to our various
worker’s compensation, property and 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.
|
Credit
Facility Availability
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Operating credit facilities. The
Charter Operating credit facilities, along with our indentures, 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,
2006, we are in compliance with the covenants under our credit facilities,
as
well as under our indentures, and we expect to remain in compliance with those
covenants for the next twelve months. As of December 31, 2006, our potential
availability under our credit facilities totaled approximately $1.3 billion,
although the actual availability at that time was only $1.1 billion because
of
limits imposed by covenant restrictions. Continued access to our credit
facilities 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 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.
Limitations
on Distributions
Charter’s
ability to make interest payments on its convertible senior notes, and, in
2009,
to repay the outstanding principal of its convertible senior notes of $413
million, will depend on its ability to raise additional capital and/or on
receipt of payments or distributions from Charter Holdco and its subsidiaries.
As of December 31, 2006, Charter Holdco was owed $3 million in intercompany
loans from its subsidiaries and had $8 million in cash, which were available
to
pay interest and principal on Charter’s convertible senior notes. In addition,
Charter has $50 million of U.S. government securities pledged as security for
the semi-annual interest payments on Charter’s convertible senior notes
scheduled in 2007. CCHC also holds $450 million of Charter’s convertible senior
notes. As a result, if CCHC continues to hold those notes, CCHC will
receive interest payments on the convertible senior notes from the pledged
government securities. The cumulative amount of interest payments expected
to be received by CCHC may be available to be distributed to pay interest on
the
outstanding $413 million of the convertible senior notes due in 2008 and May
2009, although CCHC may use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for
payment of principal on parent company notes, are
restricted under the indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes and Charter Operating notes unless
there is no default under the applicable indenture and each applicable
subsidiary’s leverage ratio test is met at the time of such distribution, and,
in the case of such distributions by Charter Operating for payment of principal
on a portion of the outstanding CCO Holdings notes, other specified tests are
met. For
the
quarter ended December 31, 2006, there was no default under any of these
indentures, and each such subsidiary met its applicable leverage ratio tests
based on December 31, 2006 financial results. Such
distributions would be restricted, however, if any such subsidiary fails to
meet
these tests at the time of the contemplated distribution. 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
the
contemplated distribution. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in the credit facilities. Distributions
by CIH, CCH I, CCH II, CCO Holdings and Charter
Operating
to a parent company for payment of parent company interest are permitted if
there is no default under the aforementioned indentures, and in the case of
such
distributions by Charter Operating for payment of interest on a portion of
the
outstanding CCO Holdings notes, Charter Operating’s leverage ratio and other
specified tests are met.
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 December
31, 2006, there was no default under Charter Holdings’ indentures, and the other
specified tests were met.
Such
distributions would be restricted, however, if Charter Holdings fails to meet
these tests at the time of the contemplated distribution. 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 the contemplated 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.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by our subsidiaries may be limited by applicable
law. See “Risk Factors —
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our subsidiaries.
Restrictions in our subsidiaries’ debt instruments and under applicable law
limit their ability to provide funds to us or our various debt
issuers.”
Access
to Capital
Our
significant amount of debt could negatively affect our ability to access
additional capital or the pricing or terms under which such capital might be
available in the future. Additionally, our ability to incur additional debt
may
be limited by the restrictive covenants in our indentures 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, 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, or through additional debt or equity financings, we would
consider:
|
•
|
issuing
equity that would significantly dilute existing shareholders;
|
|
•
|
issuing
convertible debt or other debt securities that may have structural
or
other priority over our existing notes and may also, in the case
of
convertible debt, significantly dilute Charter’s existing shareholders;
|
|
•
|
further
reducing our expenses and capital expenditures, which may impair
our
ability to increase revenue and grow operating cash flows;
|
|
•
|
selling
assets; or
|
|
•
|
requesting
waivers or amendments with respect to our credit facilities, the
availability and terms of which would be subject to negotiation;
and
cannot be assured.
|
If
the
above strategies are not successful, we could be forced to restructure our
obligations or seek bankruptcy protection. 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 the full
principal and interest payments to which they are contractually entitled.
Recent
Financing Transactions
We
have
completed many capital transactions since the formation of Charter. In 2006,
we
completed the following capital transactions, all of which impacted our
liquidity.
In
January 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which were provided to Charter Operating, which
used
such funds to reduce borrowings, but not commitments, under the revolving
portion of its credit facilities.
In
April
2006, Charter Operating completed a $6.85 billion refinancing of its credit
facilities including a new $350 million revolving/term facility (which converts
to a term loan no later than April 2007), a $5.0 billion term loan due in 2013,
and certain amendments to the existing $1.5 billion revolving credit facility.
In addition, the refinancing reduced margins on Eurodollar rate term loans
to
2.625% from a weighted average of 3.15% previously, and
margins
on base rate term loans to 1.625% from a weighted average of 2.15% previously.
Concurrent with this refinancing, the CCO Holdings bridge loan was
terminated.
In
September 2006, Charter Holdings and its wholly owned subsidiaries, CCH I and
CCH II, completed the exchange of approximately $797 million in total principal
amount of outstanding debt securities of Charter Holdings. Holders of Charter
Holdings notes due in 2009-2010 tendered $308 million principal amount of notes
for $250 million principal amount of new 10.25% CCH II notes due 2013 and $37
million principal amount of 11% CCH I notes due 2015. Holders of Charter
Holdings notes due 2011-2012 tendered $490 million principal amount of notes
for
$425 million principal amount of 11% CCH I notes due 2015. The Charter Holdings
notes received in the exchanges were thereafter distributed to Charter Holdings
and retired. Also in September 2006, CCHC and CCH II completed the exchange
of
$450 million principal amount of Charter’s outstanding 5.875% senior convertible
notes due 2009 for $188 million in cash, 45 million shares of Charter’s Class A
common stock and $146 million principal amount of 10.25% CCH II notes due 2010.
The convertible notes received in the exchange are held by CCHC.
Sale
of Assets
In
2006,
we closed asset sales for total net proceeds of approximately $1.0 billion.
We
used the net proceeds from the asset sales to reduce borrowings, but not
commitments, under the revolving portion of our credit facilities. Also in
2006,
we recorded asset impairment charges of $159 million related to cable systems
meeting the criteria of assets held for sale.
Acquisition
In
January 2006, we closed the purchase of certain cable systems in Minnesota
from
Seren Innovations, Inc. We acquired approximately 17,500 analog video customers,
8,000 digital video customers, 13,200 high-speed Internet customers, and 14,500
telephone customers, for a total purchase price of approximately $42
million.
Historical
Operating, Financing and Investing Activities
Cash
and Cash Equivalents. We
held
$60 million in cash and cash equivalents as of December 31, 2006 compared to
$21
million as of December 31, 2005.
Operating
Activities.
Net cash
provided by operating activities increased $63 million, or 24% from $260 million
for the year ended December 31, 2005 to $323 million for the year ended December
31, 2006. For the year ended December 31, 2006, net cash provided by operating
activities increased primarily as a result of changes in operating assets and
liabilities that provided $240 million more cash during the year ended December
31, 2006 than the corresponding period in 2005, offset by an increase in cash
interest expense of $214 million over the corresponding prior
period.
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.
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.
Investing
Activities. Net
cash
used in investing activities for the years ended December 31, 2006 and 2005
was
$65 million and $1.0 billion, respectively. Investing activities used $960
million less cash during the year ended December 31, 2006 than the corresponding
period in 2005 primarily due to $1.0 billion of proceeds received in 2006 from
the sale of assets, including cable systems.
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 during 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.
Financing
Activities. Net
cash
used by financing activities was $219 million and net cash provided by financing
activities was $136 million for the years ended December 31, 2006 and 2005,
respectively. The decrease in cash provided during the year ended December
31,
2006 compared to the corresponding period in 2005, was primarily the result
of
an increase in repayments of long-term debt.
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 a decrease in borrowings of long-term
debt
and proceeds from issuance of debt offset by a decrease in repayments of
long-term debt.
Capital
Expenditures
We
have
significant ongoing capital expenditure requirements. Capital expenditures
were
$1.1 billion, $1.1 billion, and $924 million for the years ended December 31,
2006, 2005, and 2004, respectively. The majority of the capital expenditures
in
2006, 2005, and 2004 related to our scalable infrastructure and customer premise
equipment. 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, 2006, 2005, and 2004, our
liabilities related to capital expenditures increased by $24 million, and $8
million, and decreased $43 million, respectively.
During
2007, we expect capital expenditures to be approximately $1.2 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 scalable infrastructure. We expect to fund
capital expenditures for 2007 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
then 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 reporting capital
expenditures and customers among peer companies in the cable industry. These
disclosures are not required disclosures under GAAP, nor do they impact our
accounting for capital expenditures under GAAP.
The
following table presents our major capital expenditures categories in accordance
with NCTA disclosure guidelines for the years ended December 31, 2006,
2005, and 2004 (dollars in millions):
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Customer
premise equipment (a)
|
|
$
|
507
|
|
$
|
434
|
|
$
|
451
|
|
Scalable
infrastructure (b)
|
|
|
214
|
|
|
174
|
|
|
108
|
|
Line
extensions (c)
|
|
|
107
|
|
|
134
|
|
|
131
|
|
Upgrade/Rebuild
(d)
|
|
|
45
|
|
|
49
|
|
|
49
|
|
Support
capital (e)
|
|
|
230
|
|
|
297
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$
|
1,103
|
|
$
|
1,088
|
|
$
|
924
|
|
(a)
|
Customer
premise equipment includes costs for set-top boxes and cable modems,
etc.
used at the customer residence to secure new customers, revenue generating
units, and additional bandwidth. It also includes customer installation
costs in accordance with SFAS 51.
|
(b)
|
Scalable
infrastructure includes costs not related to customer premise equipment
or
our network, to secure growth of new customers, revenue generating
units,
and additional bandwidth revenues, or to provide service enhancements
(e.g., headend equipment).
|
(c)
|
Line
extensions include network costs (e.g., fiber/coaxial cable, amplifiers,
electronic equipment, make-ready and design engineering) associated
with
entering new service areas.
|
(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 (e.g., non-network equipment, land, buildings
and
vehicles) due to technological and physical obsolescence.
|
Description
of Our Outstanding Debt
Overview
As
of
December 31, 2006 and 2005, our long-term debt totaled approximately $19.1
billion and $19.4 billion, respectively. This debt was comprised of
approximately $5.4 billion and $5.7 billion of credit facility debt, $13.3
billion and $12.8 billion accreted amount of high-yield notes and $408 million
and $863 million accreted amount of convertible senior notes at December 31,
2006 and 2005, respectively. See the organizational chart on page 4 and the
first table under “ — Liquidity and Capital Resources — Overview of Our Debt and
Liquidity” for debt outstanding by issuer.
As
of
December 31, 2006 and 2005, the blended weighted average interest rate on our
debt was 9.5% and 9.3%, respectively. The interest rate on approximately 78%
and
77% of the total principal amount of our debt was effectively fixed, including
the effects of our interest rate hedge agreements, as of December 31, 2006
and
2005, respectively. The fair value of our high-yield notes was $13.3 billion
and
$10.4 billion at December 31, 2006 and 2005, respectively. The fair value of
our
convertible senior notes was $576 million and $647 million at December 31,
2006
and 2005, respectively. The fair value of our credit facilities was $5.4 billion
and $5.7 billion at December 31, 2006 and 2005, respectively. The fair value
of
high-yield and convertible notes was based on quoted market prices, and the
fair
value of the credit facilities was based on dealer quotations.
The
following description is a summary of certain provisions of our credit
facilities and our notes (the “Debt Agreements”). The summary does not
restate the terms of the Debt Agreements in their entirety, nor does it describe
all terms of the Debt Agreements. The agreements and instruments governing
each of the Debt Agreements are complicated and you should consult such
agreements and instruments for more detailed information regarding the Debt
Agreements.
Charter
Operating Credit Facilities - General
The
Charter Operating credit facilities were amended and restated in April 2006,
among other things, to defer maturities and to increase availability under
these
facilities. The Charter Operating credit facilities provide borrowing
availability of up to $6.85 billion as follows:
|
•
|
a
term facility with a total principal amount of $5.0 billion,
repayable in 23 equal quarterly installments, commencing
September 30, 2007 and aggregating in each loan year to 1% of the
original amount of the term facility, with the remaining balance
due at
final maturity in 2013;
|
|
|
|
|
•
|
a
revolving credit facility of $1.5 billion, with a maturity date in
2010; and
|
|
|
|
|
•
|
a
revolving credit facility (the “R/T Facility”) of $350.0 million,
that converts to term loans no later than April 2007, repayable on
the
same terms as the term facility described
above.
|
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 revolving credit
facility and R/T Facility (until converted to term loans), up to 2.625% for
the
term facility and R/T Facility loans after converting to term loans, and for
base rate loans of up to 2.00% for the revolving credit facility and R/T
Facility (until converted to term loans), and up to 1.625% for the term facility
and R/T Facility loans after converting to term loans. A quarterly commitment
fee of up to .75% is payable on the average daily unborrowed balance of the
revolving credit facility and, until converted into term loans, the R/T
Facility.
The
obligations of Charter Operating 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
certain subsidiaries, including immaterial subsidiaries and subsidiaries
precluded from guaranteeing by reason of the provisions of other indebtedness
to
which they are subject (the “non-guarantor subsidiaries”). The Obligations are
also secured by (i) a lien on substantially all of the assets of Charter
Operating and its subsidiaries (other than assets of the non-guarantor
subsidiaries), and (ii) a pledge by CCO Holdings of the equity interests
owned by it in Charter Operating, as well as intercompany obligations owing
to
it by Charter Operating.
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
and
interest coverage to be tested as of the end of each quarter. The maximum
allowable leverage ratio is 4.25 to 1.0 until maturity. Additionally, the
Charter Operating credit facilities contain provisions requiring mandatory
loan
prepayments under specific circumstances, including in connection with certain
sales of assets, so long as the proceeds have not been reinvested in the
business.
The
Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the Charter convertible
notes, the CCHC notes, the Charter Holdings notes, the CIH notes, the CCH I
notes, the CCH II notes, the CCO Holdings notes, and the Charter Operating
second-lien 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, 2005 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 and Charter
Operating and its subsidiaries 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.
|
Outstanding
Notes
Charter
Communications, Inc. 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, subject to applicable limitations of the NASDAQ stock market.
Holders who convert their notes prior to November 16, 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. We expect to
use
such securities to fund the first six interest payments under the notes, four
of
which were funded in 2005 and 2006. The fair value of the pledged securities
was
$49 million at December 31, 2006.
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, or $4.356 per share, if such 30 trading
day period begins prior to November 16, 2007, or 150% of the conversion price,
or $3.63 per share, 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 Class B 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 is $57 million as of December 31, 2006 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
From
March 1999 through January 2002, Charter Holdings and Charter Communications
Holdings Capital Corporation (“Charter Capital”) jointly issued $10.2 billion
total principal amount of notes, of which $967 million total principal amount
was outstanding as of December 31, 2006. The notes were issued over 15 series
of
notes with maturities from 2007 through 2012 and have varying interest rates
as
set forth in the table above under “Liquidity and Capital Resources - Overview
of Our Debt and Liquidity.” The Charter Holdings notes are senior debt
obligations of Charter Holdings and Charter Capital. They rank equally with
all
other current and future unsecured, 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 Charter Operating notes,
and
the Charter Operating credit facilities.
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, issued over six series of notes and with varying
interest rates as set forth in the table above under “Liquidity and Capital
Resources - Overview of Our Debt and Liquidity.” The notes are guaranteed on a
senior unsecured basis 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 Charter Operating
notes and the Charter Operating credit facilities.
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 and, in
September 2006, issued an additional $462 million total principal amount of
such
notes in exchange for an aggregate of $527 million of certain Charter Holdings
notes. The notes are guaranteed on a senior unsecured basis 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, and by
a
pledge of the CC VIII interests, and the proceeds thereof.
Such
pledges are subject to significant limitations as described in the related
pledge agreement.
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 Charter Operating notes and the Charter Operating credit
facilities.
CCH
II, LLC Notes
In
September 2003 and January 2006, CCH II and CCH II Capital Corp. jointly issued
approximately $2.2 billion total principal amount of 10.25% senior notes due
2010 (the “CCH II 2010 Notes”) and, in September 2006, issued $250 million total
principal amount of 10.25% senior notes due 2013 (the “CCH II 2013 Notes” and,
together with the CCH II 2010 Notes, the “CCH II notes”) in exchange for an
aggregate of $270 million of certain Charter Holdings notes. The CCH II Notes
are senior debt obligations of CCH II and CCH II Capital Corp. They rank equally
with all other current and future unsecured, unsubordinated obligations of
CCH
II and CCH II Capital Corp. The CCH II 2013 Notes are guaranteed on a senior
unsecured basis by Charter Holdings. The CCH II notes are structurally
subordinated to
all
obligations of subsidiaries of CCH II, including the CCO Holdings notes, the
Charter Operating notes and the Charter Operating credit
facilities.
CCO
Holdings, LLC Notes
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 “CCOH 2013 Notes”) and, in
December 2004, issued $550 million total principal amount of senior floating
rate notes due 2010 (the “CCOH 2010 Notes and, together with the CCOH 2013
Notes, the CCOH Notes”). 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.
The
CCO
Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings
Capital Corp. They rank equally with all other current and future unsecured,
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 Charter Operating notes and the
Charter Operating credit facilities.
Charter
Communications Operating, LLC Notes
On
April
27, 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. 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.
Subject
to specified limitations, CCO Holdings and those subsidiaries of Charter
Operating that are guarantors of, or otherwise obligors with respect to,
indebtedness under the Charter Operating credit facilities and related
obligations are 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;
|
|
·
|
senior
in right of payment to any future subordinated indebtedness of such
guarantor; and
|
|
·
|
effectively
senior to the relevant subsidiary’s unsecured indebtedness, to the extent
of the value of the collateral but subject to the prior lien of the
credit
facilities.
|
The
Charter Operating notes and related note guarantees are secured by a
second-priority lien on 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
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.
The
Charter Operating notes are senior debt obligations of Charter Operating and
Charter Communications Operating Capital Corp. To the extent of the value of
the
collateral (but subject to the prior lien of the credit facilities), they rank
effectively senior to all of Charter Operating’s future unsecured senior
indebtedness.
Redemption
Provisions of Our High Yield Notes
The
various notes issued by our subsidiaries included in the table may be redeemed
in accordance with the following table or are not redeemable until maturity
as
indicated:
Note
Series
|
|
Redemption
Dates
|
|
Percentage
of Principal
|
|
|
|
|
|
|
|
|
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
8.250%
senior notes due 2007
|
|
|
Not
callable
|
|
|
|
N/A
|
|
8.625%
senior notes due 2009
|
|
|
April
1, 2006 - March 31, 2007
|
|
|
|
101.438
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
10.000%
senior notes due 2009
|
|
|
Not
callable
|
|
|
|
N/A
|
|
10.750%
senior discount notes due 2009
|
|
|
Not
callable
|
|
|
|
N/A
|
|
9.625%
senor notes due 2009
|
|
|
Not
callable
|
|
|
|
N/A
|
|
10.250%
senior notes due 2010
|
|
|
January
15, 2007 - January 14, 2008
|
|
|
|
101.708
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2010
|
|
|
January
15, 2007 - January 14, 2008
|
|
|
|
101.958
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
11.125%
senior notes due 2011
|
|
|
January
15, 2007 - January 14, 2008
|
|
|
|
103.708
|
%
|
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
101.854
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
13.500%
senior discount notes due 2011
|
|
|
January
15, 2007 - January 14, 2008
|
|
|
|
104.500
|
%
|
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
102.250
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
9.920%
senior discount notes due 2011
|
|
|
April
1, 2006 - March 31, 2007
|
|
|
|
101.653
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
10.000%
senior notes due 2011
|
|
|
May
15, 2006 - May 14, 2007
|
|
|
|
105.000
|
%
|
|
|
|
May
15, 2007 - May 14, 2008
|
|
|
|
103.333
|
%
|
|
|
|
May
15, 2008 - May 14, 2009
|
|
|
|
101.667
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2011
|
|
|
May
15, 2006 - May 14, 2007
|
|
|
|
105.875
|
%
|
|
|
|
May
15, 2007 - May 14, 2008
|
|
|
|
103.917
|
%
|
|
|
|
May
15, 2008 - May 14, 2009
|
|
|
|
101.958
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
12.125%
senior discount notes due 2012
|
|
|
January
15, 2007 - January 14, 2008
|
|
|
|
106.063
|
%
|
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
104.042
|
%
|
|
|
|
January
15, 2009 - January 14, 2010
|
|
|
|
102.021
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CIH:
|
|
|
|
|
|
|
|
|
11.125%
senior discount notes due 2014
|
|
|
September
30, 2007 - January 14, 2008
|
|
|
|
103.708
|
%
|
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
101.854
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
13.500%
senior discount notes due 2014
|
|
|
September
30, 2007 - January 14, 2008
|
|
|
|
104.500
|
%
|
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
102.250
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
9.920%
senior discount notes due 2014
|
|
|
September
30, 2007 - Thereafter
|
|
|
|
100.000
|
%
|
10.000%
senior discount notes due 2014
|
|
|
September
30, 2007 - May 14, 2008
|
|
|
|
103.333
|
%
|
|
|
|
May
15, 2008 - May 14, 2009
|
|
|
|
101.667
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2014
|
|
|
September
30, 2007 - May 14, 2008
|
|
|
|
103.917
|
%
|
|
|
|
May
15, 2008 - May 14, 2009
|
|
|
|
101.958
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
12.125%
senior discount notes due 2015
|
|
|
September
30, 2007 - January 14, 2008
|
|
|
|
106.063
|
%
|
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
104.042
|
%
|
|
|
|
January
15, 2009 - January 14, 2010
|
|
|
|
102.021
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CCH
I:
|
|
|
|
|
|
|
|
|
11.000%
senior notes due 2015*
|
|
|
October
1, 2010 - September 30, 2011
|
|
|
|
105.500
|
%
|
|
|
|
October
1, 2011 - September 30, 2012
|
|
|
|
102.750
|
%
|
|
|
|
October
1, 2012 - September 30, 2013
|
|
|
|
101.375
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CCH
II:
|
|
|
|
|
|
|
|
|
10.250%
senior notes due 2010
|
|
|
September
15, 2008 - September 14, 2009
|
|
|
|
105.125
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
10.250%
senior notes due 2013**
|
|
|
October
1, 2010 - September 30, 2011
|
|
|
|
105.125
|
%
|
|
|
|
October
1, 2011 - September 30, 2012
|
|
|
|
102.563
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CCO
Holdings:
|
|
|
|
|
|
|
|
|
Senior
floating notes due 2010
|
|
|
December
15, 2006 - December 14, 2007
|
|
|
|
102.000
|
%
|
|
|
|
December
15, 2007 - December 14, 2008
|
|
|
|
101.000
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
8
3/4% senior notes due 2013
|
|
|
November
15, 2008 - November 14, 2009
|
|
|
|
104.375
|
%
|
|
|
|
November
15, 2009 - November 14, 2010
|
|
|
|
102.917
|
%
|
|
|
|
November
15, 2010 - November 14, 2011
|
|
|
|
101.458
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
Charter
Operating:***
|
|
|
|
|
|
|
|
|
8%
senior second-lien notes due 2012
|
|
|
Any
time
|
|
|
|
****
|
|
8
3/8% senior second-lien notes due 2014
|
|
|
April
30, 2009 - April 29, 2010
|
|
|
|
104.188
|
%
|
|
|
|
April
30, 2010 - April 29, 2011
|
|
|
|
102.792
|
%
|
|
|
|
April
30, 2011 - April 29, 2012
|
|
|
|
101.396
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
* CCH
I
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.
** CCH
II
may, prior to October 1, 2009 in the event of a qualified equity offering
providing sufficient proceeds, redeem up to 35% of the aggregate principal
amount of the CCH II notes at a redemption price of 110.25% of the principal
amount plus accrued and unpaid interest.
*** Charter
Operating may, prior to April 30, 2007 in the event of a qualified equity
offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the Charter Operating notes at a redemption price of
108.375% with respect to the 8 3/8% senior second-lien notes due 2014 Notes
and
a redemption price of 108% with respect to the 8% senior second-lien notes
due
2012.
**** Charter
Operating may, at any time and from time to time, at their option, redeem the
outstanding 8% second lien notes due 2012, in whole or in part, at a redemption
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date, plus the Make-Whole Premium. The
Make-Whole Premium is an amount equal to the excess of (a) the present value
of
the remaining interest and principal payments due on a 8% senior second-lien
notes due 2012 to its final maturity date, computed using a discount rate equal
to the Treasury Rate on such date plus 0.50%, over (b) the outstanding principal
amount of such Note.
In
the
event that a specified change of control event occurs, each of the respective
issuers of the notes must offer to repurchase any then outstanding notes at
101%
of their principal amount or accrued value, as applicable, plus accrued and
unpaid interest, if any.
Summary
of Restrictive Covenants of Our High Yield Notes
The
following description is a summary of certain restrictions of our Debt
Agreements. The summary does not restate the terms of the Debt Agreements
in their entirety, nor does it describe all restrictions of the Debt Agreements.
The agreements and instruments governing each of the Debt Agreements are
complicated and you should consult such agreements and instruments for more
detailed information regarding the Debt Agreements.
The
notes
issued by Charter Holdings, CIH, CCH I, CCH II, CCO Holdings and Charter
Operating (together, the “note issuers”) were issued pursuant to indentures that
contain covenants that restrict the ability of the note issuers and their
subsidiaries to, among other things:
· |
pay
dividends or make distributions in respect of capital stock and other
restricted payments;
|
· |
consolidate,
merge, or sell all or substantially all
assets;
|
· |
enter
into sale leaseback transactions;
|
· |
create
restrictions on the ability of restricted subsidiaries to make certain
payments; or
|
· |
enter
into transactions with affiliates.
|
However,
such covenants are subject to a number of important qualifications and
exceptions. Below we set forth a brief summary of certain of the restrictive
covenants.
Restrictions
on Additional Debt
The
limitations on incurrence of debt and issuance of preferred stock contained
in
various indentures permit each of the respective notes issuers and its
restricted subsidiaries to incur additional debt or issue preferred stock,
so
long as, after
giving pro forma effect to the incurrence, the leverage ratio would be below
a
specified level for each of the note issuers as follows:
Issuer
|
|
Leverage
Ratio
|
|
|
|
Charter
Holdings
|
|
8.75
to 1
|
CIH
|
|
8.75
to 1
|
CCH
I
|
|
7.5
to 1
|
CCH
II
|
|
5.5
to 1
|
CCOH
|
|
4.5
to 1
|
CCO
|
|
4.25
to 1
|
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, each issuer
and
their restricted subsidiaries are permitted to issue among other permitted
indebtedness:
|
·
|
up
to an amount of debt under credit facilities not otherwise allocated
as
indicated below:
|
· |
Charter
Holdings: $3.5 billion
|
· |
CIH,
CCH I, CCH II and CCO Holdings: $9.75
billion
|
· |
Charter
Operating: $6.8 billion
|
|
·
|
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;
|
|
·
|
Charter
Holdings and CIH may incur additional debt in an amount equal to
200% of
proceeds of new cash equity proceeds received since March 1999, the
date
of our first indenture, and not allocated for restricted payments
or
permitted investments (the “Equity Proceeds Basket”); 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.
|
Indebtedness
under a single facility or agreement may be incurred in part under one of the
categories listed above and in part under another, and generally may also later
be reclassified into another category including as debt incurred under the
leverage ratio. Accordingly, indebtedness under our credit facilities is
incurred under a combination of the categories of permitted indebtedness listed
above.
The
restricted subsidiaries of note issuers are generally not permitted to issue
subordinated debt securities.
Restrictions
on Distributions
Generally,
under the various indentures each of the note issuers and their respective
restricted subsidiaries are permitted to pay dividends on or repurchase equity
interests, or make other specified restricted payments, only if the applicable
issuer can incur $1.00 of new debt under the applicable leverage ratio test
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 may be made in a total amount of up to the following amounts for the
applicable issuer as indicated below:
· |
Charter
Holdings: the sum of 100% of Charter Holdings’ Consolidated EBITDA, as
defined, minus 1.2 times its Consolidated Interest Expense, as defined,
plus 100% of new cash and appraised 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;
|
· |
CIH:
the sum of the greater of (a) $500 million or (b) 100% of CIH’s
Consolidated EBITDA, as defined, minus 1.2 times its Consolidated
Interest
Expense, as defined, plus 100% of new cash and appraised 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;
|
· |
CCH
I: the sum of 100%
of CCH I’s Consolidated EBITDA, as defined, minus 1.3 times its
Consolidated Interest Expense, as defined, plus 100% of new cash
and
appraised non-cash equity proceeds received by CCH I and not allocated
to
certain investments, all cumulative from September 28, 2005, plus
$100
million;
|
· |
CCH
II: the sum of 100%
of CCH II’s Consolidated EBITDA, as defined, minus 1.3 times its
Consolidated Interest Expense, as defined, plus 100% of new cash
and
appraised non-cash equity proceeds received by CCH II and not allocated
to
certain investments, cumulatively from July 1, 2003, plus $100
million;
|
· |
CCO
Holdings: the sum of 100%
of CCO Holdings’ Consolidated EBITDA, as defined, minus 1.3 times its
Consolidated Interest Expense, as defined, plus 100% of new cash
and
appraised non-cash equity proceeds received by CCO Holdings and not
allocated to certain investments, cumulatively from October 1, 2003,
plus
$100 million;
and
|
· |
Charter
Operating: the sum of 100%
of Charter Operating’s Consolidated EBITDA, as defined, minus 1.3 times
its Consolidated Interest Expense, as defined, plus 100% of new cash
and
appraised non-cash equity proceeds received by Charter Operating
and not
allocated to certain investments, cumulatively from April 1, 2004,
plus
$100 million.
|
In
addition, each of the note issuers may make distributions or restricted
payments, so long as no default exists or would be caused by transactions among
other distributions or restricted payments:
|
·
|
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 the applicable issuer
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.
|
Each
of
CCH I, CCH II, CCO Holdings, and Charter Operating and their respective
restricted
subsidiaries may make distributions or restricted payments: (i) so long as
certain defaults do not exist and even if the applicable leverage test referred
to above is not met, to enable certain of its parents to pay interest on certain
of their indebtedness or (ii) so long as the applicable issuer could incur
$1.00
of indebtedness under the applicable leverage ratio test referred to above,
to
enable certain of its parents to purchase, redeem or refinance certain
indebtedness.
Restrictions
on Investments
Each
of
the note issuers and their respective restricted subsidiaries may not make
investments except (i) permitted investments or (ii) if, after giving effect
to
the transaction, their leverage would be above the applicable leverage
ratio.
Permitted
investments include, among others:
|
·
|
investments
in and generally among restricted subsidiaries or by restricted
subsidiaries in the applicable
issuer;
|
· |
investments
in productive assets (including through equity investments) aggregating
up
to $150 million since March 1999;
|
· |
other
investments aggregating up to $50 million since March 1999;
and
|
· |
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;
|
· |
investments
aggregating up to $750 million at any time
outstanding;
|
· |
investments
aggregating up to 100% of new cash equity proceeds received by CIH
since
March 1999 and not allocated to the debt incurrence or restricted
payments
covenant (as if CIH had been in existence at all times during such
periods);
|
· |
investments
aggregating up to $750 million at any time
outstanding;
|
· |
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;
|
· |
investments
aggregating up to $750 million at any time
outstanding;
|
· |
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;
|
· |
investments
aggregating up to $750 million at any time
outstanding;
|
· |
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;
|
· |
investments
aggregating up to $750 million at any time
outstanding;
|
· |
investments
aggregating up to 100% of new cash equity proceeds received by CCO
Holdings since April 27, 2004 to the extent the proceeds have not
been
allocated to the restricted payments
covenant.
|
Restrictions
on Liens
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, for the most recent fiscal quarter for which internal financial
reports are available) would exceed 3.75 to 1.0. The restrictions on liens
for
each of the other note issuers only applies to liens on assets of the issuers
themselves and does not restrict liens on assets of subsidiaries. With respect
to all of the note issuers, permitted liens include liens securing indebtedness
and other obligations under credit facilities (subject to specified limitations
in the case of Charter Operating), liens securing the purchase price of financed
new assets, liens securing indebtedness of up to $50 million and other specified
liens.
Restrictions
on the Sale of Assets; Mergers
The
note
issuers 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,
leverage would be below the applicable leverage ratio for the applicable issuer,
no default exists, and the surviving entity is a U.S. entity that assumes the
applicable notes.
The
note
issuers and their restricted subsidiaries may generally not otherwise sell
assets or, in the case of restricted subsidiaries, issue equity interests,
in
excess of $100 million 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. The note issuers and their restricted subsidiaries
are then required within 365 days after any asset sale either to use or commit
to use the net cash proceeds over a specified threshold to acquire assets used
or useful in their businesses or use the net cash proceeds to repay specified
debt, or to offer to repurchase the issuer’s notes with any remaining
proceeds.
Restrictions
on Sale and Leaseback Transactions
The
note
issuers and their restricted subsidiaries may generally not engage in sale
and
leaseback transactions unless, at the time of the transaction, the applicable
issuer could have incurred secured indebtedness under its leverage ratio test
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.
Prohibitions
on Restricting Dividends
The
note
issuers’ restricted subsidiaries may generally not enter into arrangements
involving restrictions on their ability to make dividends or distributions
or
transfer assets to the applicable note issuer unless those restrictions with
respect to financing arrangements are on terms that are no more restrictive
than
those governing the credit facilities existing when they entered into the
applicable indentures or are not materially more restrictive than customary
terms in comparable financings and will not materially impair the applicable
note issuers’ ability to make payments on the notes.
Affiliate
Transactions
The
indentures also restrict the ability of the note issuers and their 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 the applicable note issuer that
the
transaction complies with this covenant, or transactions with affiliates
involving over $50 million without receiving an opinion as to the fairness
to
the holders of such transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national
standing.
Cross
Acceleration
Our
indentures and those of certain of our subsidiaries include various events
of
default, including cross acceleration 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. 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 or the
Charter Operating credit facilities could cause cross-defaults under our
subsidiaries’ indentures.
Recently
Issued Accounting Standards
In
September 2006, the SEC issued SAB 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
which
addresses the effects of prior year uncorrected misstatements in quantifying
misstatements in current year financial statements. Misstatements are required
to be quantified using both the balance-sheet (“iron-curtain”) and
income-statement approach (“rollover”) and evaluated as to whether either
approach results in a material error in light of quantitative and qualitative
factors. SAB 108 is effective for fiscal years ending after November 15, 2006
and we adopted SAB 108 effective for the fiscal year ended December 31, 2006.
The adoption of SAB 108 did not have a material impact on our financial
statements.
In
June
2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109,
which
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. FIN 48 is effective for fiscal years beginning
after
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements,
which
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We will adopt
SFAS 157 effective January 1, 2008. We do not expect that the adoption of SFAS
157 will have a material impact on our financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115,
which
allows measurement at fair value of eligible financial assets and liabilities
that are not otherwise measured at fair value. If the fair value option
for an eligible item is elected, unrealized gains and losses for that item
shall
be reported in current earnings at each subsequent reporting date. SFAS
159 also establishes presentation and disclosure requirements designed to draw
comparison between the different measurement attributes the company elects
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted. We
are currently assessing the impact of SFAS 159 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, 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, 2006 and 2005, our long-term debt totaled approximately $19.1
billion and $19.4 billion, respectively. As of December 31, 2006 and 2005,
the
weighted average interest rate on the credit facility debt was approximately
7.9% and 7.8%, the weighted average interest rate on the high-yield notes was
approximately 10.3% and 10.2%, and the weighted average interest rate on the
convertible senior notes was approximately 6.9% and 6.3%, respectively,
resulting in a blended weighted average interest rate of 9.5% and 9.3%,
respectively. The interest rate on approximately 78% and 77% of the total
principal amount of our debt was effectively fixed, including the effects of
our
interest rate hedge agreements as of December 31, 2006 and 2005, respectively.
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, 2006, 2005, and
2004,
other income, net includes gains of $2 million, $3 million, and $4 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, 2006, 2005, and 2004,
a
loss of $1 million and gains of $16 million and $42 million, respectively,
related to derivative instruments designated as cash flow hedges, were 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 other income,
net,
in our statements of operations. For the years ended December 31, 2006, 2005,
and 2004, other income, net includes gains of $4 million, $47 million, and
$65
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,
2006 (dollars in millions):
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
Fair
Value at December 31, 2006
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
$
|
105
|
|
$
|
--
|
|
$
|
828
|
|
$
|
2,251
|
|
$
|
303
|
|
$
|
9,532
|
|
$
|
13,019
|
|
$
|
13,254
|
|
Average
Interest Rate
|
|
8.25%
|
|
|
--
|
|
|
7.67%
|
|
|
10.26%
|
|
|
11.21%
|
|
|
10.13%
|
|
|
10.01%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
$
|
25
|
|
$
|
50
|
|
$
|
50
|
|
$
|
995
|
|
$
|
50
|
|
$
|
4,775
|
|
$
|
5,945
|
|
$
|
5,979
|
|
Average
Interest Rate
|
|
7.78%
|
|
|
7.44%
|
|
|
7.44%
|
|
|
8.53%
|
|
|
7.60%
|
|
|
7.72%
|
|
|
7.85%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to Fixed Swaps
|
$
|
875
|
|
$
|
--
|
|
$
|
--
|
|
$
|
500
|
|
$
|
300
|
|
$
|
--
|
|
$
|
1,675
|
|
$
|
--
|
|
Average
Pay Rate
|
|
7.55%
|
|
|
--
|
|
|
--
|
|
|
7.46%
|
|
|
7.63%
|
|
|
--
|
|
|
7.54%
|
|
|
|
|
Average
Receive Rate
|
|
7.92%
|
|
|
--
|
|
|
--
|
|
|
7.58%
|
|
|
7.59%
|
|
|
--
|
|
|
7.75%
|
|
|
|
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, 2006.
At
December 31, 2006 and 2005, we had outstanding $1.7 billion and $1.8 billion
and
$0 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 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.
None.
Item
9A. Controls
and Procedures.
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 Exchange
Act
is recorded, processed, summarized and reported within the time periods
specified in the Commission’s rules and forms.
There
was
no change in our internal control over financial reporting during the fourth
quarter of 2006 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
Exchange Act). 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, 2006. 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 December
31, 2006, our internal control over financial reporting were
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.
Item
9B. Other
Information.
None.
PART
III
The
information required by Item 10 will be included in Charter's 2007 Proxy
Statement (the “Proxy Statement”) under the headings “Election of Class A/Class
B Director” and "Election of Class B Directors" and is incorporated herein by
reference. The Proxy Statement will be filed with the SEC pursuant to Regulation
14A within 120 days of the end of the Corporation’s 2006 fiscal year.
The
information required by Item 11 will be included in the Proxy Statement
under the headings “Executive Compensation” and is incorporated herein by
reference.
The
information required by Item 12 will be included in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
The
information required by Item 13 will be included in the Proxy Statement
under the heading “Certain Relationships and Related Transactions” and is
incorporated herein by reference.
The
information required by Item 14 will be included in the Proxy Statement
under the heading “Ratification of the Appointment of Independent Registered
Public Accounting Firm” and is incorporated herein by reference.
PART
IV
|
(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 74 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.
|
|
CHARTER
COMMUNICATIONS, INC.,
|
|
|
Registrant
|
|
|
By:
|
|
/s/
Neil Smit
|
|
|
|
|
Neil
Smit
|
|
|
|
|
President
and Chief Executive Officer
|
Date:
February 28, 2007
|
|
|
|
|
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.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Paul G. Allen
|
|
Chairman
of the Board of Directors
|
|
February
28, 2007
|
Paul
G. Allen
|
|
|
|
|
|
|
|
|
|
/s/
Neil Smit
|
|
President,
Chief Executive
|
|
February
22, 2007
|
Neil
Smit
|
|
Officer,
Director (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Executive
Vice President and Chief Financial Officer |
|
February
16, 2007 |
Jeffrey
T. Fisher |
|
(Principal
Financial Officer) |
|
|
|
|
|
|
|
/s/
Kevin D. Howard |
|
Vice
President and Chief Accounting Officer |
|
February
28, 2007 |
Kevin
D. Howard |
|
(Principal
Accounting Officer) |
|
|
|
|
|
|
|
/s/
W. Lance Conn
|
|
Director
|
|
February
28, 2007
|
W.
Lance Conn |
|
|
|
|
|
|
|
|
|
/s/
Nathaniel A. Davis
|
|
Director
|
|
February
23, 2007
|
Nathaniel
A. Davis
|
|
|
|
|
|
|
|
|
|
/s/Jonathan
L. Dolgen
|
|
Director
|
|
February
22, 2007
|
Jonathan
L. Dolgen
|
|
|
|
|
|
|
|
|
|
/s/
Rajive Johri
|
|
Director
|
|
February
23, 2007
|
Rajive
Johri
|
|
|
|
|
|
|
|
|
|
/s/
Robert P. May
|
|
Director
|
|
February
22, 2007
|
Robert
P. May
|
|
|
|
|
|
|
|
|
|
/s/
David C. Merritt
|
|
Director
|
|
February
28, 2007
|
David
C. Merritt
|
|
|
|
|
|
|
|
|
|
/s/
Marc B. Nathanson
|
|
Director
|
|
February
16, 2007
|
Marc
B. Nathanson
|
|
|
|
|
|
|
|
|
|
/s/
Jo Allen Patton
|
|
Director
|
|
February
28, 2007
|
Jo
Allen Patton
|
|
|
|
|
|
|
|
|
|
/s/
John H. Tory
|
|
Director
|
|
February
28, 2007
|
John
H. Tory
|
|
|
|
|
|
|
|
|
|
/s/
Larry W. Wangberg
|
|
Director
|
|
February
28, 2007
|
Larry
W. Wangberg
|
|
|
|
|
(Exhibits
are listed by numbers corresponding to the Exhibit Table of Item 601
in Regulation S-K).
3.1(a)
|
|
Restated
Certificate of Incorporation of Charter Communications, Inc. (Originally
incorporated July 22, 1999) (incorporated by reference to
Exhibit 3.1 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)).
|
3.1(b)
|
|
Certificate
of Amendment of Restated Certificate of Incorporation of Charter
Communications, Inc. filed May 10, 2001 (incorporated by reference to
Exhibit 3.1(b) to the annual report of Form 10-K of Charter
Communications, Inc. filed on March 29, 2002 (File
No. 000-27927)).
|
3.2
|
|
Amended
and Restated By-laws of Charter Communications, Inc. as of October
30,
2006 (incorporated by reference to Exhibit 3.1 to the quarterly report
on
Form 10-Q of Charter Communications, Inc. filed on October 31, 2006
(File
No. 000-27927)).
|
|
|
Certain
long-term debt instruments, none of which relates to authorized
indebtedness that exceeds 10% of the consolidated assets of the
Registrants have not been filed as exhibits to this Form 10-K. The
Registrants agree to furnish to the Commission upon its request a
copy of
any instrument defining the rights of holders of long- term debt
of the
Company and its consolidated subsidiaries.
|
4.1(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)).
|
4.1(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)).
|
4.2
|
|
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)).
|
4.3
|
|
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)).
|
4.4
|
|
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)).
|
4.5
|
|
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
|
|
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)).
|
10.2
|
|
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)).
|
10.3 |
|
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)). |
10.4(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)).
|
10.4(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)).
|
10.5(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)).
|
10.5(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)).
|
10.6(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)).
|
10.6(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)).
|
10.7(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)).
|
10.7(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)).
|
10.8(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)).
|
10.8(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)).
|
10.9(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 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)).
|
10.9(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)). |
10.10(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 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)).
|
10.10(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)).
|
10.11(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)).
|
10.11(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)).
|
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 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)).
|
10.12(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
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)).
|
10.12(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
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)).
|
10.12(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)).
|
10.13(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 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)).
|
10.13(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)).
|
10.13(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)).
|
10.13(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)). |
10.14(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)).
|
10.14(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)).
|
10.15(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)).
|
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(a)
|
|
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)).
|
10.19(b)
|
|
First
Supplemental Indenture dated August 17, 2005 by and 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 and CCO Holdings Capital Corp. filed on
August
23, 2005 (File No. 333-112593)).
|
10.20
|
|
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)).
|
10.21(a) |
|
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)). |
10.21(b)
|
|
First
Supplemental Indenture relating to the 11.00% Senior Secured Notes
due
2015, dated as of September 14, 2006, by and between CCH I, LLC,
CCH I
Capital Corp. as Issuers, Charter Communications Holdings, LLC as
Parent
Guarantor and The Bank of New York Trust Company, N.A. as trustee
(incorporated by reference to Exhibit 10.4 to the current report
on Form
8-K of Charter Communications, Inc. on September 19, 2006 (File No.
000-27927)).
|
10.22
|
|
Indenture
relating to the 10.25% Senior Notes due 2013, dated as of September
14,
2006, by and between CCH II, LLC, CCH II Capital Corp. as Issuers,
Charter
Communications Holdings, LLC as Parent Guarantor and The Bank of
New York
Trust Company, N.A. as trustee (incorporated by reference to Exhibit
10.2
to the current report on Form 8-K of Charter Communications, Inc.
on
September 19, 2006 (File No. 000-027927)).
|
10.23(a)
|
|
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)).
|
10.23(b)
|
|
Amendment
to the Pledge Agreement between CCH I, LLC in favor of The Bank of
New
York Trust Company, N.A., as Collateral Agent, dated as of
September 14, 2006 (incorporated by reference to Exhibit 10.3 to
the current report on Form 8-K of Charter Communications, Inc. on
September 19, 2006 (File No. 000-27927)).
|
10.24
|
|
Exchange
and Registration Rights Agreement, dated as of September 14, 2006, by
and between CCH I, LLC, CCH I Capital Corp., CCH II, LLC, CCH II
Capital
Corp. Charter Communications Holdings, LLC and Banc of America Securities
LLC (incorporated by reference to Exhibit 10.5 to the current report
on Form 8-K of Charter Communications, Inc. on September 19,
2006 (File No. 000-27927)).
|
10.25
|
|
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)).
|
10.26
|
|
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)).
|
10.27
|
|
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)).
|
10.28
|
|
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)).
|
10.29
|
|
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)).
|
10.30
|
|
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)).
|
10.31(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)).
|
10.32(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)). |
10.32(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)). |
10.33(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)).
|
10.33(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)).
|
10.34
|
|
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)).
|
10.35(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)).
|
10.35(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)).
|
10.36(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)).
|
10.36(b)
|
|
First
Amendment to the Amended and Restated Limited Liability Company Agreement
of Charter Communications Operating, LLC, adopted as of June 22,
2004
(incorporated by reference to Exhibit 10.16(b) to the annual report
on
Form 10-K filed by Charter Communications, Inc. on February 28, 2006
(File
No. 000-27927)).
|
10.37
|
|
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)).
|
10.38(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)).
|
10.38(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)).
|
10.39
|
|
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)).
|
10.40
|
|
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)).
|
10.41
|
|
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)).
|
10.42
|
|
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)).
|
10.43 |
|
CCHC,
LLC Subordinated and Accreting Note, dated as of October 31, 2005
(revised) (incorporated by reference to Exhibit 10.3 to the current
report on Form 8-K of Charter Communications, Inc. filed on
November 4, 2005 (File No. 000-27927)). |
10.44
|
|
Amended
and Restated Credit Agreement, dated as of April 28, 2006, among
Charter Communications Operating, LLC, CCO Holdings, LLC, the lenders
from
time to time parties thereto and JPMorgan Chase Bank, N.A., as
administrative agent (incorporated by reference to Exhibit 10.1 to
the current report on Form 8-K of Charter Communications, Inc. filed
on May 1, 2006 (File No. 000-27927)).
|
10.45(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)).
|
10.45(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)).
|
10.45(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)).
|
10.45(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)).
|
10.45(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)).
|
10.45(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(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)).
|
10.46(i)+
|
|
Description
of Long-Term Incentive Program to the Charter Communications, Inc.
2001
Stock Incentive Plan (incorporated by reference to Exhibit 10.18(g)
to the annual report on Form 10-K filed by Charter Communications,
Inc. on March 31, 2005 (File No. 333-77499)).
|
10.47+
|
|
Description
of Charter Communications, Inc. 2006 Executive Bonus Plan (incorporated
by
reference to Exhibit 10.2 to the quarterly report on Form 10-Q
filed by Charter Communications, Inc. on May 2, 2006 (File
No. 000-27927)).
|
10.48+
|
|
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)).
|
10.49+
|
|
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)).
|
10.50+
|
|
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)).
|
10.51+
|
|
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)).
|
10.52+
|
|
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)).
|
10.53+
|
|
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)).
|
10.54+
|
|
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)).
|
10.55+
|
|
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)).
|
10.56+
|
|
Employment
Agreement dated as of February 28, 2006 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 on March 3, 2006 (File
No. 000-27927)).
|
10.57+
|
|
Employment
Agreement dated as of August 1, 2006 by and between Marwan Fawaz 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 1, 2006 (File
No. 000-27927)).
|
21.1*
|
|
Subsidiaries
of Charter Communications, Inc.
|
23.1*
|
|
Consent
of KPMG LLP.
|
31.1*
|
|
Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
under
the Securities Exchange Act of 1934.
|
31.2*
|
|
Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
under
the Securities Exchange Act of 1934.
|
32.1*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
|
32.2*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
|
*
|
|
Document
attached
|
|
|
|
+
|
|
Management
compensatory plan or arrangement
|
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Audited
Financial Statements
|
|
|
Report
of Independent Registered Public Accounting Firm - Consolidated Financial
Statements
|
|
F-2
|
Report
of Independent Registered Public Accounting Firm - Internal Controls
over
Financial Reporting
|
|
F-3
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
|
F-4
|
Consolidated
Statements of Operations for the Years Ended December 31, 2006, 2005,
and 2004
|
|
F-5
|
Consolidated
Statements of Changes in Shareholders’ Equity (Deficit) for the Years
Ended December 31, 2006, 2005, and 2004
|
|
F-6
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006, 2005,
and 2004
|
|
F-7
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders
Charter
Communications, Inc.:
We
have
audited the accompanying consolidated balance sheets of Charter Communications,
Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
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.
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, 2006, 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, 2007 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/
KPMG
LLP
St.
Louis, Missouri
February
27, 2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
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, 2006, 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, 2006, 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, 2006, 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, 2006 and 2005, 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, 2006, and our report
dated February 27, 2007 expressed
an unqualified opinion on those consolidated financial statements.
/s/
KPMG
LLP
St.
Louis, Missouri
February
27, 2007
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in millions, except share data)
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
60
|
|
$
|
21
|
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
$16
and $17, respectively
|
|
|
195
|
|
|
214
|
|
Prepaid
expenses and other current assets
|
|
|
84
|
|
|
92
|
|
Total
current assets
|
|
|
339
|
|
|
327
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $7,644 and $6,749, respectively
|
|
|
5,217
|
|
|
5,840
|
|
Franchises,
net
|
|
|
9,223
|
|
|
9,826
|
|
Total
investment in cable properties, net
|
|
|
14,440
|
|
|
15,666
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
321
|
|
|
438
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
15,100
|
|
$
|
16,431
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,298
|
|
$
|
1,191
|
|
Total
current liabilities
|
|
|
1,298
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
19,062
|
|
|
19,388
|
|
NOTE
PAYABLE - RELATED PARTY
|
|
|
57
|
|
|
49
|
|
DEFERRED
MANAGEMENT FEES - RELATED PARTY
|
|
|
14
|
|
|
14
|
|
OTHER
LONG-TERM LIABILITIES
|
|
|
692
|
|
|
517
|
|
MINORITY
INTEREST
|
|
|
192
|
|
|
188
|
|
PREFERRED
STOCK - REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
shares
authorized; 36,713 shares issued and outstanding,
respectively
|
|
|
4
|
|
|
4
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 1.75 billion shares
authorized;
|
|
|
|
|
|
|
|
407,994,585
and 416,204,671 shares issued and outstanding,
respectively
|
|
|
--
|
|
|
--
|
|
Class
B Common stock; $.001 par value; 750 million
|
|
|
|
|
|
|
|
shares
authorized; 50,000 shares issued and outstanding
|
|
|
--
|
|
|
--
|
|
Preferred
stock; $.001 par value; 250 million shares
|
|
|
|
|
|
|
|
authorized;
no non-redeemable shares issued and outstanding
|
|
|
--
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
5,313
|
|
|
5,241
|
|
Accumulated
deficit
|
|
|
(11,536
|
)
|
|
(10,166
|
)
|
Accumulated
other comprehensive loss
|
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(6,219
|
)
|
|
(4,920
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$
|
15,100
|
|
$
|
16,431
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(dollars
in millions, except per share and share data)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
5,504
|
|
$
|
5,033
|
|
$
|
4,760
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
2,438
|
|
|
2,203
|
|
|
1,994
|
|
Selling,
general and administrative
|
|
|
1,165
|
|
|
1,012
|
|
|
965
|
|
Depreciation
and amortization
|
|
|
1,354
|
|
|
1,443
|
|
|
1,433
|
|
Impairment
of franchises
|
|
|
--
|
|
|
--
|
|
|
2,297
|
|
Asset
impairment charges
|
|
|
159
|
|
|
39
|
|
|
--
|
|
Other
operating expenses, net
|
|
|
21
|
|
|
32
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,137
|
|
|
4,729
|
|
|
6,702
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from continuing operations
|
|
|
367 |
|
|
304 |
|
|
(1,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,887
|
)
|
|
(1,789
|
)
|
|
(1,670
|
)
|
Gain
(loss) on extinguishment of debt and preferred stock
|
|
|
101
|
|
|
521
|
|
|
(31
|
)
|
Other
income, net
|
|
|
20
|
|
|
73
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,766
|
)
|
|
(1,195
|
)
|
|
(1,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes and
cumulative
effect of accounting change
|
|
|
(1,399
|
)
|
|
(891
|
)
|
|
(3,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
|
|
(187
|
)
|
|
(112
|
)
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before cumulative effect of
accounting
change
|
|
|
(1,586
|
)
|
|
(1,003
|
)
|
|
(3,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS,
NET
OF TAX
|
|
|
216
|
|
|
36
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of accounting change
|
|
|
(1,370
|
)
|
|
(967
|
)
|
|
(3,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE
EFFECT OF ACCOUNTING CHANGE,
NET
OF TAX
|
|
|
--
|
|
|
--
|
|
|
(765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,370
|
)
|
|
(967
|
)
|
|
(4,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock - redeemable
|
|
|
--
|
|
|
(3
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(1,370
|
)
|
$
|
(970
|
)
|
$
|
(4,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before cumulative effect of
accounting
change
|
|
$
|
(4.78
|
)
|
$
|
(3.24
|
)
|
$
|
(11.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4.13
|
)
|
$
|
(3.13
|
)
|
$
|
(14.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
331,941,788
|
|
|
310,209,047
|
|
|
300,341,877
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Total
|
|
|
|
Class
A
|
|
Class
B
|
|
Additional
|
|
|
|
Other
|
|
Shareholders'
|
|
|
|
Common
|
|
Common
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
Equity
|
|
|
|
Stock
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
Income
(Loss)
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2003
|
|
$
|
--
|
|
$
|
--
|
|
$
|
4,700
|
|
$
|
(4,851
|
)
|
$
|
(24
|
)
|
$
|
(175
|
)
|
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
20
|
|
|
20
|
|
Option
compensation expense, net
|
|
|
--
|
|
|
--
|
|
|
27
|
|
|
--
|
|
|
--
|
|
|
27
|
|
Issuance
of common stock in exchange for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
notes
|
|
|
--
|
|
|
--
|
|
|
67
|
|
|
--
|
|
|
--
|
|
|
67
|
|
Dividends
on preferred stock - redeemable
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(4
|
)
|
|
--
|
|
|
(4
|
)
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(4,341
|
)
|
|
--
|
|
|
(4,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2004
|
|
|
--
|
|
|
--
|
|
|
4,794
|
|
|
(9,196
|
)
|
|
(4
|
)
|
|
(4,406
|
)
|
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
and other
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
9
|
|
|
9
|
|
Option
compensation expense, net
|
|
|
--
|
|
|
--
|
|
|
14
|
|
|
--
|
|
|
--
|
|
|
14
|
|
Issuance
of shares in Securities Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Action
settlement
|
|
|
--
|
|
|
--
|
|
|
15
|
|
|
--
|
|
|
--
|
|
|
15
|
|
CC
VIII, LLC settlement - exchange of
interests
|
|
|
--
|
|
|
--
|
|
|
418
|
|
|
--
|
|
|
--
|
|
|
418
|
|
Dividends
on preferred stock - redeemable
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3
|
)
|
|
--
|
|
|
(3
|
)
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(967
|
)
|
|
--
|
|
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2005
|
|
|
--
|
|
|
--
|
|
|
5,241
|
|
|
(10,166
|
)
|
|
5
|
|
|
(4,920
|
)
|
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1
|
)
|
|
(1
|
)
|
Option
compensation expense, net
|
|
|
--
|
|
|
--
|
|
|
6
|
|
|
--
|
|
|
--
|
|
|
6
|
|
Issuance
of common stock in exchange for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
notes
|
|
|
--
|
|
|
--
|
|
|
66
|
|
|
--
|
|
|
--
|
|
|
66
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,370
|
)
|
|
--
|
|
|
(1,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
$
|
--
|
|
$
|
--
|
|
$
|
5,313
|
|
$
|
(11,536
|
)
|
$
|
4
|
|
$
|
(6,219
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(dollars
in millions)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,370
|
)
|
$
|
(967
|
)
|
$
|
(4,341
|
)
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,362
|
|
|
1,499
|
|
|
1,495
|
|
Impairment
of franchises
|
|
|
--
|
|
|
--
|
|
|
2,433
|
|
Asset
impairment charges
|
|
|
159
|
|
|
39
|
|
|
--
|
|
Noncash
interest expense
|
|
|
138
|
|
|
254
|
|
|
324
|
|
Deferred
income taxes
|
|
|
202
|
|
|
109
|
|
|
(109
|
)
|
Gain
(loss) on sale of assets, net
|
|
|
(192
|
)
|
|
6
|
|
|
(86
|
)
|
(Gain)
loss on extinguishment of debt and preferred stock
|
|
|
(101
|
)
|
|
(527
|
)
|
|
20
|
|
Cumulative
effect of accounting change, net of tax
|
|
|
--
|
|
|
--
|
|
|
765
|
|
Other,
net
|
|
|
(2
|
)
|
|
(40
|
)
|
|
39
|
|
Changes
in operating assets and liabilities, net of effects from acquisitions
and
dispositions:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
24
|
|
|
(29
|
)
|
|
(7
|
)
|
Prepaid
expenses and other assets
|
|
|
55
|
|
|
97
|
|
|
(2
|
)
|
Accounts
payable, accrued expenses and other
|
|
|
48
|
|
|
(181
|
)
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
323
|
|
|
260
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(1,103
|
)
|
|
(1,088
|
)
|
|
(924
|
)
|
Change
in accrued expenses related to capital expenditures
|
|
|
24
|
|
|
8
|
|
|
(43
|
)
|
Proceeds
from sale of assets
|
|
|
1,020
|
|
|
44
|
|
|
744
|
|
Purchase
of cable system
|
|
|
(42
|
)
|
|
--
|
|
|
--
|
|
Purchases
of investments
|
|
|
--
|
|
|
(3
|
)
|
|
(17
|
)
|
Proceeds
from investments
|
|
|
37
|
|
|
17
|
|
|
--
|
|
Other,
net
|
|
|
(1
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(65
|
)
|
|
(1,025
|
)
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
6,322
|
|
|
1,207
|
|
|
3,148
|
|
Repayments
of long-term debt
|
|
|
(6,938
|
)
|
|
(1,239
|
)
|
|
(5,448
|
)
|
Proceeds
from issuance of debt
|
|
|
440
|
|
|
294
|
|
|
2,882
|
|
Payments
for debt issuance costs
|
|
|
(44
|
)
|
|
(70
|
)
|
|
(145
|
)
|
Redemption
of preferred stock
|
|
|
--
|
|
|
(56
|
)
|
|
--
|
|
Purchase
of pledge securities
|
|
|
--
|
|
|
--
|
|
|
(143
|
)
|
Other,
net
|
|
|
1
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
(219
|
)
|
|
136
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
39
|
|
|
(629
|
)
|
|
523
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
21
|
|
|
650
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
60
|
|
$
|
21
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$
|
1,671
|
|
$
|
1,526
|
|
$
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
Issuances
of Charter Class A common stock
|
|
$
|
68
|
|
$
|
--
|
|
$
|
--
|
|
Issuance
of debt by CCH I Holdings, LLC
|
|
$
|
--
|
|
$
|
2,423
|
|
$
|
--
|
|
Issuance
of debt by CCH I, LLC
|
|
$
|
419
|
|
$
|
3,686
|
|
$
|
--
|
|
Issuance
of debt by CCH II, LLC
|
|
$
|
410
|
|
$
|
--
|
|
$
|
--
|
|
Issuance
of debt by Charter Communications Operating, LLC
|
|
$
|
37
|
|
$
|
333
|
|
$
|
--
|
|
Retirement
of Charter convertible notes
|
|
$
|
(255
|
)
|
$
|
--
|
|
$
|
--
|
|
Retirement
of Charter Communications Holdings, LLC debt
|
|
$
|
(796
|
)
|
$
|
(7,000
|
)
|
$
|
--
|
|
Retirement
of Renaissance Media Group LLC debt
|
|
$
|
(37
|
)
|
$
|
--
|
|
$
|
--
|
|
Issuance
of Charter Class A common stock in Securities Class Action
Settlement
|
|
$
|
--
|
|
$
|
15
|
|
$
|
--
|
|
CC
VIII, LLC Settlement - exchange of interests
|
|
$
|
--
|
|
$
|
418
|
|
$
|
--
|
|
Debt
exchanged for Charter Class A common stock
|
|
$
|
--
|
|
$
|
--
|
|
$
|
30
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
1. Organization
and Basis of Presentation
Charter
Communications, Inc. (“Charter”) is a holding company whose principal assets at
December 31, 2006 are the 55% controlling common equity interest (52% for
accounting purposes) in Charter Communications Holding Company, LLC (“Charter
Holdco”) and “mirror” notes which are payable by Charter Holdco to Charter and
have the same principal amount and terms as those of Charter’s convertible
senior notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"), which
is
the sole owner of Charter Communications Holdings, LLC ("Charter Holdings").
The
consolidated financial statements include the accounts of Charter, Charter
Holdco, CCHC, Charter Holdings and all of their subsidiaries where the
underlying operations reside, which are collectively referred to herein as
the
"Company." 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), high-speed Internet services, advanced
broadband services such as high definition television, OnDemand, and digital
video recorder service, and, in many of our markets, telephone service. The
Company sells its cable video programming, high-speed Internet, telephone and
advanced broadband services on a subscription basis. The Company also sells
local advertising on cable networks.
The
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 2006
presentation,
including
discontinued operations as discussed in Note 4.
2. Liquidity
and Capital Resources
The
Company incurred net loss applicable to common stock of $1.4 billion, $970
million, and $4.3 billion in 2006, 2005, and 2004, respectively. The Company’s
net cash flows from operating activities were $323 million, $260 million, and
$472 million for the years ending December 31, 2006, 2005, and 2004,
respectively.
The
Company has a significant level of debt. The Company's long-term debt as of
December 31, 2006 consisted of $5.4 billion of credit facility debt, $13.3
billion accreted value of high-yield notes and $408 million accreted value
of
convertible senior notes. In 2007, $130 million of the Company’s debt matures
and in 2008, an additional $50 million matures. In 2009 and beyond, significant
additional amounts will become due under the Company’s remaining long-term debt
obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically funded these
requirements through cash flows from operating activities, borrowings under
its
credit facilities, sales of assets, issuances of debt and equity securities,
and
cash on hand. However, the mix of funding sources changes from period to
period. For
the
year ended December 31, 2006, the Company generated $323 million of net cash
flows from operating activities after paying cash interest of $1.7 billion.
In
addition, the Company received proceeds from the sale of assets of approximately
$1.0 billion and used $1.1 billion for purchases of property, plant and
equipment. Finally, the Company had net cash flows used in financing activities
of $219 million.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
The
Company expects that cash on hand, cash flows from operating activities and
the
amounts available under its credit facilities will be adequate to meet its
cash
needs through 2007. The Company believes that cash flows from operating
activities and amounts available under the Company’s credit facilities may not
be sufficient to fund the Company’s operations and satisfy its interest and
principal repayment obligations in 2008, and will not be sufficient to fund
such
needs in 2009 and beyond. The Company continues to work with its financial
advisors concerning its approach to addressing liquidity, debt maturities and
its overall balance sheet leverage.
Credit
Facility Availability
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Communications Operating,
LLC (“Charter Operating”) credit facilities. The Charter Operating credit
facilities, along with the Company’s indentures, contain certain restrictive
covenants, some of which require the Company to maintain specified financial
ratios, and meet financial tests, and to provide annual audited financial
statements with an unqualified opinion from the Company’s independent auditors.
As of December 31, 2006, the Company is in compliance with the covenants under
its credit facilities, as well as under its indentures, and the Company expects
to remain in compliance with those covenants for the next twelve months. As
of
December 31, 2006, the
Company’s potential availability under its credit facilities totaled
approximately $1.3 billion, although the actual availability at that time
was only $1.1 billion because of limits imposed by covenant
restrictions.
Continued
access to the Company’s credit facilities is subject to the Company remaining in
compliance with these covenants, including covenants tied to the Company’s
operating performance. If any events of non-compliance occur, funding under
the
credit facilities may not be available and defaults on some or potentially
all
of the Company’s debt obligations could occur. An event of default under any of
the Company’s debt instruments could result in the acceleration of its payment
obligations under that debt and, under certain circumstances, in cross-defaults
under its other debt obligations, which could have a material adverse effect
on
the Company’s consolidated financial condition and results of
operations.
Limitations
on Distributions
Charter’s
ability to make interest payments on its convertible senior notes, and, in
2009,
to repay the outstanding principal of its convertible senior notes of $413
million, will depend on its ability to raise additional capital and/or on
receipt of payments or distributions from Charter Holdco and its subsidiaries.
As
of December 31, 2006, Charter Holdco was owed $3 million in intercompany loans
from its subsidiaries and had $8 million in cash, which were available to pay
interest and principal on Charter's convertible senior notes.
In
addition, Charter has $50 million of U.S. government securities pledged as
security for the semi-annual interest payments on Charter’s convertible senior
notes scheduled in 2007. CCHC also holds an additional $450 million of
Charter’s convertible senior notes. As a result, if CCHC continues to hold
those notes, CCHC will receive interest payments on the convertible senior
notes
from the pledged government securities. The cumulative amount of interest
payments expected to be received by CCHC may be available to be distributed
to
pay interest on the outstanding $413 million principal amount of the convertible
senior notes due in 2008 and May 2009, although CCHC may use those amounts
for
other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for
payment of principal on parent company notes, are
restricted under the indentures governing the CCH I Holdings, LLC (“CIH”) notes,
CCH I, LLC (“CCH I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings, LLC
(“CCO Holdings”) notes, and Charter Operating notes unless
there is no default under the applicable indenture, and each applicable
subsidiary’s leverage ratio test is met at the time of such distribution, and,
in the case of such distributions by Charter Operating for payment of principal
on a portion of the outstanding CCO Holdings notes, other specified tests are
met. For
the
quarter ended December 31, 2006, there was no default under any of these
indentures and each such subsidiary met its applicable leverage ratio tests
based on December 31, 2006 financial results. Such
distributions would be restricted, however, if any such subsidiary fails to
meet
these tests at the time of the contemplated distribution. 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
the
contemplated distribution. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in the credit facilities.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Distributions
by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures, and in the case of such distributions
by
Charter Operating for payment of interest on a portion of the outstanding CCO
Holdings notes, Charter Operating’s leverage ratio and other specified tests are
met.
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 December
31, 2006, there was no default under Charter Holdings’ indentures and the other
specified tests were met. Such
distributions would be restricted, however, if Charter Holdings fails to meet
these tests at the time of the contemplated distribution. 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 the contemplated 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.
Recent
Financing Transactions
In
January 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which were provided to Charter Operating, which
used
such funds to reduce borrowings, but not commitments, under the revolving
portion of its credit facilities.
In
April
2006, Charter Operating completed a $6.85 billion refinancing of its credit
facilities including a new $350 million revolving/term facility (which converts
to a term loan no later than April 2007), a $5.0 billion term loan due in 2013,
and certain amendments to the existing $1.5 billion revolving credit facility.
In addition, the refinancing reduced margins on Eurodollar rate term loans
to
2.625% from a weighted average of 3.15% previously, and margins on base rate
term loans to 1.625% from a weighted average of 2.15% previously. Concurrent
with this refinancing, the CCO Holdings bridge loan was terminated. The
refinancing resulted in a loss on extinguishment of debt of approximately $27
million.
In
September 2006, Charter Holdings and its wholly owned subsidiaries, CCH I and
CCH II, completed the exchange of approximately $797 million in total principal
amount of outstanding debt securities of Charter Holdings. Holders of Charter
Holdings notes due in 2009-2010 tendered $308 million principal amount of notes
for $250 million principal amount of new 10.25% CCH II notes due 2013 and $37
million principal amount of 11% CCH I notes due 2015. Holders of Charter
Holdings notes due 2011-2012 tendered $490 million principal amount of notes
for
$425 million principal amount of 11% CCH I notes due 2015. The Charter Holdings
notes received in the exchanges were thereafter distributed to Charter Holdings
and retired. Also in September 2006, CCHC and CCH II completed the exchange
of
$450 million principal amount of Charter’s outstanding 5.875% senior convertible
notes due 2009 for $188 million in cash, 45 million shares of Charter’s Class A
Common Stock and $146 million principal amount of 10.25% CCH II notes due 2010.
The convertible notes received in the exchange are held by CCHC.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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 the Company’s franchise agreements and leases contain provisions requiring
the Company to restore facilities or remove equipment in the event that the
franchise or lease agreement is not renewed. The Company expects to continually
renew its franchise agreements and have concluded that substantially all of
the
related franchise rights are indefinite lived intangible assets. Accordingly,
the possibility is remote that the Company 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. The Company has 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. The Company also expects to renew many of its lease agreements related
to the continued operation of its cable business in the franchise areas. For
the
Company’s lease agreements, the estimated 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 more than
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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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 December 31, 2006 and 2005
and
for the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
Gain
(Loss) for
|
|
|
Carrying
Value at
|
|
|
the
Years Ended
|
|
|
December
31,
|
|
|
December
31,
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
investments, under the cost method
|
$
|
34
|
|
$
|
61
|
|
$
|
12
|
|
$
|
--
|
|
$
|
(3)
|
Equity
investments, under the equity method
|
|
11
|
|
|
13
|
|
|
4
|
|
|
22
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45
|
|
$
|
74
|
|
$
|
16
|
|
$
|
22
|
|
$
|
4
|
The
gain
on equity investments, under the cost method for the year ended December 31,
2006 primarily represents gains realized on the sale of two investments. Such
amounts are included in other income, net in the statements of
operations.
The
gain
on equity investments, under the equity method for the year ended December
31,
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 income, 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), four of which were funded
in 2006 and 2005. These securities are accounted for as held-to-maturity
securities. At December 31, 2006 and 2005, the carrying value of the securities
was approximately $50 million and $98 million, respectively, while the fair
value of the securities was approximately $49 million and $97 million,
respectively. At December 31, 2006 and 2005, approximately $50 million and
$50
million was recorded in prepaid and other assets and approximately $0 and $48
million was recorded in other assets on the Company’s consolidated balance
sheets.
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. 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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 2006,
2005, and 2004; however, approximately $159 million and $39 million of
impairment on assets held for sale was recorded for the years ended December
31,
2006 and 2005, respectively (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 years ended December 31, 2006, 2005 and 2004, the Company
recognized $10 million in losses, $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, 2006 and 2005, $12 million and
$1
million, respectively, is recorded in accounts payable and accrued expenses
relating to the short-term portion of these derivatives and $0 and $1 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. Franchise fees imposed by local governmental
authorities are collected on a monthly basis from the Company’s customers and
are periodically remitted to local franchise authorities. Franchise fees of
$179
million, $174 million and $160 million for the years ended December 31, 2006,
2005 and 2004, respectively, are reported as revenues on a gross basis with
a
corresponding operating expense.
Sales
taxes collected and remitted to state and local authorities are recorded on
a
net basis.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
The
Company’s revenues by product line are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
3,349
|
|
$
|
3,248
|
|
$
|
3,217
|
|
High-speed
Internet
|
|
|
1,051
|
|
|
875
|
|
|
712
|
|
Telephone
|
|
|
135
|
|
|
36
|
|
|
18
|
|
Advertising
sales
|
|
|
319
|
|
|
284
|
|
|
279
|
|
Commercial
|
|
|
305
|
|
|
266
|
|
|
227
|
|
Other
|
|
|
345
|
|
|
324
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,504
|
|
$
|
5,033
|
|
$
|
4,760
|
|
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 $32 million, $41 million, and $59 million for the years
ended December 31, 2006, 2005, and 2004, respectively. Programming costs
included in the accompanying statement of operations were $1.5 billion, $1.4
billion, and $1.3 billion for the years ended December 31, 2006, 2005, and
2004, respectively. As of December 31, 2006 and 2005, the
deferred amounts of launch incentives, included in other long-term liabilities,
were $67 million and $83 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 $131
million, $94 million, and $70 million for the years ended December 31,
2006, 2005, and 2004, respectively.
Stock-Based
Compensation
The
Company had 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 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.
On
January 1, 2006, the Company adopted 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)
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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. Because the Company adopted the fair value recognition
provisions of SFAS No. 123 on January 1, 2003, the revised standard did not
have
a material impact on its financial statements. The Company recorded $13 million,
$14 million, and $31 million of option compensation expense which is included
in
general and administrative expenses for the years ended December 31, 2006,
2005,
and 2004, respectively.
SFAS
No. 123R 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. 123R for the years presented:
|
Year
Ended December 31,
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
$
|
(1,370)
|
|
$
|
(970)
|
|
$
|
(4,345)
|
Add
back stock-based compensation expense related to stock
options
included in reported net loss (net of minority interest)
|
|
13
|
|
|
14
|
|
|
31
|
Less
employee stock-based compensation expense determined under fair
value
based method for all employee stock option awards
(net
of minority interest)
|
|
(13)
|
|
|
(14)
|
|
|
(33)
|
Effects
of unvested options in stock option exchange (see Note 20)
|
|
--
|
|
|
--
|
|
|
48
|
Pro
forma
|
$
|
(1,370)
|
|
$
|
(970)
|
|
$
|
(4,299)
|
|
|
|
|
|
|
|
|
|
Loss
per common shares, basic and diluted:
|
|
|
|
|
|
|
|
|
As
reported
|
$
|
(4.13)
|
|
$
|
(3.13)
|
|
$
|
(14.47)
|
Pro
forma
|
$
|
(4.13)
|
|
$
|
(3.13)
|
|
$
|
(14.32)
|
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, 2006, 2005, and
2004,
respectively; risk-free interest rates of 4.6%, 4.0%, and 3.3%; expected
volatility of 87.3%, 70.9%, and 92.4% based on historical volatility; and
expected lives of 6.3 years, 4.5 years, and 4.6 years, respectively. The
valuations assume no dividends are paid.
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 21).
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 $192 million and $188 million as of
December 31, 2006 and 2005, 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, LLC (“CC VIII”) and Charter Holdco. Because
minority interest in Charter Holdco was substantially eliminated, Charter
absorbs substantially all losses before income taxes that otherwise would have
been allocated to minority interest (see Note 11).
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Loss
per Common Share
Basic
loss per common share is computed by dividing the net loss applicable to common
stock by 331,941,788 shares, 310,209,047 shares, and 300,341,877 shares for
the
years ended December 31, 2006, 2005, and 2004, 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, 2006, Charter Holdco had 747,176,616
membership units outstanding. Should the holders exchange units for shares,
the
effect would not be dilutive because the Company incurred net losses.
The
39.8
million and 116.9 million shares outstanding as of December 31, 2006 and 2005,
respectively, pursuant to the share lending agreement described in Note 13
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
2006,
the Company sold certain cable television systems serving a total of
approximately 356,000 analog video customers in 1) West Virginia and
Virginia
to
Cebridge Connections, Inc. (the “Cebridge Transaction”); 2) Illinois and
Kentucky to Telecommunications Management, LLC, doing business as New Wave
Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico
and Utah to Orange Broadband Holding Company, LLC
(the
“Orange Transaction”) for a total sales price of approximately $971 million. The
Company used the net proceeds from the asset sales to reduce borrowings, but
not
commitments, under the revolving portion of the Company’s credit facilities.
These cable systems met the criteria for assets held for sale. As such, the
assets were written down to fair value less estimated costs to sell, resulting
in asset impairment charges during the year ended December 31, 2006 of
approximately $99 million related to the New Wave Transaction and the Orange
Transaction. Also in 2006, the Company recorded asset impairment charges of
$60
million related to other cable systems meeting the criteria of assets held
for
sale.
During
the second quarter of 2006, the Company determined, based on changes in the
Company’s organizational and cost structure, that its asset groupings for long
lived asset accounting purposes are at the level of their individual market
areas, which are at a level below the Company’s geographic clustering. As a
result, the Company has determined that the West Virginia and Virginia cable
systems comprise operations and cash flows that for financial
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
reporting
purposes meet the criteria for discontinued operations. Accordingly, the
results
of operations for the West Virginia and Virginia cable systems (including
a gain
on sale of approximately $200 million recorded in the third quarter of 2006)
have been presented as discontinued operations, net of tax for the year ended
December 31, 2006 and all prior periods presented herein have been reclassified
to conform to the current presentation. Tax expense of $18 million associated
with this gain on sale was recorded in the fourth quarter of
2006.
Summarized
consolidated financial information for the years ended December 31, 2006, 2005
and 2004 for the West Virginia and Virginia cable systems is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
109
|
|
$
|
221
|
|
$
|
217
|
|
Income
(loss) before income taxes and cumulative effect of
accounting
change
|
|
$
|
238
|
|
$
|
39
|
|
$
|
(104
|
)
|
Income
tax expense
|
|
$
|
(22
|
)
|
$
|
(3
|
)
|
$
|
(31
|
)
|
Net
income (loss)
|
|
$
|
216
|
|
$
|
36
|
|
$
|
(135
|
)
|
Earnings
(loss) per common share, basic and diluted
|
|
$
|
0.65
|
|
$
|
0.12
|
|
$
|
(0.45
|
)
|
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, certain of those cable systems met
the
criteria for assets held for sale. As such, the assets were written down
to fair
value less estimated costs to sell resulting in asset impairment charges
during
the 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 other
income, net 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:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
17
|
|
$
|
15
|
|
$
|
17
|
|
Charged
to expense
|
|
|
89
|
|
|
76
|
|
|
92
|
|
Uncollected
balances written off, net of recoveries
|
|
|
(90
|
)
|
|
(74
|
)
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$
|
16
|
|
$
|
17
|
|
$
|
15
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
6.
Property, Plant and Equipment
Property,
plant and equipment consists of the following as of December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cable
distribution systems
|
|
$
|
7,035
|
|
$
|
7,014
|
|
Customer
equipment and installations
|
|
|
4,219
|
|
|
3,955
|
|
Vehicles
and equipment
|
|
|
474
|
|
|
473
|
|
Buildings
and leasehold improvements
|
|
|
526
|
|
|
584
|
|
Furniture,
fixtures and equipment
|
|
|
607
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
12,861
|
|
|
12,589
|
|
Less:
accumulated depreciation
|
|
|
(7,644
|
)
|
|
(6,749
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
5,217
|
|
$
|
5,840
|
|
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.
Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 was $1.3 billion,
$1.4 billion and $1.4 billion, respectively.
7. Franchises
and Goodwill
Franchise
rights represent the value attributed to agreements with local authorities
that
allow access to homes in cable service areas acquired through the purchase
of
cable systems. Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite life or an
indefinite-life as defined by 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 2005 and 2006 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 (less the
anticipated customer churn), and the new services added to those customers
in
future periods. The sum of the present value of the franchises' after-tax cash
flow in years 1 through 10 and the continuing value of the after-tax cash flow
beyond year 10 yields the fair value of the franchise.
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 (less
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
the
anticipated customer churn), and are calculated by projecting future after-tax
cash flows from these customers, including the right to deploy and market
additional services 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, 2002 the 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. Such impairment assessment
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.
As
of
December 31, 2006 and 2005, indefinite-lived and finite-lived intangible
assets are presented in the following table:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$
|
9,207
|
|
$
|
--
|
|
$
|
9,207
|
|
$
|
9,806
|
|
$
|
--
|
|
$
|
9,806
|
|
Goodwill
|
|
|
61
|
|
|
--
|
|
|
61
|
|
|
52
|
|
|
--
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,268
|
|
$
|
--
|
|
$
|
9,268
|
|
$
|
9,858
|
|
$
|
--
|
|
$
|
9,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$
|
23
|
|
$
|
7
|
|
$
|
16
|
|
$
|
27
|
|
$
|
7
|
|
$
|
20
|
|
For
the
year ended December 31, 2006, the net carrying amount of indefinite-lived and
finite-lived franchises was reduced by $452 million and $2 million,
respectively, related to cable asset sales completed in 2006 and
indefinite-lived franchises were further reduced by $147 million as a result
of
the asset impairment charges recorded related to these cable asset sales. For
the year ended December 31, 2005, the net carrying amount of indefinite-lived
franchises was reduced by $52 million related to cable asset sales completed
in
2005 (see Note 4). Additionally, in 2005, approximately $13 million 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
2005.
Franchise
amortization expense represents the amortization relating to franchises that
did
not qualify for indefinite-life treatment under SFAS No. 142, including costs
associated with franchise renewals. Franchise amortization expense for the
years
ended December 31, 2006, 2005 and 2004 was $2 million, $4 million, and $3
million, respectively. The Company expects that amortization expense on
franchise assets will be approximately $1 million annually for each of the
next
five years. Actual amortization expense in future periods could differ from
these
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
estimates
as a result of new intangible asset acquisitions or divestitures, changes in
useful lives and other relevant factors.
For
the
year ended December 31, 2006, the net carrying amount of goodwill increased
$9
million as a result of the Company’s purchase of certain cable systems in
Minnesota from Seren Innovations, Inc. in January 2006.
8. Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of December 31, 2006
and 2005:
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Accounts
payable - trade
|
|
$
|
92
|
|
$
|
114
|
|
Accrued
capital expenditures
|
|
|
97
|
|
|
73
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
Interest
|
|
|
410
|
|
|
333
|
|
Programming
costs
|
|
|
268
|
|
|
269
|
|
Franchise
related fees
|
|
|
68
|
|
|
67
|
|
Compensation
|
|
|
110
|
|
|
90
|
|
Other
|
|
|
253
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,298
|
|
$
|
1,191
|
|
9.
Long-Term Debt
Long-term
debt consists of the following as of December 31, 2006 and 2005:
|
2006
|
|
2005
|
|
Principal
|
|
Accreted
|
|
Principal
|
|
Accreted
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.750%
convertible senior notes due June 1, 2006
|
$
|
--
|
|
$
|
--
|
|
$
|
20
|
|
$
|
20
|
|
|
5.875%
convertible senior notes due November 16, 2009
|
|
413
|
|
|
408
|
|
|
863
|
|
|
843
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.250%
senior notes due April 1, 2007
|
|
105
|
|
|
105
|
|
|
105
|
|
|
105
|
|
|
8.625%
senior notes due April 1, 2009
|
|
187
|
|
|
187
|
|
|
292
|
|
|
292
|
|
|
10.000%
senior notes due April 1, 2009
|
|
105
|
|
|
105
|
|
|
154
|
|
|
154
|
|
|
10.750%
senior notes due October 1, 2009
|
|
71
|
|
|
71
|
|
|
131
|
|
|
131
|
|
|
9.625%
senior notes due November 15, 2009
|
|
52
|
|
|
52
|
|
|
107
|
|
|
107
|
|
|
10.250%
senior notes due January 15, 2010
|
|
32
|
|
|
32
|
|
|
49
|
|
|
49
|
|
|
11.750%
senior discount notes due January 15, 2010
|
|
21
|
|
|
21
|
|
|
43
|
|
|
43
|
|
|
11.125%
senior notes due January 15, 2011
|
|
52
|
|
|
52
|
|
|
217
|
|
|
217
|
|
|
13.500%
senior discount notes due January 15, 2011
|
|
62
|
|
|
62
|
|
|
94
|
|
|
94
|
|
|
9.920%
senior discount notes due April 1, 2011
|
|
63
|
|
|
63
|
|
|
198
|
|
|
198
|
|
|
10.000%
senior notes due May 15, 2011
|
|
71
|
|
|
71
|
|
|
137
|
|
|
136
|
|
|
11.750%
senior discount notes due May 15, 2011
|
|
55
|
|
|
55
|
|
|
125
|
|
|
120
|
|
|
12.125%
senior discount notes due January 15, 2012
|
|
91
|
|
|
91
|
|
|
113
|
|
|
100
|
CIH:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due January 15, 2014
|
|
151
|
|
|
151
|
|
|
151
|
|
|
151
|
|
|
13.500%
senior discount notes due January 15, 2014
|
|
581
|
|
|
581
|
|
|
581
|
|
|
578
|
|
|
9.920%
senior discount notes due April 1, 2014
|
|
471
|
|
|
471
|
|
|
471
|
|
|
471
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
|
|
10.000%
senior notes due May 15, 2014
|
|
299
|
|
|
299
|
|
|
299
|
|
|
299
|
|
|
11.750%
senior discount notes due May 15, 2014
|
|
815
|
|
|
815
|
|
|
815
|
|
|
781
|
|
|
12.125%
senior discount notes due January 15, 2015
|
|
217
|
|
|
216
|
|
|
217
|
|
|
192
|
CCH
I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.000%
senior notes due October 1, 2015
|
|
3,987
|
|
|
4,092
|
|
|
3,525
|
|
|
3,683
|
CCH
II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due September 15, 2010
|
|
2,198
|
|
|
2,190
|
|
|
1,601
|
|
|
1,601
|
|
|
10.250%
senior notes due October 1, 2013
|
|
250
|
|
|
262
|
|
|
--
|
|
|
--
|
CCO
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
floating notes due December 15, 2010
|
|
550
|
|
|
550
|
|
|
550
|
|
|
550
|
|
|
8
3/4% senior notes due November 15, 2013
|
|
800
|
|
|
795
|
|
|
800
|
|
|
794
|
Charter
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8%
senior second-lien notes due April 30, 2012
|
|
1,100
|
|
|
1,100
|
|
|
1,100
|
|
|
1,100
|
|
|
8
3/8% senior second-lien notes due April 30, 2014
|
|
770
|
|
|
770
|
|
|
733
|
|
|
733
|
Renaissance
Media Group LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior discount notes due April 15, 2008
|
|
--
|
|
|
--
|
|
|
114
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Facilities
|
|
5,395
|
|
|
5,395
|
|
|
5,731
|
|
|
5,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,964
|
|
$
|
19,062
|
|
$
|
19,336
|
|
$
|
19,388
|
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. Certain of the CIH notes, CCH
I
notes, and CCH II notes issued in exchange for Charter Holdings notes and
Charter convertible notes in 2005 and 2006 are recorded for financial reporting
purposes at values different from the current accreted value for legal purposes
and notes indenture purposes (the amount that is currently payable if the debt
becomes immediately due). As of December 31, 2006, the accreted value of the
Company’s debt for legal purposes and notes indenture purposes is $18.8
billion.
Charter
Convertible Notes
The
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 were 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 included
anti-dilutive provisions, which automatically occur based on the occurrence
of
specified events to provide protection rights to holders of the notes.
Additionally, Charter could adjust the conversion ratio under certain
circumstances when deemed appropriate. These notes were 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.
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,
resulting in a gain on debt extinguishment of approximately $3
million.
In
June
2006, the Company retired the remaining $20 million principal amount of
Charter’s 4.75% convertible senior notes due 2006.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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 November
16,
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.
Charter
Holdco used a portion of the proceeds from the sale of the 5.875% convertible
senior 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 semi-annual interest payments on
Charter’s convertible senior notes scheduled in 2007. CCHC also holds an
additional $450 million of Charter’s convertible senior notes. As a
result, if CCHC continues to hold those notes, CCHC will receive interest
payments on the convertible senior notes from the pledged government
securities. The cumulative amount of interest payments expected to be
received by CCHC may be available to be distributed to pay interest on the
outstanding $413 million of the convertible senior notes due in 2008 and May
2009, although CCHC may use those amounts for other purposes. The fair value
of
the pledged securities was $49 million and $97 million at December 31, 2006
and
2005, respectively.
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.
In
September 2006, CCHC and CCH II completed the exchange of $450 million principal
amount of Charter’s outstanding 5.875% senior convertible notes due 2009 for
$188 million in cash, 45 million shares of Charter’s Class A common stock valued
at $68 million and $146 million principal amount of 10.25% CCH II notes due
2010. The convertible notes received in the exchange are held by CCHC. The
exchange between Charter and CCHC and CCH II resulted in a gain on
extinguishment of debt of approximately $20 million.
Charter
Holdings Notes
The
Charter Holdings notes are senior debt obligations of Charter Holdings and
Charter Communications Capital Corporation (“Charter Capital”). They
rank
equally with all other current and future unsecured, 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 Charter Operating notes,
and the Charter Operating credit facilities.
Except
for the 8.250% notes due April 1, 2007, the 10.00% notes due April 1, 2009,
the
10.75% notes due October 1, 2009 and the 9.625% notes due November 15, 2009
which notes may not be redeemed prior to their respective maturity dates, the
Charter Holdings notes may be redeemed at the option of Charter Holdings on
or
after varying dates in 2006 and 2007, 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 2007 through
2010.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
In
the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding notes at 101%
of
their principal amount or accreted value, as applicable, plus accrued and
unpaid
interest, if any.
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 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 Charter Holdings notes
received in the exchange were thereafter distributed to Charter Holdings and
cancelled. The exchanges resulted in a gain on extinguishment of debt of
approximately $10 million.
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
CCH I and CIH new debt securities. The Charter Holdings notes received in the
exchange were thereafter distributed to Charter Holdings and cancelled. The
exchanges resulted in a gain on extinguishment of debt of approximately $490
million.
In
September 2006, Charter Holdings, CCH I and CCH II, completed the exchange
of
approximately $797 million in total principal amount of outstanding debt
securities of Charter Holdings for $250 million principal amount of new 10.25%
CCH II notes due 2013 and $462 million principal amount of 11% CCH I notes
due
2015. The Charter Holdings notes received in the exchange were thereafter
distributed to Charter Holdings and cancelled. The exchange between Charter
Holdings and CCH I and CCH II resulted in a gain on extinguishment of debt
of
approximately $108 million.
CCH
I Holdings, LLC Notes
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 Charter Operating
notes and the Charter Operating credit facilities. The CIH notes are guaranteed
on a senior unsecured basis by Charter Holdings. As of December 31, 2006, there
was $2.3 billion in accreted value for legal purposes and notes indentures
purposes.
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
The
CCH I
notes are guaranteed on a senior unsecured basis 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, and by
a
pledge of CCH I’s 70% interest in the 24,273,943
Class A preferred membership units of CC VIII (collectively, the "CC VIII
interest"),
and the
proceeds thereof.
Such
pledges are subject to significant limitations as described in the related
pledge agreement.
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 Charter Operating notes and the Charter Operating credit
facilities. As of December 31, 2006, there was $4.0 billion in accreted value
for legal purposes and notes indentures purposes.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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, LLC Notes
The
CCH
II Notes are senior debt obligations of CCH II and CCH II Capital Corp. The
CCH
II Notes rank equally with all other current and future unsecured,
unsubordinated obligations of CCH II and CCH II Capital Corp. The CCH II 2013
Notes are guaranteed on a senior unsecured basis by Charter Holdings. The CCH
II
notes are structurally
subordinated to
all
obligations of subsidiaries of CCH II, including the CCO Holdings notes, the
Charter Operating notes and the Charter Operating credit
facilities.
On
or
after September 15, 2008, the issuers of the CCH II 2010 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 2010 Notes redeemed, plus,
in each case, any accrued and unpaid interest. On or after October 1, 2010,
the
issuers of the CCH II 2013 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 October 1, 2012
of 100.0% of the principal amount of the CCH II 2013 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.
CCO
Holdings Notes
The
CCO
Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings
Capital Corp. They rank equally with all other current and future unsecured,
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 Charter Operating notes and the
Charter Operating credit facilities.
On
or
after November 15, 2008, the issuers of the CCO Holdings 8 ¾% 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
November 15, 2011 of 100.0% of the principal amount of the CCO Holdings 8 ¾%
senior notes redeemed, plus, in each case, any accrued and unpaid
interest.
Interest
on the CCO Holdings senior floating rate notes accrues at the LIBOR rate (5.36%
and 4.53% as of December 31, 2006 and 2005, respectively) plus 4.125% annually,
from the date interest was most recently paid.
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.
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
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Charter
Operating Notes
The
Charter Operating notes are senior debt obligations of Charter Operating and
Charter Communications Operating Capital Corp. To the extent of the value of
the
collateral (but subject to the prior lien of the credit facilities), they rank
effectively senior to all of Charter Operating’s future unsecured senior
indebtedness. 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). CCO Holdings and those subsidiaries of Charter
Operating that are guarantors of, or otherwise obligors with respect to,
indebtedness under the Charter Operating credit facilities and related
obligations, guarantee the Charter Operating notes.
Charter
Operating may, prior to April 30, 2007 in the event of a qualified equity
offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the Charter Operating notes at a redemption price of
108.375% with respect to the 8 3/8% senior second-lien notes due 2014 and a
redemption price of 108% with respect to the 8% senior second-lien notes due
2012.
Charter
Operating may, at any time and from time to time, at their option, redeem the
outstanding 8% second lien notes due 2012, in whole or in part, at a redemption
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date, plus the Make-Whole Premium. The
Make-Whole Premium is an amount equal to the excess of (a) the present value
of
the remaining interest and principal payments due on a 8% senior second-lien
notes due 2012 to its final maturity date, computed using a discount rate equal
to the Treasury Rate on such date plus 0.50%, over (b) the outstanding principal
amount of such Note.
On
or
after April 30, 2009, Charter Operating may redeem all or a part of the 8 3/8%
senior second lien notes at a redemption price that declines ratably from the
initial redemption price of 104.188% to a redemption price on or after April
30,
2012 of 100% of the principal amount of the 8 3/8% senior second lien notes
redeemed plus in each case accrued and unpaid interest.
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.
Renaissance
Notes
In
March
2006, the Company exchanged $37 million of Renaissance Media Group LLC 10%
senior discount notes due 2008 for $37 million principal amount of new Charter
Operating 8 3/8% senior second-lien notes due 2014 issued in a private
transaction. The terms and conditions of the new Charter Operating 8 3/8% senior
second-lien notes due 2014 are identical to Charter Operating’s currently
outstanding 8 3/8% senior second-lien notes due 2014. In June 2006, the Company
retired the remaining $77 million principal amount of Renaissance Media Group
LLC’s 10% senior discount notes due 2008.
High-Yield
Restrictive Covenants; Limitation on Indebtedness. The
indentures governing the Charter Holdings, CIH, CCH II, CCO Holdings and Charter
Operating notes 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., and all of their
restricted subsidiaries to:
|
·
|
pay
dividends on equity or repurchase
equity;
|
|
·
|
sell
all or substantially all of their assets or merge with or into other
companies;
|
|
·
|
enter
into sale-leasebacks;
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
|
·
|
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
|
Charter
Operating Credit Facilities
The
Charter Operating credit facilities provide borrowing availability of up to
$6.85 billion as follows:
· |
term
facility with a total principal amount of $5.0 billion, repayable in
23 equal quarterly installments, commencing September 30, 2007 and
aggregating in each loan year to 1% of the original amount of the
term
facility, with the remaining balance due at final maturity in
2013;
|
· |
a
revolving credit facility of $1.5 billion, with a maturity date in
2010; and
|
· |
a
revolving credit facility (the “R/T Facility”) of $350.0 million,
that converts to term loans no later than April 2007, repayable on
the
same terms as the term facility described
above.
|
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate (5.36% to
5.38% as of December 31, 2006 and 4.06% to 4.50% as of December 31, 2005),
as
defined, plus a margin. The margin prior to the amendment of the facility in
April 2006 for Eurodollar loans was 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. The margin on Eurodollar rate term
loans after the amendment of the credit facilities in April 2006 is 2.625%
and
on base rate term loans is 1.625%. The margin on revolving credit facility
Eurodollar rate loans is 3.00%
and
2.00% on base rate loans. A quarterly commitment fee of up to .75% is payable
on
the average daily unborrowed balance of the revolving credit facility and,
until
converted into term loans, the R/T facility.
The
obligations of Charter Operating 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
certain subsidiaries (the “non-guarantor 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), and (ii)
a
pledge by CCO Holdings of the equity interests owned by it in Charter Operating,
as well as intercompany obligations owing to it by Charter Operating.
As
of
December 31, 2006, outstanding borrowings under the Charter Operating credit
facilities were approximately $5.4 billion and the unused total potential
availability was approximately $1.3 billion,
although
the actual availability at that time was only $1.1 billion because of limits
imposed 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
and
interest coverage, to be tested as of the end of each quarter. Additionally,
the
Charter Operating credit facilities contain provisions requiring mandatory
loan
prepayments under specific circumstances, including in connection with certain
sales of assets,
so long
as the proceeds have not been reinvested in the business.
The
Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the Charter convertible
notes, the CCHC note, the Charter Holdings notes, the CIH notes, the CCH I
notes, the CCH II notes, the CCO Holdings notes, the CCHC note and the Charter
Operating senior second-lien 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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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 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,
|
|
·
|
certain
of Charter Operating’s indirect or direct parent companies and Charter
Operating and its subsidiaries having indebtedness in excess of $500
million aggregate principal amount which remains undefeased three
months
prior to the final maturity of such indebtedness,
and
|
|
·
|
certain
changes in control.
|
Based
upon outstanding indebtedness as of December 31, 2006, 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, 2006, are as follows:
Year
|
|
Amount
|
|
|
|
|
|
2007
|
|
$
|
130
|
|
2008
|
|
|
50
|
|
2009
|
|
|
878
|
|
2010
|
|
|
3,246
|
|
2011
|
|
|
353
|
|
Thereafter
|
|
|
14,307
|
|
|
|
|
|
|
|
|
$
|
18,964
|
|
For
the
amounts of debt scheduled to mature during 2007, it is management’s intent to
fund the repayments from borrowings on the Company’s revolving credit facility.
The accompanying consolidated balance sheets reflect this intent by presenting
all debt balances as long-term while the table above reflects actual debt
maturities as of the stated date.
10. Note
Payable - Related Party
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
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 Class B 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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, 2006 and
2005
is $57 million and $49 million, respectively. If not redeemed prior to maturity
in 2020, $380 million would be due under this note.
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 $413
million and $863 million at December 31, 2006 and 2005, 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, 2006
and 2005 primarily represents preferred membership interests in CC VIII, an
indirect subsidiary of Charter Holdco, of $192 million and $188 million,
respectively. As more fully described in Note
22,
this preferred interest is held by Mr. Allen, Charter’s Chairman and controlling
shareholder, and CCH I. 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 $5.9
billion, $4.8 billion, and $4.4 billion as of December 31, 2006, 2005, and
2004,
respectively, thus minority interest in Charter Holdco has been eliminated.
Minority ownership, for accounting purposes, was 48%, 52%, and 53% as of
December 31, 2006, 2005, and 2004, respectively. Because minority interest
in
Charter Holdco is substantially eliminated, Charter absorbs all losses of
Charter Holdco. Subject to any changes in Charter Holdco’s capital structure,
future losses will continue to be absorbed by Charter for GAAP purposes. Changes
to minority interest consist of the following for the periods presented:
|
|
Minority
|
|
|
Interest
|
|
|
|
Balance,
December 31, 2003
|
$
|
689
|
Minority
interest in loss of a subsidiary
|
|
(19)
|
Minority
interest in cumulative effect of accounting change
|
|
(19)
|
Reclass
of Helicon, LLC interest
|
|
(25)
|
Changes
in fair value of interest rate agreements
|
|
22
|
|
|
|
Balance,
December 31, 2004
|
|
648
|
Minority
interest in loss of subsidiary
|
|
(1)
|
CC
VIII settlement - exchange of interests
|
|
(467)
|
Changes
in fair value of interest rate agreements and other
|
|
8
|
|
|
|
Balance,
December 31, 2005
|
|
188
|
Minority
interest in income of subsidiary
|
|
4
|
|
|
|
Balance,
December 31, 2006
|
$
|
192
|
12. Preferred
Stock - Redeemable
In
November 2005, Charter repurchased 508,546 shares of its Series A Convertible
Redeemable Preferred Stock (the “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.
The remaining Preferred Stock is redeemable by Charter at its option 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
whole
or
in part, at the option of the holders through August 31, 2008, into shares
of
common stock, at an initial conversion price of $24.71 per share of common
stock, subject to certain customary adjustments.
In
connection with the repurchase, the holders of the Preferred Stock consented
to
an amendment to the Certificate of Designation governing the Preferred Stock
that eliminated the quarterly dividends on all of the outstanding Preferred
Stock and provided 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.
13. Common
Stock
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 B common stock.
Charter
issued 45 million shares of Class A Common Stock in September 2006 in connection
with the Charter, CCHC and CCH II exchange. See Note 2.
The
following table summarizes our share activity for the three years ended December
31, 2006:
|
|
Class
A
|
|
Class
B
|
|
|
Common
|
|
Common
|
|
|
Stock
|
|
Stock
|
|
|
|
|
|
BALANCE,
January 1, 2004
|
|
295,038,606
|
|
50,000
|
Option
exercises
|
|
839,598
|
|
--
|
Restricted
stock issuances, net of cancellations
|
|
2,072,748
|
|
--
|
Issuances
in exchange for convertible notes
|
|
7,252,818
|
|
--
|
|
|
|
|
|
BALANCE,
December 31, 2004
|
|
305,203,770
|
|
50,000
|
Option
exercises
|
|
19,717
|
|
--
|
Restricted
stock issuances, net of cancellations
|
|
2,669,884
|
|
--
|
Issuances
pursuant to share lending agreement
|
|
94,911,300
|
|
--
|
Issuance
of shares in Securities Class Action settlement
|
|
13,400,000
|
|
--
|
|
|
|
|
|
BALANCE,
December 31, 2005
|
|
416,204,671
|
|
50,000
|
Option
exercises
|
|
1,046,540
|
|
--
|
Restricted
stock issuances, net of cancellations
|
|
809,474
|
|
--
|
Issuances
pursuant to share lending agreement
|
|
22,038,000
|
|
--
|
Returns
pursuant to share lending agreement
|
|
(77,104,100)
|
|
--
|
Issuances
in exchange for convertible notes
|
|
45,000,000
|
|
--
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
407,994,585
|
|
50,000
|
Charter
issued 22.0 million and 94.9 million shares of Class A common stock during
2006
and 2005, respectively, in public offerings. 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").
As
of December 31, 2006, 77.1 million shares had been returned under the share
lending agreement.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
These
offerings of Charter’s Class A common stock were conducted to facilitate
transactions by which investors in Charter’s 5.875% convertible senior notes 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 116.9 million shares pursuant to this share lending agreement is
essentially analogous to a sale of shares coupled with a forward contract for
the reacquisition of the shares at a future date. An instrument that requires
physical settlement by repurchase of a fixed number of shares in exchange for
cash is considered a forward purchase instrument. While the share lending
agreement does not require a cash payment upon return of the shares, physical
settlement is required (i.e., the shares borrowed must be returned at the end
of
the arrangement). The fair value of the 39.8 million loaned shares outstanding
is approximately $122 million as of December 31, 2006. However, the net effect
on shareholders’ deficit of the shares lent pursuant to the share lending
agreement, which includes Charter’s requirement to lend the shares and the
counterparties’ requirement to return the shares, is de minimis
and represents the cash received upon lending of the shares and is equal to
the
par value of the common stock to be issued.
14. 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, 2006, 2005, and 2004 was $1.4 billion, $961 million and $4.3
billion, respectively.
15. 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, 2006, 2005 and 2004, other
income, net includes
gains of $2 million, $3 million and $4 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 specified
by
SFAS No. 133 are reported in accumulated other comprehensive loss. For the
years
ended December 31, 2006, 2005, and 2004, a loss of $1 million and gains of
$16
million and $42 million, respectively, related to derivative instruments
designated as cash flow hedges, were 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).
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Certain
interest rate derivative instruments are not designated as hedges as they
do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative instruments
not
designated as hedges are marked to fair value, with the impact recorded
as
other
income, net, in
the
Company’s consolidated statement of operations.
For the
years ended December 31, 2006, 2005, and 2004
other
income, net
includes
gains of $4 million, $47 million, and $65 million, respectively, for interest
rate derivative instruments not designated as hedges.
As
of
December 31, 2006, 2005, and 2004, the Company had outstanding $1.7
billion, $1.8 billion, and $2.7 billion and $0, $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 loss. The amounts exchanged are determined by reference
to
the notional amount and the other terms of the contracts.
16. Fair
Value of Financial Instruments
The
Company has estimated the fair value of its financial instruments as of
December 31, 2006 and 2005 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, 2006 and 2005 are based on quoted market prices, and the fair
value of the credit facilities is based on dealer quotations.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
A
summary
of the carrying value and fair value of the Company’s debt and related interest
rate agreements at December 31, 2006 and 2005 is as follows:
|
|
2006
|
|
2005
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
convertible notes
|
|
$
|
408
|
|
|
$
|
576
|
|
|
$
|
863
|
|
|
$
|
647
|
Charter
Holdings debt
|
|
|
967
|
|
|
|
932
|
|
|
|
1,746
|
|
|
|
1,145
|
CIH
debt
|
|
|
2,533
|
|
|
|
2,294
|
|
|
|
2,472
|
|
|
|
1,469
|
CCH
I debt
|
|
|
4,092
|
|
|
|
4,104
|
|
|
|
3,683
|
|
|
|
2,959
|
CCH
II debt
|
|
|
2,452
|
|
|
|
2,575
|
|
|
|
1,601
|
|
|
|
1,592
|
CCO
Holdings debt
|
|
|
1,345
|
|
|
|
1,391
|
|
|
|
1,344
|
|
|
|
1,299
|
Charter
Operating debt
|
|
|
1,870
|
|
|
|
1,943
|
|
|
|
1,833
|
|
|
|
1,820
|
Credit
facilities
|
|
|
5,395
|
|
|
|
5,418
|
|
|
|
5,731
|
|
|
|
5,719
|
Other
|
|
|
--
|
|
|
|
--
|
|
|
|
115
|
|
|
|
114
|
Interest
Rate Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
--
|
|
|
|
--
|
|
|
|
(4)
|
|
|
|
(4)
|
Collars
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
The
weighted average interest pay rate for the Company’s interest rate swap
agreements was 10.23% and 9.51% at December 31, 2006 and 2005,
respectively.
17. Other
Operating Expenses, Net
Other
operating expenses, net consist of the following for the years
presented:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Gain)
loss on sale of assets, net
|
|
$
|
8
|
|
$
|
6
|
|
$
|
(86
|
)
|
Hurricane
asset retirement loss
|
|
|
--
|
|
|
19
|
|
|
--
|
|
Special
charges, net
|
|
|
13
|
|
|
7
|
|
|
104
|
|
Unfavorable
contracts and other settlements
|
|
|
--
|
|
|
--
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21
|
|
$
|
32
|
|
$
|
13
|
|
(Gain)
loss on sale of assets, net
(Gain)
loss on sale of assets represents the gain or loss recognized on the sale of
fixed assets and cable systems. For the year ended December 31, 2004, the gain
on sale of assets includes the gain recognized on the sale of certain cable
systems in Florida, Pennsylvania, Maryland, Delaware, New York and West Virginia
to Atlantic Broadband Finance, LLC.
Hurricane
asset retirement loss
For
the
year ended December 31, 2005, hurricane asset retirement loss represents the
write off of $19 million of the Company’s plants’ net book value as a result of
significant plant damage suffered by certain of the Company’s cable systems in
Louisiana as a result of hurricanes Katrina and Rita.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where
indicated)
Special
charges, net
Special
charges, net for the year ended December 31, 2006 primarily represent severance
associated with the closing of call centers and divisional restructuring.
Special charges, net for the year ended December 31, 2005 primarily represent
severance costs as a result of reducing workforce, consolidating administrative
offices and executive severance. For
the
year ended December 31, 2005, special charges, net were offset by approximately
$2 million related to an agreed upon discount in respect of the portion of
settlement consideration payable under the settlement terms of class action
lawsuits. Special
charges, net for the year ended December 31, 2004 primarily represent the
settlement of the consolidated federal class action and federal derivative
action lawsuits and litigation costs related to the settlement of a 2004
national class action suit coupled with severance costs as a result of reducing
workforce, consolidating administrative offices and executive severance.
Unfavorable
contracts and other settlements
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.
18. Gain
(loss) on extinguishment of debt and preferred stock
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Charter
Holdings debt exchanges
|
|
$
|
108
|
|
$
|
500
|
|
$
|
--
|
|
Charter
Operating credit facility refinancing
|
|
|
(27
|
)
|
|
--
|
|
|
(21
|
)
|
Charter
convertible note repurchases / exchanges
|
|
|
20
|
|
|
3
|
|
|
(10
|
)
|
Charter
preferred stock repurchase
|
|
|
--
|
|
|
23
|
|
|
--
|
|
CC
V Holdings notes repurchase
|
|
|
--
|
|
|
(5
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101
|
|
$
|
521
|
|
$
|
(31
|
)
|
19. Other
Income, Net
Other
income, net consists of the following for years presented:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative instruments and hedging
activities,
net (Note 15)
|
|
$
|
6
|
|
$
|
50
|
|
$
|
69
|
|
Minority
interest (Note 11)
|
|
|
(4
|
)
|
|
1
|
|
|
19
|
|
Gain
on investment (Note 3)
|
|
|
16
|
|
|
22
|
|
|
4
|
|
Loss
on debt to equity conversion
|
|
|
--
|
|
|
--
|
|
|
(23
|
)
|
Other,
net
|
|
|
2
|
|
|
--
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20
|
|
$
|
73
|
|
$
|
68
|
|
Loss
on debt to equity conversion
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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where
indicated)
20. Stock
Compensation Plans
The
Company has stock option plans (the “Plans”) which provide for the grant of
non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or shares of restricted stock (not to exceed 20,000,000 shares of Charter
Class A common stock), as each term is defined in the Plans. Employees,
officers, consultants and directors of the Company and its subsidiaries and
affiliates are eligible to receive grants under the Plans. Options granted
generally vest over four to five years from the grant date, with 25% generally
vesting on the anniversary of the grant date and ratably thereafter. Generally,
options expire 10 years from the grant date. The Plans allow for the
issuance of up to a total of 90,000,000 shares of Charter Class A common
stock (or units convertible into Charter Class A common stock).
In
the
years ended December 31, 2006, 2005 and 2004, certain directors were awarded
a
total of 574,543, 492,225 and 182,932 shares, respectively, of restricted Class
A common stock of which 34,239 shares had been cancelled as of December 31,
2006. The shares vest one year from the date of grant. In 2006, 2005 and 2004,
in connection with new employment agreements, certain officers were awarded
100,000, 2,987,500 and 50,000 shares, respectively, of restricted Class A common
stock of which 50,000 shares had been cancelled as of December 31, 2006. The
shares vest
annually over a one to three-year period beginning from the date of grant.
As of
December 31, 2006, deferred compensation remaining to be recognized in future
periods totaled $12 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,
2006, 2005 and 2004, is as follows (amounts in thousands, except per share
data):
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, beginning of period
|
|
|
29,127
|
|
$
|
4.47
|
|
|
24,835
|
|
$
|
6.57
|
|
|
47,882
|
|
$
|
12.48
|
Granted
|
|
|
6,065
|
|
|
1.28
|
|
|
10,810
|
|
|
1.36
|
|
|
9,405
|
|
|
4.88
|
Exercised
|
|
|
(1,049)
|
|
|
1.41
|
|
|
(17)
|
|
|
1.11
|
|
|
(839)
|
|
|
2.02
|
Cancelled
|
|
|
(7,740)
|
|
|
4.39
|
|
|
(6,501)
|
|
|
7.40
|
|
|
(31,613)
|
|
|
15.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, end of period
|
|
|
26,403
|
|
$
|
3.88
|
|
|
29,127
|
|
$
|
4.47
|
|
|
24,835
|
|
$
|
6.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining contractual life
|
|
|
8
years
|
|
|
|
|
|
8
years
|
|
|
|
|
|
8
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, end of period
|
|
|
10,984
|
|
$
|
6.62
|
|
|
9,999
|
|
$
|
7.80
|
|
|
7,731
|
|
$
|
10.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$
|
0.96
|
|
|
|
|
$
|
0.65
|
|
|
|
|
$
|
3.71
|
|
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2006:
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.00
|
|
—
|
|
$
|
1.36
|
|
10,197
|
|
9
years
|
|
$
|
1.15
|
|
1,379
|
|
8
years
|
|
$
|
1.18
|
$
|
1.53
|
|
—
|
|
$
|
1.96
|
|
5,101
|
|
8
years
|
|
|
1.55
|
|
1,825
|
|
7
years
|
|
|
1.56
|
$
|
2.85
|
|
—
|
|
$
|
3.35
|
|
2,608
|
|
7
years
|
|
|
2.96
|
|
1,495
|
|
6
years
|
|
|
2.90
|
$
|
4.30
|
|
—
|
|
$
|
5.17
|
|
5,391
|
|
7
years
|
|
|
5.03
|
|
3,179
|
|
7
years
|
|
|
5.00
|
$
|
9.13
|
|
—
|
|
$
|
12.27
|
|
1,426
|
|
5
years
|
|
|
10.95
|
|
1,426
|
|
5
years
|
|
|
10.95
|
$
|
13.96
|
|
—
|
|
$
|
20.73
|
|
1,418
|
|
3
years
|
|
|
18.61
|
|
1,418
|
|
3
years
|
|
|
18.61
|
$
|
21.20
|
|
—
|
|
$
|
23.09
|
|
262
|
|
4
years
|
|
|
22.84
|
|
262
|
|
4
years
|
|
|
22.84
|
In
2004,
the Company completed 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. 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.
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
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 exceed a
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
10.0 million shares in the year ended December 31, 2006 under this program,
respectively, and recognized expense of $4 million. In 2005 and 2004, Charter
granted 3.2 million and 6.9 million shares under this program and recognized
no
expense in 2005 or 2004 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
and Benefits Committee of Charter’s Board of Directors approved a modification
to the financial performance measures under Charter's LTIP required to be met
for the 2005 performance shares to vest. Such expense is being recognized over
the remaining two year service period.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
21. 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. Charter also records financial statement deferred tax
assets and liabilities related to its investments in Charter
Holdco.
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. Since 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, 2006 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 $1 billion through
December 31, 2006.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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
have
the right at anytime to exchange some or all of their membership units in
Charter Holdco for Charter’s Class B common stock, be merged with Charter
in exchange for Charter’s Class B common stock, or be acquired by Charter in a
non-taxable reorganization in exchange for Charter’s Class B common stock. 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, 2006, 2005 and 2004, 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. 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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Current
and deferred income tax benefit (expense) is as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Current
expense:
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
$
|
(2
|
)
|
$
|
(2
|
)
|
$
|
(2
|
)
|
State
income taxes
|
|
|
(5
|
)
|
|
(4
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current
income tax expense
|
|
|
(7
|
)
|
|
(6
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
(177
|
)
|
|
(95
|
)
|
|
175
|
|
State
income taxes
|
|
|
(25
|
)
|
|
(14
|
)
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax benefit (expense)
|
|
|
(202
|
)
|
|
(109
|
)
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income benefit (expense)
|
|
$
|
(209
|
)
|
$
|
(115
|
)
|
$
|
194
|
|
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. Also a portion of income tax expense was recorded
as a
reduction of income (loss) from discontinued operations in the years ended
December 31, 2006, 2005, and 2004. See Note 4.
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, 2006, 2005, and 2004 as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Statutory
federal income taxes
|
|
$
|
407
|
|
$
|
298
|
|
$
|
1,288
|
|
Statutory
state income taxes, net
|
|
|
58
|
|
|
43
|
|
|
184
|
|
Franchises
|
|
|
(202
|
)
|
|
(109
|
)
|
|
200
|
|
Valuation
allowance provided and other
|
|
|
(472
|
)
|
|
(347
|
)
|
|
(1,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
(115
|
)
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
cumulative effect of accounting change and
discontinued
operations
|
|
|
22
|
|
|
3
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
$
|
(187
|
)
|
$
|
(112
|
)
|
$
|
134
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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, 2006 and
2005 which are included in long-term liabilities are presented
below.
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
2,689
|
|
$
|
2,352
|
|
Investment
in Charter Holdco
|
|
|
1,955
|
|
|
1,817
|
|
Other
|
|
|
5
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
4,649
|
|
|
4,175
|
|
Less:
valuation allowance
|
|
|
(4,200
|
)
|
|
(3,656
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
449
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Investment
in Charter Holdco
|
|
$
|
(737
|
)
|
$
|
(597
|
)
|
Indirect
Corporate Subsidiaries:
|
|
|
|
|
|
|
|
Property,
plant & equipment
|
|
|
(31
|
)
|
|
(41
|
)
|
Franchises
|
|
|
(195
|
)
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
Gross
deferred tax liabilities
|
|
|
(963
|
)
|
|
(844
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(514
|
)
|
$
|
(325
|
)
|
As
of
December 31, 2006, the Company has deferred tax assets of $4.6 billion,
which include $2.0 billion of financial losses in excess of tax losses allocated
to Charter from Charter Holdco. The deferred tax assets also include $2.7
billion of tax net operating loss carryforwards (generally expiring in years
2007 through 2026) of Charter and its indirect corporate subsidiaries. Valuation
allowances of $4.2 billion exist with respect to these deferred tax assets
of
which $2.2 billion relate to the tax net operating loss carryforwards.
The
amount 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 impact of any 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 the
issuance of shares of common stock upon future conversion of Charter’s
convertible senior notes, reacquisition of the shares borrowed under the share
lending agreement by Charter (of which 77.1 million were returned through
December 31, 2006), 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, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
The
deferred tax liability for Charter’s investment in Charter Holdco is largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite lived. If certain exchanges, as described above, were
to
take place, Charter would likely record for financial reporting purposes
additional deferred tax liability related to its increased interest in Charter
Holdco and the related underlying indefinite lived franchise
assets.
The
total
valuation allowance for deferred tax assets as of December 31, 2006 and
2005 was $4.2 billion and $3.7 billion, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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.
Charter
Holdco is currently under examination by the Internal Revenue Service for the
tax years ending December 31, 2003 and 2002. In
addition, one of the Company’s indirect corporate subsidiaries is under
examination by the Internal Revenue Service for the tax year ended December
31,
2004. The
Company’s results (excluding Charter and its indirect corporate subsidiaries,
with the exception of the indirect corporate subsidiary under examination)
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.
22. 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 2006, 2005 and 2004, Charter Holdco paid to Charter $51
million, $64 million and $49 million, respectively, related to interest on
the
mirror notes, and Charter Holdco paid an additional $0, $3 million and $4
million, respectively, 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 and Charter Holdco provide
management services for the cable systems owned or operated by their
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 charged directly to the Company’s operating
subsidiaries and are included within operating costs in the accompanying
consolidated statements of operations. Such costs totaled $231 million, $205
million, and $195 million for the years ended December 31, 2006, 2005, and
2004, 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, 2006, 2005, and 2004, 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
Company’s credit facilities 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. Charter or Charter Holdco
or
any of their subsidiaries may not pursue, or allow their subsidiaries to pursue,
a business transaction outside of this scope, unless Mr. Allen consents to
Charter or its subsidiaries engaging in the business transaction. The cable
transmission business means the business of transmitting video, audio,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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. (“Digeo”), 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, 2006, 2005, and
2004 were each less than 1% of total operating expenses.
TechTV.
The
Company received from TechTV programming for distribution via its cable system
pursuant to an affiliation agreement. In March 2004, Charter Holdco entered
into
agreements with Vulcan Programming and TechTV, which provided for, among other
things, 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 certain claims. For the years ended December 31, 2006, 2005,
and
2004, the Company recognized approximately $1 million, $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 to the Company pursuant to
a
carriage agreement. Under the carriage agreement, the Company paid Oxygen
approximately $8 million, $9 million, and $13 million for the years ended
December 31, 2006, 2005, and 2004, respectively. In addition, Oxygen paid 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, $0.1 million, and $1 million related to these launch
incentives as a reduction of programming expense for the years ended December
31, 2006, 2005 and 2004, respectively.
In
2005,
pursuant to an amended equity issuance agreement, Oxygen Media delivered 1
million shares of Oxygen Preferred Stock with a liquidation preference of $33.10
per share plus accrued dividends to Charter Holdco. 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
initial carriage agreement (which expired February 1, 2005) as a reduction
of
programming expense. For the years ended December 31, 2006,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
2005,
and
2004, the Company recorded approximately $0, $2 million, and $13 million,
respectively, as a reduction of programming expense. The carrying value of
the
Company’s investment in Oxygen was approximately $33 million as of December 31,
2006 and 2005.
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. At that time, the equity interest was 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 recovered its
amount contributed (the “Priority Return”), Charter Ventures should have had a
100% profit interest in DBroadband Holdings, LLC. Charter Ventures was not
required to make any capital contributions, including capital calls to
DBroadband Holdings, LLC. DBroadband Holdings, LLC therefore was 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 October 3, 2006,
Vulcan Ventures and Digeo recapitalized Digeo. In connection with such
recapitalization, DBroadband Holdings, LLC consented to the conversion of its
preferred stock holdings in Digeo to common stock, and Vulcan Ventures
surrendered its Priority Return to Charter Ventures. As a result, DBroadband
Holdings, LLC is now included in the Company’s consolidated financial
statements. Such amounts are immaterial. After the recapitalization, DBroadband
Holdings, LLC owns 1.8% of Digeo, Inc’s common stock. Digeo, Inc. is therefore
not included in the Company’s consolidated financial statements.
The
Company paid Digeo Interactive approximately $2 million, $3 million, and $3
million for the years ended December 31, 2006, 2005, and 2004, respectively,
for
customized development of the i-channels and the local content tool kit.
On
June
30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for
the
purchase of 100,000 digital video recorder (“DVR”) units. The software for these
DVR units is being supplied by Digeo Interactive, LLC under a license agreement
entered into in April 2004. Pursuant to a software license agreement with Digeo
Interactive for the right to use Digeo's proprietary software for DVR units,
Charter paid approximately $3 million and $1 million in license and maintenance
fees in 2006 and 2005, respectively.
Charter
paid approximately $11 million, $10 million, and $1 million for the years ended
December 31, 2006, 2005 and 2004, respectively, in capital purchases under
an
agreement with Digeo Interactive for the development, testing and purchase
of
70,000 Digeo PowerKey DVR units. 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.
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, the CC VIII
interest with an initial 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 became the holder of the CC VIII
interest, indirectly through an affiliate.
At
such
time through 2005, such interest was held at CC VIII and was subject to a
dispute between Mr. Allen and the Company as to the ultimate ownership of the
CC
VIII interest. In 2005, Mr. Allen, a Special Committee of independent directors,
Charter, Charter Holdco and certain of their affiliates, agreed to settle a
dispute related to the CC VIII interest. Pursuant to the Settlement, CII has
retained 30% of its CC VIII interest (the "Remaining Interests"). The Remaining
Interests are subject to certain transfer restrictions, including requirements
that the Remaining Interests participate in a sale with other holders or that
allow other holders to participate in a sale of the Remaining Interests, as
detailed in the revised CC VIII Limited Liability Company Agreement. CII
transferred the
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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 interest, 7.4% has been
transferred by CII to CCHC for the CCHC note (see Note 10). 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%.
As
part
of the debt exchange in September 2006 described in Note 2, CCHC contributed
the
CC VIII interest in the Class A preferred equity interests of CC VIII to CCH
I.
The CC VIII interest was pledged as security for all CCH I notes. The CC VIII
preferred interests are entitled to a 2% accreting priority return on the
priority capital.
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 $203 million of face value at
December 31, 2006.
23. Commitments
and Contingencies
Commitments
The
following table summarizes the Company’s payment obligations as of December 31,
2006 for its contractual obligations.
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
and Operating Lease Obligations (1)
|
$
|
95
|
|
$
|
20
|
|
$
|
17
|
|
$
|
15
|
|
$
|
17
|
|
$
|
8
|
|
$
|
18
|
Programming
Minimum Commitments (2)
|
|
854
|
|
|
349
|
|
|
287
|
|
|
218
|
|
|
--
|
|
|
--
|
|
|
--
|
Other
(3)
|
|
423
|
|
|
284
|
|
|
43
|
|
|
26
|
|
|
24
|
|
|
24
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,372
|
|
$
|
653
|
|
$
|
347
|
|
$
|
259
|
|
$
|
41
|
|
$
|
32
|
|
$
|
40
|
(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, 2006, 2005, and 2004, were $23 million, $22 million, and $22
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 $1.5 billion, $1.4
billion, and $1.3 billion, for the years ended December 31, 2006, 2005, and
2004, respectively. Certain of the Company’s
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
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, 2006, 2005, and 2004, was $44
million, $44 million, and $42 million, respectively.
|
|
·
|
The
Company pays franchise fees under multi-year franchise agreements
based on
a percentage of revenues generated 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 $175 million, $165 million, and $159 million for
the years
ended December 31, 2006, 2005, and 2004,
respectively.
|
|
·
|
The
Company also has $147 million in letters of credit, primarily to
its
various worker’s compensation, property and 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
In
2004,
the Company settled a series of lawsuits filed against Charter and certain
of
its former and present officers and directors (the “Settlement”). 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.
The
Settlement provided that 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. Charter elected to fund
$80 million of the 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)
paid in cash. In addition, Charter paid approximately $5 million in cash to
its insurance carrier. 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.
The
Company is a defendant or co-defendant in several unrelated lawsuits claiming
infringement of various patents relating to various aspects of its businesses.
Other industry participants are also defendants in certain of these cases,
and,
in many cases, the Company expects that any potential liability would be
the
responsibility of its equipment vendors pursuant to applicable contractual
indemnification provisions. In the event that a court ultimately determines
that
the Company infringes on any intellectual property rights, it may be subject
to
substantial damages and/or an injunction that could require the Company or
its
vendors to modify certain products and services the Company offers to its
subscribers. While the Company believes the lawsuits are without merit and
intends to defend the actions vigorously, the lawsuits could be material
to the
Company’s consolidated results of operations of any one period, and no assurance
can be given that any adverse outcome would not be material to the Company’s
consolidated financial condition, results of operations or liquidity.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Charter
is a party to other lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal matters
pending against the Company or its subsidiaries cannot be predicted, and
although such lawsuits and claims are not expected individually to have a
material adverse effect on the Company’s consolidated financial condition,
results of operations or liquidity, such lawsuits could have, in the aggregate,
a material adverse effect on the Company’s consolidated financial condition,
results of operations or liquidity.
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.
24. 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 $8 million, $6 million, and $7 million for the years ended
December 31, 2006, 2005, and 2004, respectively.
25. Recently
Issued Accounting Standards
In
September 2006, the SEC issued SAB 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
which
addresses the effects of prior year uncorrected misstatements in quantifying
misstatements in current year financial statements. Misstatements are required
to be quantified using both the balance-sheet (“iron-curtain”) and
income-statement approach (“rollover”) and evaluated as to whether either
approach results in a material error in light of quantitative and qualitative
factors. SAB 108 is effective for fiscal years ending after November 15, 2006
and the Company adopted SAB 108 effective for the fiscal year ended December
31,
2006. The adoption of SAB 108 did not have a material impact on the Company’s
financial statements.
In
June
2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109,
which
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and the Company will adopt FIN 48 effective January
1,
2007. The Company is currently assessing the impact of FIN 48 on its financial
statements.
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements,
which
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
will adopt SFAS 157 effective January 1, 2008. The Company does not expect
that
the adoption of SFAS 157 will have a material impact on its financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
In
February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115,
which
allows measurement at fair value of eligible financial assets and liabilities
that are not otherwise measured at fair value. If the fair value option
for an eligible item is elected, unrealized gains and losses for that item
shall
be reported in current earnings at each subsequent reporting date. SFAS
159 also establishes presentation and disclosure requirements designed to draw
comparison between the different measurement attributes the company elects
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted. The
Company is currently assessing the impact of SFAS 159 on its 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.
26. 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)
Condensed
Balance Sheet
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1
|
|
$
|
--
|
|
Receivable
from related party
|
|
|
24
|
|
|
9
|
|
Notes
receivable from Charter Holdco
|
|
|
867
|
|
|
886
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
892
|
|
$
|
895
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
27
|
|
$
|
20
|
|
Convertible
notes
|
|
|
408
|
|
|
863
|
|
Notes
payable to related party
|
|
|
445
|
|
|
--
|
|
Deferred
income taxes
|
|
|
315
|
|
|
113
|
|
Other
long term liabilities
|
|
|
--
|
|
|
1
|
|
Preferred
stock — redeemable
|
|
|
4
|
|
|
4
|
|
Losses
in excess of investment
|
|
|
5,912
|
|
|
4,814
|
|
Shareholders’
deficit
|
|
|
(6,219
|
)
|
|
(4,920
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$
|
892
|
|
$
|
895
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Condensed
Statement of Operations
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
REVENUES
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
59
|
|
$
|
76
|
|
$
|
52
|
|
Management
fees
|
|
|
30
|
|
|
35
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
89
|
|
|
111
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Equity
in losses of Charter Holdco
|
|
|
(1,168
|
)
|
|
(865
|
)
|
|
(4,488
|
)
|
General
and administrative expenses
|
|
|
(30
|
)
|
|
(35
|
)
|
|
(14
|
)
|
Interest
expense
|
|
|
(59
|
)
|
|
(73
|
)
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
(1,257
|
)
|
|
(973
|
)
|
|
(4,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(1,168
|
)
|
|
(862
|
)
|
|
(4,484
|
)
|
Income
tax (expense) benefit
|
|
|
(202
|
)
|
|
(105
|
)
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,370
|
)
|
|
(967
|
)
|
|
(4,341
|
)
|
Dividend
on preferred equity
|
|
|
--
|
|
|
(3
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss after preferred dividends
|
|
$
|
(1,370
|
)
|
$
|
(970
|
)
|
$
|
(4,345
|
)
|
Shareholder’s
deficit and Equity in losses of Charter Holdco include the gain on the Charter
convertible notes exchange to reflect the substance of the transaction (See
Note
9). Notes payable to related party reflect the full accreted value of the
convertible notes held by CCHC subsequent to the exchange.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
Condensed
Statements of Cash Flows
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss after preferred dividends
|
|
$
|
(1,370
|
)
|
$
|
(970
|
)
|
$
|
(4,345
|
)
|
Equity
in losses of Charter Holdco
|
|
|
1,168
|
|
|
865
|
|
|
4,488
|
|
Changes
in operating assets and liabilities
|
|
|
1
|
|
|
--
|
|
|
(1
|
)
|
Deferred
income taxes
|
|
|
202
|
|
|
105
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
1
|
|
|
--
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Receivables
from Charter Holdco
|
|
|
--
|
|
|
--
|
|
|
(863
|
)
|
Payments
from Charter Holdco
|
|
|
20
|
|
|
132
|
|
|
588
|
|
Investment
in Charter Holdco
|
|
|
(1
|
)
|
|
--
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
19
|
|
|
132
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Issuance
of convertible notes
|
|
|
--
|
|
|
--
|
|
|
863
|
|
Paydown
of convertible notes
|
|
|
(20
|
)
|
|
(132
|
)
|
|
(588
|
)
|
Net
proceeds from issuance of common stock
|
|
|
1
|
|
|
--
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
(19
|
)
|
|
(132
|
)
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1
|
|
|
--
|
|
|
(1
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
|
|
--
|
|
|
--
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of year
|
|
$
|
1
|
|
$
|
--
|
|
$
|
--
|
|
27. Unaudited
Quarterly Financial Data
The
following table presents quarterly data for the periods presented on the
consolidated statement of operations:
|
|
Year
Ended December 31, 2006
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,320
|
|
$
|
1,383
|
|
$
|
1,388
|
|
$
|
1,413
|
|
Operating
income (loss) from continuing operations
|
|
$
|
(8
|
)
|
$
|
146
|
|
$
|
66
|
|
$
|
163
|
|
Loss
from continuing operations
|
|
$
|
(473
|
)
|
$
|
(402
|
)
|
$
|
(333
|
)
|
$
|
(378
|
)
|
Income
(loss) from discontinued operations, net of tax
|
|
$
|
14
|
|
$
|
20
|
|
$
|
200
|
|
$
|
(18
|
)
|
Net
loss applicable to common stock
|
|
$
|
(459
|
)
|
$
|
(382
|
)
|
$
|
(133
|
)
|
$
|
(396
|
)
|
Basic
and diluted loss from continuing operations
per
common share
|
|
$
|
(1.49
|
)
|
$
|
(1.27
|
)
|
$
|
(1.02
|
)
|
$
|
(1.03
|
)
|
Basic
and diluted loss per common share
|
|
$
|
(1.45
|
)
|
$
|
(1.20
|
)
|
$
|
(0.41
|
)
|
$
|
(1.08
|
)
|
Weighted-average
shares outstanding, basic and diluted
|
|
|
317,463,472
|
|
|
317,696,946
|
|
|
326,960,632
|
|
|
365,331,337
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(dollars
in millions, except where indicated)
In
the
fourth quarter, loss from continuing operations and income from discontinued
operations, net of tax include $16 million and $18 million, respectively, of
income tax expense related to asset sales that
occurred in the third quarter of 2006.
|
|
Year
Ended December 31, 2005
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,215
|
|
$
|
1,266
|
|
$
|
1,265
|
|
$
|
1,287
|
|
Operating
income from continuing operations
|
|
$
|
42
|
|
$
|
100
|
|
$
|
54
|
|
$
|
108
|
|
Income
(loss) from continuing operations
|
|
$
|
(377
|
)
|
$
|
(359
|
)
|
$
|
72
|
|
$
|
(339
|
)
|
Income
from discontinued operations, net of tax
|
|
$
|
25
|
|
$
|
4
|
|
$
|
4
|
|
$
|
3
|
|
Net
income (loss) applicable to common stock
|
|
$
|
(353
|
)
|
$
|
(356
|
)
|
$
|
75
|
|
$
|
(336
|
)
|
Basic
income (loss) from continuing operations per
common
share
|
|
$
|
(1.25
|
)
|
$
|
(1.19
|
)
|
$
|
0.23
|
|
$
|
(1.07
|
)
|
Diluted
income (loss) from continuing operations per
common
share
|
|
$
|
(1.25
|
)
|
$
|
(1.19
|
)
|
$
|
0.08
|
|
$
|
(1.07
|
)
|
Basic
income (loss) per common share
|
|
$
|
(1.16
|
)
|
$
|
(1.18
|
)
|
$
|
0.24
|
|
$
|
(1.06
|
)
|
Diluted
income (loss) per common share
|
|
$
|
(1.16
|
)
|
$
|
(1.18
|
)
|
$
|
0.09
|
|
$
|
(1.06
|
)
|
Weighted-average
shares outstanding, basic
|
|
|
303,358,880
|
|
|
303,670,347
|
|
|
316,264,740
|
|
|
317,322,233
|
|
Weighted-average
shares outstanding, diluted
|
|
|
303,358,880
|
|
|
303,670,347
|
|
|
1,012,641,842
|
|
|
317,322,233
|
|