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, 2008
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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:
Title
of each class
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Name
of Exchange which registered
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Class
A Common Stock, $.001 Par Value
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NASDAQ
Global Select Market
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Preferred
Share Purchase Rights
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NASDAQ
Global Select Market
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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 o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo þ
The
aggregate market value of the registrant of outstanding Class A Common
Stock held by non-affiliates of the registrant at June 30, 2008 was
approximately $393 million, computed based on the closing sale price as quoted
on the NASDAQ Global Select 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 400,801,768 shares of Class A Common Stock outstanding as of February
28, 2009. There were 50,000 shares of Class B Common Stock
outstanding as of the same date.
Documents
Incorporated By Reference
Information
required by Part III is incorporated by reference from Registrant’s proxy
statement or an amendment to this Annual Report on Form 10-K to be filed by
April 30, 2009.
CHARTER
COMMUNICATIONS, INC.
FORM 10-K — FOR THE YEAR ENDED
DECEMBER 31, 2008
TABLE OF CONTENTS
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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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35
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Item 2
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Properties
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35
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Item 3
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Legal
Proceedings
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35
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Item 4
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Submission
of Matters to a Vote of Security Holders
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37
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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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38
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Item 6
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Selected
Financial Data
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40
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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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41
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Item 7A
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Quantitative
and Qualitative Disclosure About Market Risk
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74
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Item 8
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Financial
Statements and Supplementary Data
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75
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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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75
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Item
9A
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Controls
and Procedures
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76
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Item
9B
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Other
Information
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76
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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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77
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Item 11
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Executive
Compensation
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77
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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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77
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Item 13
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Certain
Relationships and Related Transactions, and Director
Independence
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77
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Item 14
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Principal
Accounting Fees and Services
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77
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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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77
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Signatures
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S-1
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Exhibit
Index
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E-1
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This
annual report on Form 10-K is for the year ended December 31,
2008. 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 –
Company Focus," 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
completion of the Company’s announced restructuring including the outcome,
and impact on our business, of any resulting proceedings under Chapter 11
of the Bankruptcy Code;
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the
availability and access, in general, of funds to meet interest payment
obligations under our debt and to fund our operations and necessary
capital expenditures, either through cash on hand, cash flows from
operating activities, further borrowings or other sources and, in
particular, our ability to fund debt obligations (by dividend, investment
or otherwise) to the applicable obligor of such
debt;
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our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which, if not cured in a timely manner, could
trigger a default of our other obligations under cross-default
provisions;
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our
ability to repay debt prior to or when it becomes due and/or successfully
access the capital or credit markets to refinance that debt through new
issuances, exchange offers or otherwise, including restructuring our
balance sheet and leverage position, especially given recent volatility
and disruption in the capital and credit markets;
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the
impact of competition from other distributors, including but not limited
to incumbent telephone companies, direct broadcast satellite operators,
wireless broadband providers, and digital subscriber line (“DSL”)
providers; |
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difficulties
in growing and operating our telephone services, while adequately
meeting customer expectations for the reliability of voice
services; |
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our
ability to adequately meet 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 our customer base, particularly in the
face of increasingly aggressive
competition;
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our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
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general
business conditions, economic uncertainty or downturn, including the
recent volatility and disruption in the capital and credit markets and the
significant downturn in the housing sector and overall economy;
and
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the
effects of governmental regulation 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") operates broadband communications businesses in
the United States with approximately 5.5 million customers at December 31,
2008. We offer residential and commercial customers traditional cable
video programming (basic and digital video), high-speed Internet services, and
telephone services, as well as advanced broadband services such as high
definition television, Charter OnDemand™ (“OnDemand”), and digital video
recorder (“DVR”) service. We sell our cable video programming,
high-speed Internet, telephone, and advanced broadband services primarily on a
subscription basis. We also sell advertising to national and local
clients on advertising supported cable networks. See "Item 1.
Business — Products and Services" for further description of these terms,
including "customers."
At
December 31, 2008, we served approximately 5.0 million video customers, of which
approximately 3.1 million were digital video customers. We also
served approximately 2.9 million high-speed Internet customers and provided
telephone service to approximately 1.3 million customers.
We have a
history of net losses. Our net losses are principally attributable to
insufficient revenue to cover the combination of operating expenses and interest
expenses we incur because of our high amounts of debt, and depreciation expenses
resulting from the capital investments we have made and continue to make in our
cable properties.
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 at December 31, 2008 are the 55%
controlling common equity interest (53% 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"). As sole
manager, Charter controls the affairs of Charter Holdco and its limited
liability company subsidiaries.
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.
Recent
Developments – Restructuring
On
February 12, 2009, we reached an agreement in principle with holders of certain
of our subsidiaries’ senior notes (the “Noteholders”) holding approximately $4.1
billion in aggregate principal amount of notes issued by our subsidiaries, CCH
I, LLC (“CCH I”) and CCH II, LLC (“CCH II”). Pursuant to separate
restructuring agreements, dated February 11, 2009, entered into with each
Noteholder (the “Restructuring Agreements”), on or prior to April 1, 2009, we
and our subsidiaries expect to file voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code to implement a restructuring pursuant to
a joint plan of reorganization (the “Plan”) aimed at improving our capital
structure (the “Proposed Restructuring”).
The
Proposed Restructuring is expected to be funded with cash from operations, an
exchange of debt of CCH II for other debt at CCH II (the “Notes Exchange”), the
issuance of additional debt (the “New Debt Commitment”), and the proceeds of an
equity offering (the “Rights Offering”) for which we have received a back-stop
commitment (the “Back-Stop Commitment”) from certain Noteholders. In
addition to the Restructuring Agreements, the Noteholders have entered into
commitment letters with us (the “Commitment Letters”), pursuant to which they
have agreed to exchange and/or purchase, as applicable, certain securities of
Charter, as described in more detail below.
Under the
Notes Exchange, existing holders of senior notes of CCH II and CCH II Capital
Corp. (“CCH II Notes”) will be entitled to exchange their CCH II Notes for new
13.5% Senior Notes of CCH II and CCH II Capital Corp. (the “New CCH II
Notes”). CCH II Notes that are not exchanged in the Notes Exchange
will be paid in cash in an amount equal to the outstanding principal amount of
such CCH II Notes plus accrued but unpaid interest to the bankruptcy petition
date plus post-petition interest, but excluding any call premiums or prepayment
penalties and for the avoidance of doubt, any unmatured interest. The
aggregate principal amount of New CCH II Notes to be issued
pursuant
to the Plan is expected to be approximately $1.5 billion plus accrued but unpaid
interest to the bankruptcy petition date plus post-petition interest, but
excluding any call premiums or prepayment penalties (collectively, the “Target
Amount”), plus an additional $85 million.
Under the
Commitment Letters, certain holders of CCH II Notes have committed to exchange,
pursuant to the Notes Exchange, an aggregate of approximately $1.2 billion in
aggregate principal amount of CCH II Notes, plus accrued but unpaid interest to
the bankruptcy petition date plus post-petition interest, but excluding any call
premiums or any prepayment penalties. In the event that the aggregate
principal amount of New CCH II Notes to be issued pursuant to the Notes Exchange
would exceed the Target Amount, each Noteholder participating in the Notes
Exchange will receive a pro rata portion of such Target Amount of New CCH II
Notes, based upon the ratio of (i) the aggregate principal amount of CCH II
Notes it has tendered into the Notes Exchange to (ii) the total aggregate
principal amount of CCH II Notes tendered into the Notes
Exchange. Participants in the Notes Exchange will receive a
commitment fee equal to 1.5% of the principal amount plus interest on the CCH II
Notes exchanged by such participant in the Notes Exchange.
Under the
New Debt Commitment, certain holders of CCH II Notes have committed to purchase
an additional amount of New CCH II Notes in an aggregate principal amount of up
to $267 million. Participants in the New Debt Commitment will receive
a commitment fee equal to the greater of (i) 3.0% of their respective portion of
the New Debt Commitment or (ii) 0.83% of its respective portion of the New Debt
Commitment for each month beginning April 1, 2009 during which its New Debt
Commitment remains outstanding.
Under the
Rights Offering, we will offer to existing holders of senior notes of CCH I
(“CCH I Notes”) that are accredited investors (as defined in Regulation D
promulgated under the Securities Act) or qualified institutional buyers (as
defined under Rule 144A of the Securities Act), the right (the “Rights”) to
purchase shares of the new Class A Common Stock of Charter, to be issued upon
our emergence from bankruptcy, in exchange for a cash payment at a discount
to the equity value of Charter upon emergence. Upon emergence from
bankruptcy, Charter’s new Class A Common Stock is not expected to be listed on
any public or over-the-counter exchange or quotation system and will be subject
to transfer restrictions. It is expected, however, that we will
thereafter apply for listing of Charter’s new Class A Common Stock on the NASDAQ
Stock Market as provided in a term sheet describing the Proposed Restructuring
(the “Term Sheet”). The Rights Offering is expected to generate
proceeds of up to approximately $1.6 billion and will be used to pay holders of
CCH II Notes that do not participate in the Notes Exchange, repayment
of certain amounts relating to the satisfaction of certain swap agreement
claims against Charter Communications Operating, LLC (“Charter Operating”) and
for general corporate purposes.
Under the
Commitment Letters, certain Noteholders (the “Backstop Parties”) have agreed to
subscribe for their respective pro rata portions of the Rights Offering, and
certain of the Backstop Parties have, in addition, agreed to subscribe for a pro
rata portion of any Rights that are not purchased by other holders of CCH I
Notes in the Rights Offering (the “Excess Backstop”). Noteholders who
have committed to participate in the Excess Backstop will be offered the option
to purchase a pro rata portion of additional shares of Charter’s new Class A
Common Stock, at the same price at which shares of the new Class A Common Stock
will be offered in the Rights Offering, in an amount equal to $400 million less
the aggregate dollar amount of shares purchased pursuant to the Excess
Backstop. The Backstop Parties will receive a commitment fee equal to
3% of its respective equity backstop.
The
Restructuring Agreements further contemplate that upon consummation of the Plan
(i) the notes and bank debt of our subsidiaries, Charter Operating and CCO
Holdings, LLC (“CCO Holdings”) will remain outstanding, (ii) holders of notes
issued by CCH II will receive New CCH II Notes pursuant to the Notes Exchange
and/or cash, (iii) holders of notes issued by CCH I will receive shares of
Charter’s new Class A Common Stock, (iv) holders of notes issued by CCH I
Holdings, LLC (“CIH”) will receive warrants to purchase shares of common stock
in Charter, (v) holders of notes of Charter Holdings will receive warrants to
purchase shares of Charter’s new Class A Common Stock, (vi) holders of
convertible notes issued by Charter will receive cash and preferred stock issued
by Charter, (vii) holders of common stock will not receive any
amounts on account of their common stock, which will be cancelled, and (viii)
trade creditors will be paid in full. In addition, as part of the
Proposed Restructuring, it is expected that consideration will be paid by
holders of CCH I Notes to other entities participating in the financial
restructuring. The recoveries summarized above are more fully
described in the Term Sheet.
Pursuant
to a separate restructuring agreement among Charter, Mr. Paul G. Allen,
Charter’s chairman and controlling shareholder, and an entity controlled by Mr.
Allen (the “Allen Agreement”), in settlement of their rights, claims and
remedies against Charter and its subsidiaries, and in addition to any amounts
received by virtue of their holding any claims of the type set forth above, upon
consummation of the Plan, Mr. Allen or his affiliates will be issued a number of
shares of the new Class B Common Stock of Charter such that the aggregate voting
power of
such
shares of new Class B Common Stock shall be equal to 35% of the total voting
power of all new capital stock of Charter. Each share of new Class B
Common Stock will be convertible, at the option of the holder, into one share of
new Class A Common Stock, and will be subject to significant restrictions on
transfer. Certain holders of new Class A Common Stock and new Class B
Common Stock will receive certain customary registration rights with respect to
their shares. Upon consummation of the Plan, Mr. Allen or
his affiliates will also receive (i) warrants to purchase shares of
new Class A common stock of Charter in an aggregate amount equal to 4% of
the equity value of reorganized Charter, after giving effect to the Rights Offering, but prior to the issuance of
warrants and equity-based awards provided for by the Plan, (ii) $85
million principal amount of New CCH II Notes, (iii)
$25 million in cash for amounts
owing to Charter Investment, Inc. (“CII”) under a
management agreement, (iv) up to $20
million in cash for reimbursement of fees and
expenses in connection with the Proposed Restructuring, and (v) an
additional $150 million in cash. The warrants described above
shall have an exercise price per share based on a total equity value equal to
the sum of the equity value of reorganized Charter, plus the gross proceeds of
the Rights Offering, and shall expire seven years after the date of
issuance. In addition, on the effective date of the Plan, CII will
retain
a 1% equity interest in
reorganized Charter Holdco and a right to exchange such interest into new Class A
common
stock
of Charter.
The
Restructuring Agreements also contemplate that upon emergence from bankruptcy
each holder of 10% or more of the voting power of Charter will have the right to
nominate one member of the initial Board for each 10% of voting power; and that
at least Charter’s current Chief Executive Officer and Chief Operating Officer
will continue in their same positions. The Restructuring Agreements
require Noteholders to cast their votes in favor of the Plan and generally
support the Plan and contain certain customary restrictions on the transfer of
claims by the Noteholders.
In
addition, the Restructuring Agreements contain an agreement by the parties that
prior to commencement of the Chapter 11 cases, if performance by us of any term
of the Restructuring Agreements would trigger a default under the debt
instruments of CCO Holdings and Charter Operating, which debt is to remain
outstanding such performance would be deemed unenforceable solely to the extent
necessary to avoid such default.
The
Restructuring Agreements and Commitment Letters are subject to certain
termination events, including, among others:
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the
commitments set forth in the respective Noteholder’s Commitment Letter
shall have expired or been
terminated;
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Charter’s
board of directors shall have been advised in writing by its outside
counsel that continued pursuit of the Plan is inconsistent with its
fiduciary duties, and the board of directors determines in good faith
that, (A) a proposal or offer from a third party is reasonably likely to
be more favorable to the Company than is proposed under the Term Sheet,
taking into account, among other factors, the identity of the third party,
the likelihood that any such proposal or offer will be negotiated to
finality within a reasonable time, and the potential loss to the company
if the proposal or offer were not accepted and consummated, or (B) the
Plan is no longer confirmable or
feasible;
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the
Plan or any subsequent plan filed by us with the bankruptcy court (or a
plan supported or endorsed by us) is not reasonably consistent in all
material respects with the terms of the Restructuring
Agreements;
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Charter
shall not have filed for Chapter 11 relief with the bankruptcy court on or
before April 1, 2009;
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a
disclosure statement order reasonably acceptable to Charter, the holders
of a majority of the CCH I Notes held by the ad-hoc committee of
certain Noteholders (the “Requisite Holders”) and Mr. Allen has not been
entered by the bankruptcy court on or before the 50th day following the
bankruptcy petition date;
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a
confirmation order reasonably acceptable to Charter, the Requisite Holders
and Mr. Allen is not entered by the bankruptcy court on or before the
130th day following the bankruptcy petition
date;
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any
of the Chapter 11 cases of Charter is converted to cases under Chapter 7
of the Bankruptcy Code if as a result of such conversion the Plan is not
confirmable;
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any
Chapter 11 cases of Charter is dismissed if as a result of such dismissal
the Plan is not confirmable;
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the
order confirming the Plan is reversed on appeal or vacated;
and
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any
Restructuring Agreement or the Allen Agreement has terminated or been
breached in any material respect subject to notice and cure
provisions.
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The Allen Agreement contains similar
provisions to those provisions of the Restructuring Agreements. There is no
assurance that the treatment of creditors outlined above will not change
significantly. For
example, because the Proposed Restructuring is contingent on reinstatement of
the credit facilities and certain notes of Charter Operating and CCO Holdings,
failure to reinstate such debt would require us to revise the Proposed
Restructuring. Moreover,
if reinstatement does not
occur and current capital market conditions persist, we may not be able to
secure adequate new financing and the cost of new financing would likely be
materially higher. The
Proposed Restructuring would result in the reduction of our debt by
approximately $8 billion.
The above
summary of the Restructuring Agreements, Commitment Letters, Term Sheet and
Allen Agreement is qualified in its entirety by the full text of the
Restructuring Agreements, Commitment Letters, Term Sheet and Allen Agreement,
copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively,
to this Annual Report on Form 10-K, and incorporated herein by
reference. See “Part I. Item 1A - Risk Factors – Risks Relating to
Bankruptcy.”
Recent
Developments – Interest Payments
Two of
our subsidiaries, CIH and Charter Holdings, did not make scheduled payments of
interest due on January 15, 2009 (the “January Interest Payment”) on certain of
their outstanding senior notes (the “Overdue Payment Notes”). Each of
the respective governing indentures (the “Indentures”) for the Overdue Payment
Notes permits a 30-day grace period for such interest payments through (and
including) February 15, 2009. On February 11, 2009, in connection
with the Commitment Letters and Restructuring Agreements, Charter and certain of
its subsidiaries also entered into an Escrow Agreement with members of the
ad-hoc committee of holders of the Overdue Payment Notes (“Ad-Hoc Holders”) and
Wells Fargo Bank, National Association, as Escrow Agent (the “Escrow
Agreement”). On February 13, 2009, Charter paid the full amount of
the January Interest Payment to the Paying Agent for the Ad-Hoc Holders on the
Overdue Payment Notes, which constitute payment under the
Indentures. As required under the Indentures, Charter set a special
record date for payment of such interest payments of February 28,
2009. Under the Escrow Agreement, the Ad-Hoc Holders agreed to
deposit into an escrow account the amounts they receive in respect of the
January Interest Payment (the "Escrow Amount") and the Escrow Agent will hold
such amounts subject to the terms of the Escrow Agreement. Under the
Escrow Agreement, if the transactions contemplated by the Restructuring
Agreements are consummated on or before December 15, 2009 or such transactions
are not consummated on or before December 15, 2009 due to material breach of the
Restructuring Agreements by Charter or its direct or indirect subsidiaries, then
the Ad-Hoc Holders will be entitled to receive their pro-rata share of the
Escrow Amount. If the transactions contemplated by the Restructuring
Agreements are not consummated on or prior to December 15, 2009 for any reason
other than material breach of the Restructuring Agreements by Charter or its
direct or indirect subsidiaries, then Charter, Charter Holdings, CIH or their
designee shall be entitled to receive the Escrow Amount.
One of
Charter’s subsidiaries, CCH II, will not make its scheduled payment of interest
on March 16, 2009 on certain of its outstanding senior notes. The
governing indenture for such notes permits a 30-day grace period for such
interest payments, and Charter expects to file its voluntary Chapter 11
Bankruptcy prior to the expiration of the grace period.
Recent
Developments – Charter Operating Credit Facility
On
February 3, 2009, Charter Operating made a request to the administrative agent
under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as
amended and restated as of March 6, 2007 (the “Credit Agreement”), to borrow
additional revolving loans under the Credit Agreement. Such borrowing
request complied with the provisions of the Credit Agreement including section
2.2 (“Procedure for Borrowing”) thereof. On February 5, 2009, we
received a notice from the administrative agent asserting that one or more
Events of Default (as defined in the Credit Agreement) had occurred and was
continuing under the Credit Agreement. In response, we sent a letter
to the administrative agent on February 9, 2009, among other things, stating
that no Event of Default under the Credit Agreement occurred or was continuing
and requesting the administrative agent to rescind its notice of default and
fund Charter Operating’s borrowing request. The administrative agent
sent a letter to us on February 11, 2009, stating that it continues to believe
that one or more events of default occurred and was
continuing. As a result, with the exception of one lender who
funded approximately $0.4 million, the lenders under the Credit Agreement have
failed to fund Charter Operating’s borrowing request.
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, 2008, 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 debt eliminated in consolidation,
or any change that would result from the Proposed
Restructuring. Indebtedness amounts shown below are accreted values
for financial reporting purposes as of December 31, 2008. See Note 9
to the accompanying consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data,” which also includes the principal
amount of the indebtedness described below.
(1)
|
|
Charter
acts as the sole manager of Charter Holdco and its direct and indirect
limited liability company subsidiaries. Charter’s certificate
of incorporation requires that its principal assets be securities of
Charter Holdco, the terms of which mirror the terms of securities issued
by Charter. See “Item 1. Business — Corporate Organizational
Structure — Charter Communications, Inc.” below.
|
|
|
|
(2)
|
|
At
December 31, 2008, these membership units were held by CII and Vulcan
Cable III Inc. (“Vulcan Cable”), each of which was 100% owned by Paul G.
Allen, Charter’s 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 on a one-for-one basis. In January 2009, Vulcan
Cable merged into CII with CII being the surviving entity.
|
|
|
|
(3)
|
|
The
percentages shown in this table reflect the 21.8 million shares of
Class A common stock outstanding as of December 31, 2008 issued pursuant to the
Share Lending Agreement. However, for accounting
purposes, Charter’s common equity interest in Charter Holdco is 53%, and
Paul G. Allen’s ownership of Charter Holdco through his affiliates is
47%. These percentages exclude the 21.8 million mirror
membership units outstanding as of December 31, 2008
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.”
|
|
|
|
(4)
|
|
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. See Notes 10 and 11 to the accompanying consolidated
financial statements contained in “Item 8. Financial Statements and
Supplementary Data.”
|
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 (53% for accounting
purposes) and a 100% voting interest in Charter Holdco, and “mirror” notes that
are payable by Charter Holdco to Charter that have the same principal amount and
terms as Charter’s convertible senior notes. 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 provides management services to
Charter Holdco and its subsidiaries under a management services
agreement.
The
following table sets forth information as of December 31, 2008 with respect to
the shares of common stock of Charter on an actual outstanding, “as converted”
and “fully diluted” basis:
|
|
Charter
Communications, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
Exchange of
|
|
|
|
|
|
|
Actual
Shares Outstanding (a)
|
|
Charter
Holdco Membership Units (b)
|
|
|
Fully
Diluted Shares Outstanding (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Percentage
of
|
|
|
of
Fully
|
|
|
of
Fully
|
|
|
|
Number
of
|
|
|
Percentage
|
|
|
|
|
As
Converted
|
|
|
As
Converted
|
|
|
Diluted
|
|
|
Diluted
|
|
|
|
Common
|
|
|
of
Common
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Voting
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Percentage
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
|
411,737,894 |
|
|
|
99.99 |
% |
|
|
9.86 |
% |
|
|
411,737,894 |
|
|
|
54.83 |
% |
|
|
411,737,894 |
|
|
|
41.78 |
% |
Class B
Common Stock
|
|
|
50,000 |
|
|
|
0.01 |
% |
|
|
90.14 |
% |
|
|
50,000 |
|
|
|
0.01 |
% |
|
|
50,000 |
|
|
|
0.01 |
% |
Total
Common Shares Outstanding
|
|
|
411,787,894 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-for-One
Exchangeable Equity in Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Investment, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,818,858 |
|
|
|
29.67 |
% |
|
|
222,818,858 |
|
|
|
22.61 |
% |
Vulcan
Cable III Inc. (merged into Charter Investment, Inc. in January
2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,313,173 |
|
|
|
15.49 |
% |
|
|
116,313,173 |
|
|
|
11.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
As Converted Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,919,925 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Convertible Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
Convertible Senior
Notes
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287,190 |
|
|
|
0.13 |
% |
6.50%
Convertible Senior
Notes
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,581,566 |
|
|
|
14.27 |
% |
Employee,
Director and
Consultant
Stock Options (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,332,904 |
|
|
|
2.27 |
% |
Employee
Performance Shares (g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,036,871 |
|
|
|
3.35 |
% |
CCHC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Exchangeable
Accreting
Note
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,266,479 |
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
Diluted Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
985,424,935 |
|
|
|
100.00 |
% |
(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, but not assuming the conversion of an accreting note (the “CCHC
note”)) 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 on a one-for-one basis. Does not include shares
issuable on conversion or exercise of any other convertible securities,
including stock options, and convertible notes.
|
|
|
|
(c)
|
|
Represents
“fully diluted” common shares outstanding, assuming the exercise,
exchange, vesting or conversion of all outstanding options and
exchangeable or convertible securities, including the exchangeable
membership units described in note (b) above, the 14% CCHC
exchangeable accreting note, all outstanding 5.875% and 6.50% convertible
senior notes of Charter, all employee, director and consultant stock
options and employee performance
shares.
|
(d)
|
|
Reflects
shares issuable upon conversion of all outstanding 5.875% convertible
senior notes ($3 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.
|
|
|
|
(e)
|
|
Reflects
shares issuable upon conversion of all outstanding 6.50% convertible
senior notes ($479 million total principal amount), which are convertible
into shares of Class A common stock at an initial conversion rate of
293.3868 shares of Class A common stock per $1,000 principal amount of
notes (or approximately $3.41 per share), subject to certain
adjustments.
|
|
|
|
(f)
|
|
The
weighted average exercise price of outstanding stock options was $3.82 as
of December 31, 2008.
|
|
|
|
(g)
|
|
Represents
shares issuable under our long-term incentive plan (“LTIP”), which are
subject to vesting based on continued employment and, in many cases,
Charter’s achievement of certain performance criteria.
|
|
|
|
(h)
|
|
Mr.
Allen, through his wholly owned subsidiary CII, holds the CCHC note that
is exchangeable for Charter Holdco units. The CCHC note has a
15-year maturity. The CCHC note has an accreted value as of
December 31, 2008 of $75 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. At December 31, 2008, the common membership units of Charter
Holdco were owned approximately 55% by Charter, 15% by Vulcan Cable and 30% by
CII. In January 2009, Vulcan Cable merged into CII with CII being the
surviving entity. All of the outstanding common membership units in
Charter Holdco, which were held by Vulcan Cable and CII at December 31, 2008,
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 on a one-for-one
basis. 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% and the 6.50% mirror convertible notes of Charter Holdco that
automatically convert into common membership units upon the conversion of
Charter 5.875% or 6.50% convertible senior notes.
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. CII owns 30% of the CC VIII preferred membership
interests. CCH I, a direct subsidiary of 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 23 to our accompanying consolidated financial statements contained
in “Item 8. Financial Statements and Supplementary Data.”
Products and
Services
We sell
video, high-speed Internet, and telephone services utilizing our cable network.
Our video services include traditional cable video services (basic and digital)
and in most areas advanced broadband services such as OnDemand, high definition
television, and DVR services. Our telephone services are primarily
provided using voice over Internet protocol (“VoIP”) technology, to transmit
digital voice signals over our systems. Our video, high-speed
Internet, and telephone services are offered to residential and commercial
customers 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 approximates our customer statistics for video, residential
high-speed Internet and telephone as of December 31, 2008 and 2007.
|
|
Approximate
as of
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
(a)
|
|
|
2007
(a)
|
|
|
|
|
|
|
|
|
Video
Cable Services:
|
|
|
|
|
|
|
Basic
Video:
|
|
|
|
|
|
|
Residential
(non-bulk) basic video customers (b)
|
|
|
4,779,000 |
|
|
|
4,959,800 |
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
266,700 |
|
|
|
260,100 |
|
Total
basic video customers (b) (c)
|
|
|
5,045,700 |
|
|
|
5,219,900 |
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
3,133,400 |
|
|
|
2,920,400 |
|
|
|
|
|
|
|
|
|
|
Non-Video
Cable Services:
|
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,875,200 |
|
|
|
2,682,500 |
|
Telephone
customers (f)
|
|
|
1,348,800 |
|
|
|
959,300 |
|
|
|
|
|
|
|
|
|
|
Total Revenue Generating Units
(g)
|
|
|
12,403,100 |
|
|
|
11,782,100 |
|
After
giving effect to sales of cable systems in 2008, December 31, 2007 basic video
customers, digital video customers, high-speed Internet customers, and telephone
customers would have been 5,203,200; 2,912,800; 2,676,900; and 959,300,
respectively.
(a)
|
“Customers”
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts. At December 31, 2008 and 2007, “customers” include
approximately 36,000 and 48,200 persons, respectively, whose accounts were
over 60 days past due in payment, approximately 5,300 and 10,700 persons,
respectively, whose accounts were over 90 days past due in payment, and
approximately 2,700 and 2,900 persons, respectively, whose accounts were
over 120 days past due in payment.
|
(b)
|
“Basic
video customers” include all residential customers who receive video cable
services.
|
(c)
|
Included
within “basic video customers” are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit (“EBU”)
basis. 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 video customers is
consistent with the methodology used in determining costs paid to
programmers and has been used consistently each reporting
year.
|
(d)
|
"Digital
video customers" include all basic video customers that have one or more
digital set-top boxes or cable cards
deployed.
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers who
subscribe to our high-speed Internet
service.
|
(f)
|
“Telephone
customers” include all customers receiving telephone
service.
|
(g)
|
"Revenue
generating units" represent the sum total of all basic video, digital
video, high-speed Internet and telephone customers, not counting
additional outlets within one household. For example, a
customer who receives two types of service (such as basic video and
digital video) would be treated as two revenue generating units and, if
that customer added on high-speed Internet service, the customer would be
treated as three revenue generating units. This statistic is
computed in accordance with the guidelines of the National Cable &
Telecommunications Association
(“NCTA”).
|
Video
Services
In 2008,
video services represented approximately 53% of our total
revenues. Our video service offerings include the
following:
|
•
|
|
Basic
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
35 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 services including a
digital set-top box, an interactive electronic programming guide with
parental controls, an expanded menu of pay-per-view channels, including
OnDemand (available nearly everywhere), digital quality music channels and
the option to also receive a cable card. We also offer our customers
certain digital tiers of programming including premium channels (for
example, HBO®, Showtime® and Starz/Encore®) as well as tiers that offer
customers a variety of programming and some tiers that emphasize, for
example, sports or ethnic programming. In addition to video
programming, digital video service enables customers to receive our
advanced broadband services such as OnDemand, DVRs, and high definition
television. Recently, Charter bundled its digital sports tier with
premium sports content on charter.net.
|
|
|
|
|
|
•
|
|
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
broadband services.
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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.
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OnDemand
and Subscription OnDemand. OnDemand service
allows customers to select from hundreds of movies and other programming
at any time. These programming options may be accessed for a
fee or, in some cases, for no additional charge. In some
systems we also offer subscription OnDemand for a monthly fee or included
in a digital tier premium channel subscription.
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High
Definition Television. High definition
television offers our digital customers certain video programming at a
higher resolution to improve picture quality versus standard basic or
digital video images.
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Digital
Video Recorder. DVR service enables customers to digitally record
programming and to pause and rewind live
programming.
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High-Speed
Internet Services
In 2008,
residential high-speed Internet services represented approximately 21% of our
total revenues. We currently offer several tiers of high-speed
Internet services with speeds ranging up to 60 megabytes to our residential
customers via cable modems attached to personal computers. We also
offer home networking gateways to these customers, which permit customers to
connect up to five computers in their home to the Internet
simultaneously.
Telephone
Services
In 2008,
telephone services represented approximately 9% of our total
revenues. We provide voice communications services primarily using
VoIP technology to transmit digital voice signals over our
systems. Charter Telephone includes unlimited nationwide and in-state
calling, voicemail, call waiting, caller ID, call forwarding and other
features. Charter Telephone® also provides international calling
either by the minute or in a package of 250 minutes per month.
Commercial
Services
In 2008,
commercial services represented approximately 6% of our total
revenues. Commercial services, offered through Charter Business™,
include scalable broadband communications solutions for business organizations,
such as business-to-business Internet access, data networking, video and music
entertainment services, and business telephone.
Sale
of Advertising
In 2008,
sales of advertising represented approximately 5% 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,
2008, 2007 and 2006, we had advertising revenues from vendors of approximately
$39 million, $15 million, and $17 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.
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.
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 period expires. When customers bundle services, generally the
prices are lower per service than if they had only purchased a single
service.
Our Network
Technology
Our
network utilizes the hybrid fiber coaxial cable (“HFC”) architecture, which
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. On average, our system
design enables typically up to 400 homes passed to be served by a single node
and 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 two-way signal capacity for the
addition of future services.
HFC
architecture benefits include:
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bandwidth
capacity to enable traditional and two-way video and broadband
services;
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dedicated
bandwidth for two-way services, which avoids return signal interference
problems that can occur with two-way communication capability;
and
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signal
quality and high service
reliability.
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The
following table sets forth the technological capacity of our systems as of
December 31, 2008 based on a percentage of homes passed:
Less
than 550
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750
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860/870
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Two-way
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megahertz
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550
megahertz
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megahertz
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megahertz
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activated
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5%
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5%
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44%
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46%
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95%
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Approximately
95% 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.
Through
system upgrades and divestitures of non-strategic systems, we have reduced the
number of headends that serve our customers from 1,138 at January 1, 2001
to 300 at December 31, 2008. Headends are the control centers of
a cable system. Reducing the number of headends reduces related
equipment, service personnel, and maintenance expenditures. As of
December 31, 2008, approximately 91% of our customers were served by headends
serving at least 10,000 customers.
As of
December 31, 2008, our cable systems consisted of approximately 201,000
aerial and underground miles of coaxial cable, and approximately 58,000 aerial
and underground miles of fiber optic cable, passing approximately 11.9 million
households and serving approximately 5.5 million customers.
Management of Our
Systems
Our
corporate office, which includes employees of Charter, 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 and
performs these services on a cost reimbursement basis pursuant to a management
services agreement. In 2008, our field operations were managed within
three divisions. Each division had a divisional president and was
supported by operational, financial, legal, customer care, marketing and
engineering functions. Effective 2009, our field operations are now
managed within two operating groups. In addition, we formed shared service
centers for our field sales and marketing function, our human resource and
training function, finance, and certain areas of customer
operations.
Customer Care
Our
customer care centers are managed centrally, with the deployment and execution
of end-to-end care strategies and initiatives conducted on a company-wide
basis. We have eight internal customer care locations plus several
third-party call center locations that through technology and procedures
function as an integrated system. We provide service to our customers
24 hours a day, seven days a week. We also utilize our website to
enable our 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 e-mail functionality.
Sales
and Marketing
Our
marketing strategy emphasizes our bundled services through targeted marketing
programs to existing and potential customers. Marketing expenditures
increased by $32 million, or 14%, over the year ended December 31, 2007 to $268
million for the year ended December 31, 2008. Our marketing
organization creates and executes marketing programs intended to increase
customer relationships, retain existing customers and cross-sell additional
products to current customers. We monitor the effectiveness of our
marketing efforts, customer perception, competition, pricing, and service
preferences, among other factors, to increase our responsiveness to our
customers.
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, as well as, in some
instances, incentives for channel placement.
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, and at a higher rate than in 2008, due to a
variety of factors including amounts paid for retransmission consent, 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. Continuing demands by owners of broadcast stations for
carriage of other services or cash payments to those broadcasters in exchange
for retransmission consent will likely 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, our video service rates have not fully offset increasing
programming costs, and with the impact of increasing competition and other
marketplace factors, we do not expect them to do so in the foreseeable
future. In addition, our inability to fully pass these programming
cost increases on to our video customers has had and is expected in the future
to have an adverse impact on our cash flow and operating margins associated with
the video product. In order to mitigate
reductions of our operating margins due to rapidly increasing programming costs,
we continue to review our pricing and programming packaging strategies, and we
plan to continue to migrate certain program services from our basic 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 also 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 2009. We will seek to renegotiate the terms of these
agreements. 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, 2008, our systems operated pursuant to a total of
approximately 3,200 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, customer service
requirements, and supporting and carrying 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 10% of our franchises, covering
approximately 11% of our video customers were expired at December 31,
2008. On January 1, 2009, a number of these expired franchises
converted to statewide authorization and were no longer considered
expired. Approximately 4% of additional franchises, covering
approximately 4% of additional video customers will expire on or before December
31, 2009, if not renewed prior to expiration. We expect to renew or
continue to operate under all or substantially all of these
franchises.
Proposals
to streamline cable franchising recently have been adopted at both the federal
and state levels. These franchise reforms are primarily intended to
facilitate entry by new competitors, particularly telephone companies, but they
often include substantive relief for incumbent cable operators, like us, as
well. In many states, the local franchising process under which we
have historically operated has been replaced by a streamlined state
certification process. 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 video, high-speed
Internet access, telephone services, and other sources of home
entertainment. We operate in a very competitive business environment,
which can adversely affect the result of our business and
operations. We cannot predict the impact on us of broadband services
offered by our competitors.
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 DSL provided by telephone companies. Our principal
competitors for telephone services are established telephone companies, other
telephone service providers, and other carriers, including VoIP
providers. Based on telephone companies’ entry into video service and
the upgrades of their networks, they will 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).
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 31 million subscribers nationwide. DBS service allows the
subscriber to receive video services directly via satellite using a dish
antenna.
Video
compression technology and high powered satellites allow DBS providers to offer
more than 250 digital channels from a single satellite, thereby surpassing the
traditional analog cable system. In 2008, major DBS competitors
offered a greater variety of channel packages, and were especially competitive
with promotional pricing for more basic services. 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. Also, DBS providers are offering more
high definition programming, including local high definition
programming. However, we believe that cable-delivered OnDemand and
Subscription OnDemand services, which include HD programming, are superior to
DBS service, because cable headends can provide two-way communication to deliver
many 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. However, joint marketing arrangements between DBS
providers and telecommunications carriers allow similar bundling of services in
certain areas. DBS providers have also made attempts at deployment of
high-speed Internet access services via satellite, but those services have been
technically constrained and of limited appeal.
Telephone
Companies and Utilities
Our
telephone service competes directly with established telephone companies and
other carriers, including Internet-based 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 our competitors have resulted 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
joint marketing arrangements with DBS providers to offer bundled packages
combining telephone (including wireless), high-speed Internet, and video
services.
Most
telephone companies, which already have plant, an existing customer base, and
other operational functions in place (such as billing and service personnel),
offer DSL service. DSL service allows Internet access to subscribers
at data transmission speeds greater than those available over conventional
telephone lines. We believe DSL service is competitive with
high-speed Internet service and is often offered at prices lower than our
Internet services, although often at speeds lower than the speeds we
offer. 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 may also have the ability to
bundle telephone with Internet services for a higher percentage of their
customers. We expect DSL to remain a significant competitor to our
high-speed Internet services, particularly as telephone companies bundle DSL
with telephone and video service. In addition, the continuing
deployment of fiber optics into telephone companies’ networks (primarily by
Verizon Communications, Inc. (“Verizon”)) will enable them to provide even
higher bandwidth Internet services.
Telephone
companies, including AT&T Inc. (“AT&T”) and Verizon, can offer video and
other services in competition with us, and we expect they will increasingly do
so in the future. Upgraded portions of AT&T’s and Verizon’s
networks carry two-way video and data services. In the case of Verizon,
high-speed data services (DSL and fiber optic service (“FiOS”)) operate at
speeds as high as or higher than ours and provide digital voice services similar
to ours. In addition, these companies continue to offer their
traditional telephone services, as well as service bundles that include wireless
voice services provided by affiliated companies. Based on internal
estimates, we believe that AT&T and Verizon are offering video services in
areas serving approximately 14% to 17% of our estimated homes passed as of
December 31, 2008. AT&T and Verizon have also launched campaigns
to capture more of the multiple dwelling unit (“MDU”)
market. Additional upgrades and product launches are expected in
markets in which we operate.
In
addition to telephone companies obtaining franchises or alternative
authorizations in some areas and seeking them in others, they have been
successful through various means in reducing or streamlining the franchising
requirements applicable to them. They have had significant success at
the federal and state level, securing an FCC ruling and numerous state franchise
laws that facilitate their entry into the video marketplace. Because
telephone companies have been successful in avoiding or reducing the franchise
and other regulatory requirements that remain applicable to cable operators like
us, their competitive posture has often been enhanced. The large
scale entry of major
telephone
companies as direct competitors in the video marketplace could adversely affect
the profitability and valuation of our cable systems.
Additionally,
we are subject to competition from utilities that possess fiber optic
transmission lines capable of transmitting signals with minimal signal
distortion. Certain 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. In
some cases, it is the local municipalities that regulate us, which own cable
systems that compete with us.
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 now provides 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 historically 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 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 not affiliated with established local exchange
carriers. 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 access to capital or access to facilities
already in place that are capable of delivering cable television
programming.
As of
December 31, 2008, excluding telephone companies, we are aware of
traditional overbuild situations impacting approximately 8% to 9% of our total
homes passed and potential traditional overbuild situations in areas servicing
approximately an additional 1% 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 MDUs, such as condominiums, apartment complexes, and private
residential communities. 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. The FCC recently
adopted regulations that favor SMATV and private cable operators serving MDU
complexes, allowing them to continue to secure exclusive contracts with MDU
owners. The FCC regulations have been appealed, and the FCC is
currently considering whether to restrict their ability to enter into exclusive
arrangements, but this sort of regulatory disparity, if it withstands judicial
review, provides a competitive advantage to certain of our current and potential
competitors.
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 federal government (primarily the
FCC), certain state governments, and many 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
frequently revisited the subject of communications regulation often designed to
increase competition to the cable industry, and they are likely to do so in the
future. We could be materially disadvantaged in the future if we are
subject to new regulations that do not equally impact our key
competitors. We cannot provide 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 service 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 service cable rates (and order rate
reductions and refunds), but they generally retain the right to do so (subject
to potential regulatory limitations under state franchising laws), except in
those specific communities facing “effective competition,” as defined under
federal law. 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
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
mandates 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 election date of October 1,
2008, for the current period of 2009 through 2011. Either option has
a potentially adverse effect on our business by utilizing bandwidth
capacity. In addition, popular stations invoking “retransmission
consent” have been increasingly demanding cash compensation in their
negotiations with cable operators.
In
September 2007, the FCC adopted an order increasing the cable industry’s
existing must-carry obligations by requiring cable operators to offer “must
carry” broadcast signals in both analog and digital format (dual carriage) for a
three year period after the broadcast television industry will complete its
ongoing transition from an analog to digital format, which is presently
scheduled to occur on June 12, 2009. The burden could increase
further if cable
systems
were ever required to carry multiple program streams included within a single
digital broadcast transmission (multicast carriage), which the recent FCC order
did not address. 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. We may
need to take additional operational steps and/or make further operating and
capital investments 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, who generally offer programming that our
customers do not particularly desire. The FCC adopted new rules in
2007 mandating a significant reduction in the rates that operators can charge
commercial leased access users and imposing additional administrative
requirements that would be burdensome on the cable industry. The
effect of the FCC’s new rules was stayed by a federal court, pending a cable
industry appeal and a finding that the new rules did not comply with the
requirements of the Office of Management and Budget. Under federal
statute, commercial leased access programmers are entitled to use up to 15% of a
cable system’s capacity. 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 cable programming vendors in which a
cable operator has an attributable interest and satellite broadcast programming
vendors from favoring cable operators over competing multichannel video
distributors, such as DBS, and limit the ability of such vendors to offer
exclusive programming arrangements to cable operators. Given the
heightened competition and media consolidation that we face, 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. In December 2007, the FCC reimposed a cable
ownership cap, so that no single operator can serve more than 30% of domestic
multichannel video subscribers, which could limit the ability of potential
acquirers from acquiring our company or our systems. This same
numerical cap was previously invalidated by the courts, and the new cap is
currently being challenged. We cannot provide any assurance that the
current ownership limitations will be invalidated.
The FCC
is now engaged in a proceeding to determine whether cable’s overall subscriber
penetration levels merit additional regulations. Changes in this
regulatory area could alter the business environment in which we
operate.
Pole
Attachments. The Communications Act requires most utilities
owning utility poles 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 than only video services. Although the
FCC previously determined that the lower rate was applicable to the mixed use of
a pole attachment for the provision of both video and Internet access services
(a determination upheld by the U.S. Supreme Court), the FCC issued a Notice of Proposed Rulemaking
(“NPRM”) on November 20, 2007, in which it “tentatively concludes” that
such mixed use determination would likely be set aside. Under this
NPRM, the FCC is seeking comment on its proposal to apply a single rate for all
pole attachments over which a cable operator provides Internet access and other
services, that allocates to the cable operators the additional cost associated
with the “unusable space” of the pole. Such rate change could likely result in a
substantial increase in our pole attachment costs.
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 expressly ruled that
cable customers must be allowed to purchase set-top boxes from third parties,
and it established a multi-year phase-in during which security functions (which
allow a cable operator to control who may access their services and would remain
in the operator's exclusive control) would be unbundled from the basic channel
navigation converter functions, which could then be provided by third party
vendors. The first phase of implementation has already passed,
whereby cable operators began providing “CableCard” security modules and support
to customer-owned televisions and similar devices equipped to receive one-way
analog and digital video services without the need for
an
operator-provided set-top box. Effective July 1, 2007, cable
operators were prohibited from acquiring for deployment integrated set-top boxes
that perform both channel navigation and security functions.
The FCC
has been considering regulatory proposals for “plug-and-play” retail devices
that could access two-way cable services. Some of the proposals, if
adopted, would impose substantial costs on us and impair our ability to
innovate. In April 2008, we joined a multi-party contract among major
consumer electronics and information technology companies and the largest six
cable operators in the United States, to agree on how technology we use to
support our current generation set-top boxes will be deployed in cable networks
and in retail navigation devices to enable retail devices to access two-way
cable services without impairing our ability to innovate. This
voluntary agreement may preclude the need for additional FCC regulation in this
area but there can be no assurance the FCC will not regulate this area
notwithstanding this agreement.
MDUs / Inside
Wiring. The FCC has adopted a series of regulations designed
to spur competition to established cable operators in MDU
complexes. These regulations allow our competitors to access certain
existing cable wiring inside MDUs. The FCC also adopted regulations
limiting the ability of established cable operators, like us, to enter into
exclusive service contracts for MDU complexes. Significantly, it has
not yet imposed a similar restriction on private cable operators and SMATV
systems serving MDU properties but the FCC is currently considering extending
the prohibition to such competitors. In their current form, the FCC’s
regulations in this area favor our competitors.
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. We are subject to additional federal, state, and local
laws and regulations that impose additional subscriber and employee privacy
restrictions. Further, the FCC, FTC, and many states now regulate and
restrict 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) mandatory blackouts of certain network,
syndicated and sports programming; (5) restrictions on political advertising;
(6) restrictions on advertising in children's programming; (7) restrictions on
origination cablecasting; (8) restrictions on carriage of lottery programming;
(9) sponsorship identification obligations; (10) closed captioning of video
programming; (11) licensing of systems and facilities; (12) maintenance of
public files; and (13) emergency alert systems. Each of these
regulations restricts our business practices to varying degrees.
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 and administrative review and could adversely affect our ability to
obtain desired broadcast programming. There is uncertainty regarding
certain applications of the compulsory copyright license, including the royalty
treatment of distant broadcast signals that are not available to all cable
system subscribers served by a single headend. The Copyright Office
is currently conducting an inquiry to consider a variety of issues affecting
cable’s compulsory copyright license, including how the compulsory copyright
license should apply to newly-offered digital broadcast
signals. Current uncertainty regarding the compulsory copyright
license could lead to legislative proposals, new administrative rules, or
judicial decisions that would significantly increase our compulsory copyright
payments for the carriage of 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 utilize and
cross public rights-of-way. Although some recently enacted state
franchising laws grant indefinite franchises, 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 significantly between jurisdictions. Each franchise generally
contains provisions governing cable operations, franchise fees, system
construction, maintenance, technical performance, customer service standards,
and changes in
the
ownership of the franchisee. 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.
The
traditional cable franchising regime is currently undergoing significant change
as a result of various federal and state actions. In a series of
recent rulemakings, the FCC adopted new rules that streamlined entry for new
competitors (particularly those affiliated with telephone companies) and reduced
certain franchising burdens for these new entrants. The FCC adopted
more modest relief for existing cable operators.
At the
same time, a substantial number of states recently have adopted new franchising
laws. Again, these new laws were principally designed to streamline
entry for new competitors, and they often provide advantages for these new
entrants that are not immediately available to existing cable
operators. In many instances, the new franchising regime does not
apply to established cable operators until the existing franchise expires or a
competitor directly enters the franchise territory. In a number of
instances, however, incumbent cable operators have the ability to immediately
“opt into” the new franchising regime, which can provide significant regulatory
relief. The exact nature of these state franchising laws, and their
varying application to new and existing video providers, will impact our
franchising obligations and our competitive position.
Internet
Service
Over the
past several years, proposals have been advanced at the FCC and Congress to
adopt “net neutrality” rules that would require cable operators offering
Internet service to provide non-discriminatory access of customers to their
networks and could interfere with the ability of cable operators to manage their
networks. The FCC issued a non-binding policy statement in 2005
establishing four basic principles to guide 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. The FCC continues to study the network management
practices of broadband providers, and it took action against one such provider
in August 2008, based on the FCC’s belief that the provider’s network management
practices were inconsistent with these principles. That FCC action is
currently being appealed. 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. In addition,
legislative proposals have been introduced in Congress to mandate how providers
manage their networks and the broadband provisions of the newly enacted American
Recovery and Reinvestment Act incorporate the FCC’s 2005
principles.
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 than had previously existed. 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 competitive services. 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. The FCC and state regulatory
authorities are considering, for example, whether common carrier regulation
traditionally applied to incumbent local exchange carriers should be modified
and whether any of those requirements should be extended to VoIP
providers. The FCC has already determined that providers of telephone
services using Internet Protocol technology must comply with 911 emergency
service opportunities (“E911”), requirements for accommodating law enforcement
wiretaps (CALEA), Universal Service fund collection, Customer Proprietary
Network Information requirements, and telephone relay
requirements. It is unclear whether and how the FCC will apply
additional types of common carrier regulations, such as inter-carrier
compensation to alternative voice technology. In March 2007, a
federal appeals court affirmed the FCC’s decision concerning federal regulation
of certain VoIP services, but declined to specifically find that VoIP service
provided by cable companies, such as we provide, should be regulated only at the
federal level. As a result, some states have begun proceedings to
subject cable VoIP services to state level regulation. Also, the FCC
and Congress continue to consider to what extent, VoIP service will have
interconnection rights with telephone companies. It is unclear how
these regulatory matters ultimately will be resolved.
Employees
As of
December 31, 2008, we had approximately 16,600 full-time equivalent
employees. At December 31, 2008, approximately 80 of our employees
were represented by collective bargaining agreements. We have never
experienced a work stoppage.
Item 1A. Risk
Factors.
Risks
Relating to Bankruptcy
As
mentioned above, we and our subsidiaries plan to file voluntary petitions under
Chapter 11 of the United States Bankruptcy Code on or before April 1, 2009, in
order to implement what we refer to herein as our agreement in principle with
certain of our bondholders. A Chapter 11 filing involves many risks
including, but not limited to the following.
Our operations will be subject to the
risks and uncertainties of bankruptcy.
For the
duration of the bankruptcy, our operations will be subject to the risks and
uncertainties associated with bankruptcy which include, among other
things:
·
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The
actions and decisions of our creditors and other third parties with
interests in our bankruptcy, including official and unofficial committees
of creditors and equity holders, which may be inconsistent with our
plans;
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·
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objections
to or limitations on our ability to obtain Bankruptcy Court approval with
respect to motions in the bankruptcy that we may seek from time to time or
potentially adverse decisions by the Bankruptcy Court with respect to such
motions;
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·
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objections
to or limitations on our ability to avoid or reject contracts or leases
that are burdensome or
uneconomical;
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·
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our
ability to obtain customers and obtain and maintain normal terms with
regulators, franchise authorities, vendors and service providers;
and
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·
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our
ability to maintain contracts and leases that are critical to our
operations.
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These
risks and uncertainties could negatively affect our business and operations in
various ways. For example, negative events or publicity associated with our
bankruptcy filings and events during the bankruptcy could adversely affect our
relationships with franchise authorities, customers, vendors and employees,
which in turn could adversely affect our operations and financial condition,
particularly if the bankruptcy is protracted. Also, transactions by Charter will
generally be subject to the prior approval of the applicable Bankruptcy Court,
which may limit our ability to respond on a timely basis to certain events or
take advantage of certain opportunities.
Because
of the risks and uncertainties associated with our bankruptcy, the ultimate
impact the events that occur during these cases will have on our business,
financial condition and results of operations cannot be accurately predicted or
quantified at this time.
The
bankruptcy may adversely affect our operations going forward. Our seeking
bankruptcy protection may adversely affect our ability to negotiate favorable
terms from suppliers, landlords, contract or trading counterparties and others
and to attract and retain customers and counterparties. The failure to obtain
such favorable terms and to attract and retain customers, as well as other
contract or trading counterparties could adversely affect our financial
performance. In addition, we expect to incur substantial professional and
other fees related to our restructuring.
We will remain subject to potential
claims made after the date that we file for bankruptcy and other claims that are
not discharged in the bankruptcy, which could have a material adverse effect on
our results of operations and financial condition.
We are
currently subject to claims in various legal proceedings, and may become subject
to other legal proceedings in the future. Although such claims are generally
stayed while the bankruptcy proceeding is pending, we may not be successful in
ultimately discharging or satisfying such claims. The ultimate
outcome of each of these matters, including our ability to have these matters
satisfied and discharged in the bankruptcy proceeding, cannot presently be
determined, nor can the liability that may potentially result from a negative
outcome be reasonably estimated presently for every case. The liability we may
ultimately incur with respect to any one of these matters in the event of a
negative outcome may be in excess of amounts currently accrued with respect to
such matters and, as a result, these matters may potentially be material to our
business or to our financial condition and results of operations.
Transfers of our equity, or issuances
of equity in connection with our restructuring, may impair our ability to
utilize our federal income tax net operating loss carryforwards in the
future.
Under
federal income tax law, a corporation is generally permitted to deduct from
taxable income in any year net operating losses carried forward from prior
years. We have net operating loss carryforwards of approximately $8.7 billion as
of December 31, 2008. Our ability to deduct net operating loss carryforwards
will be subject to a significant limitation if we were to undergo an “ownership
change” for purposes of Section 382 of the Internal Revenue Code of 1986, as
amended, during or as a result of our bankruptcy and would be reduced by the
amount of any cancellation of debt income resulting from the Proposed
Restructuring that is allocable to Charter. See “—For tax purposes,
it is anticipated that we will experience a deemed ownership change upon
emergence from Chapter 11 bankruptcy, resulting in a material limitation on our
future ability to use a substantial amount of our existing net operating loss
carryforwards.”
Our
successful reorganization will depend on our ability to motivate key employees
and successfully implement new strategies.
Our
success is largely dependent on the skills, experience and efforts of our
people. In particular, the successful implementation of our business plan and
our ability to successfully consummate a plan of reorganization will be highly
dependent upon our management. Our ability to attract, motivate and retain key
employees is restricted by provisions of the Bankruptcy Code, which limit or
prevent our ability to implement a retention program or take other measures
intended to motivate key employees to remain with the Company during the
pendency of the bankruptcy. In addition, we must obtain Bankruptcy Court
approval of employment contracts and other employee compensation
programs. The loss of the services of such individuals or other key
personnel could have a material adverse effect upon the implementation of our
business plan, including our restructuring program, and on our ability to
successfully reorganize and emerge from bankruptcy.
The
prices of our debt and equity securities are volatile and, in connection with
our reorganization, holders of our securities may receive no payment, or payment
that is less than the face value or purchase price of such
securities.
The
market price for our common stock has been volatile and it is expected that our
common stock will be cancelled for no value under the agreement in principle we
have reached with a group of our bondholders. Prices for our debt
securities are also volatile and prices for such securities have generally been
substantially below par. We can make no assurance that the price of
our securities will not fluctuate or decrease substantially in the
future. See “—Our shares of Class A common stock will likely be
delisted from trading on the NASDAQ Global Select Market following a Chapter 11
bankruptcy filing” for discussion of the risk of a NASDAQ delisting of Charter’s
securities in connection with a filing.
Accordingly,
trading in our securities is highly speculative and poses substantial risks to
purchasers of such securities, as holders may not be able to resell such
securities or, in connection with our reorganization, may receive no payment, or
a payment or other consideration that is less than the par value or the purchase
price of such securities.
Our
emergence from bankruptcy is not assured, including on what terms we
emerge.
While we
expect the terms of our emergence from bankruptcy will reflect our agreement in
principle, there is no assurance that we will be able to implement the agreement
in principle with certain of the Company’s bondholders, which is subject to
numerous closing conditions. For example, because the Proposed
Restructuring is contingent on reinstatement of the credit facilities and
certain notes of Charter Operating and CCO Holdings, failure to reinstate such
debt would require us to revise the Proposed Restructuring. Moreover, if
reinstatement does not occur and current capital market conditions persist, we
may not be able to secure adequate new financing and the cost of new financing
would likely be materially higher. In addition, as set forth
above, a Chapter 11 proceeding is subject to numerous factors which could
interfere with our ability to effectuate the agreement in
principle.
Risks Related to Significant
Indebtedness of Us and Our Subsidiaries
We
and our subsidiaries have a significant amount of 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, 2008, our total debt was approximately $21.7
billion, our shareholders' deficit was approximately $10.5 billion and the
deficiency of earnings to cover fixed charges for the year ended December 31,
2008 was $2.6 billion.
Because
of our significant indebtedness and adverse changes in the capital markets, 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. As a result of our significant indebtedness, we have entered
into restructuring agreements with holders of certain of our subsidiaries’
senior notes, pursuant to which we expect to implement the Proposed
Restructuring through a Chapter 11 bankruptcy proceeding to be initiated on or
before April 1, 2009. As a result of the Proposed Restructuring or
other similar recapitalization or other transaction, our shareholders will
suffer significant dilution, including potential loss of the entire value of
their investment, and certain of our noteholders will 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:
·
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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;
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·
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limit
our flexibility in planning for, or reacting to, changes in our business,
the cable and telecommunications industries, and the economy at
large;
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·
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place
us at a disadvantage compared to our competitors that have proportionately
less debt;
|
·
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make
us vulnerable to interest rate increases, because net of hedging
transactions approximately 20% of our borrowings are, and will continue to
be, subject to variable rates of
interest;
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·
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expose
us to increased interest expense to the extent we refinance existing debt
with higher cost debt;
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·
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adversely
affect our relationship with customers and
suppliers;
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·
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limit
our ability to borrow additional funds in the future, or to access
financing at the necessary level of the capital structure, due to
applicable financial and restrictive covenants in our
debt;
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·
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make
it more difficult for us to obtain financing given the current volatility
and disruption in the capital and credit markets and the deterioration of
general economic conditions;
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·
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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 the lenders
under their credit facilities and to their noteholders;
and
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·
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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.
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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, the holders of the
Charter Operating senior second-lien notes, the secured lenders under the CCO
Holdings credit facility, and the holders of the CCH I notes could foreclose on
the collateral, which includes equity interests in certain of our subsidiaries,
and exercise other rights of secured creditors. Any default under our
debt could adversely affect our growth, our financial condition,
our results of operations, the value of our equity and our ability to make
payments on our debt. See “—Risks Relating to
Bankruptcy.” We and our subsidiaries may incur significant additional
debt in the future. If current debt amounts 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.
Our
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 restrict, among other things, our and our subsidiaries' ability
to:
·
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repurchase
or redeem equity interests and
debt;
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·
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make
certain investments or
acquisitions;
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·
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pay
dividends or make other
distributions;
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·
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dispose
of assets or merge;
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·
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enter
into related party transactions;
and
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·
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grant
liens and pledge assets.
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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, the holders of the Charter Operating senior
second-lien notes, the secured lenders under the CCO Holdings credit facility,
and the holders of the CCH I 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 senior notes, our
credit facilities, and other debt of our subsidiaries, and could force us to
seek the protection of the bankruptcy laws. See “Part I. Item
1. Business – Recent Developments – Charter Operating Credit
Facility” and “Risks Relating to Bankruptcy.”
We
depend on generating (and having available to the applicable obligor) sufficient
cash flow to fund our debt obligations, capital expenditures, and ongoing
operations. The lenders under our revolving credit facility have
refused us access to funds under the Charter Operating revolving credit
facilities. Our access to additional financing may be limited, which
could adversely affect our financial condition and our ability to conduct our
business.
Although
we have drawn down all but $27 million of the amounts available under our
revolving credit facility, our subsidiaries have historically relied on access
to credit facilities to fund operations, capital expenditures, and to service
parent company debt. Our total potential borrowing availability under our
revolving credit facility was approximately $27 million as of December 31,
2008. A recent draw request by us to borrow the remaining amount under our
revolving credit facility was not funded by the lenders with the exception of
one lender who funded approximately $0.4 million. We believe the lenders
will continue to refuse funding under our revolving credit facility. See
“Part I. Item 1. Business – Recent Developments – Charter Operating Credit
Facility” and “Risks Relating to Bankruptcy.” As a result, we will be
dependent on our cash on hand and cash flows from operating activities 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 and grow cash
flow and our access (by dividend or otherwise) to additional liquidity sources.
Our ability to generate and grow cash flow is dependent on many factors,
including:
·
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the
impact of competition from other distributors, including but not limited
to incumbent telephone companies, direct broadcast satellite operators,
wireless broadband providers and DSL
providers;
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·
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difficulties
in growing and operating our telephone services, while adequately meeting
customer expectations for the reliability of voice
services;
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·
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our
ability to adequately meet demand for installations and customer
service;
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·
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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 our customer base, particularly in the
face of increasingly aggressive
competition;
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·
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our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
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·
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general
business conditions, economic uncertainty or downturn, including the
recent volatility and disruption in the capital and credit markets and the
significant downturn in the housing sector and overall economy;
and
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·
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the
effects of governmental regulation on our
business.
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Some of these factors are beyond our
control. It is
also difficult to assess the impact that the general economic downturn and
recent turmoil in the credit markets will have on future operations and
financial results. However, the general economic downturn has
resulted in reduced spending by customers and advertisers, which may have
impacted our revenues and our cash flows from operating activities from those
that otherwise would have been generated. If we are unable to generate sufficient
cash flow or we are unable to access additional 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. It is
uncertain whether we will be able, under applicable law, to make distributions
or otherwise move cash to the relevant entities for payment of interest and
principal. 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 “–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.”
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
primary 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 “— Summary of Restrictive Covenants of Our High Yield Notes –
Restrictions on Distributions.” 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.
|
It is
uncertain whether we will have, at the relevant times, sufficient surplus at the
relevant subsidiaries to make distributions, including for payments of interest
and principal on the debts of the parents of such entities, and there can
otherwise be no assurance that our subsidiaries will not become insolvent or
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 and CCO Holdings credit facilities. Several of our subsidiaries
are also obligors and guarantors under senior high yield notes. Our
convertible senior notes are structurally subordinated in right of payment to
all of the debt and other liabilities of our
subsidiaries. As of
December 31, 2008, our total debt was approximately $21.7 billion, of which
approximately $21.3 billion was structurally senior to our convertible senior
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, and all holders
of other debt of our subsidiaries, 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 access to 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
resources, greater resources for marketing, greater and more favorable 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 have provided additional benefits to certain
of our competitors, either through access to financing, resources, or
efficiencies of scale.
Our
principal competitors for video services throughout our territory are DBS
providers. The two largest DBS providers are DirecTV and
Echostar. Competition from DBS, including intensive marketing efforts
with aggressive pricing, exclusive programming and increased high definition
broadcasting has had an adverse impact on our ability to retain customers. DBS
has grown rapidly over the last several years. DBS companies have
also recently announced plans and technical actions to expand their activities
in the MDU market. 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.
Telephone
companies, including two major telephone companies, AT&T and Verizon, and
utility companies can offer video and other services in competition with us, and
we expect they will increasingly do so in the future. Upgraded
portions of these networks carry two-way video and data services (DSL and
FiOS) and digital voice
services that are similar
to ours. In the case of Verizon, high-speed data services (FiOS)
operate at speeds as high as or higher than ours. These services are
offered at prices similar to those for comparable Charter
services. Based on our internal estimates, we believe that AT&T
and Verizon are offering these services in areas serving approximately 14% to
17% of our estimated homes passed as of December 31, 2008. AT&T and
Verizon have also launched campaigns to capture more of the MDU
market. Additional upgrades and product launches are expected in
markets in which we operate. 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. DSL
service is competitive with high-speed Internet service and is often offered at
prices lower than our Internet services, although often at speeds lower than the
speeds we offer. In addition, in many of our markets, these companies
have entered into co-marketing arrangements with DBS providers to offer service
bundles combining video services provided by a DBS provider with DSL and
traditional telephone and wireless services offered by the telephone companies
and their affiliates. These service bundles substantially resemble
our bundles. Moreover, as we expand our telephone offerings, we will
face considerable competition from established telephone companies and other
carriers.
The
existence of more than one cable system operating in the same territory is
referred to as an overbuild. Overbuilds could adversely affect our
growth, financial condition, and results of operations, by creating or
increasing competition. Based on internal estimates and excluding
telephone companies, as of December 31, 2008, we are aware of traditional
overbuild situations impacting approximately 8% to 9% of our estimated homes
passed, and potential traditional overbuild situations in areas servicing
approximately an additional 1% of our estimated homes
passed. Additional overbuild situations may occur in other
systems.
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
and install customer premise equipment. Customers who subscribe to
our services as a result of these offerings may not remain customers following
the end of the promotional period. A failure to retain customers
could have a material adverse effect on our business.
Mergers,
joint ventures, and alliances among franchised, wireless, or private cable
operators, DBS 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 also negatively
impact advertisers’ willingness to purchase advertising from us, as well as the
price they are willing to pay for advertising. 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 the services we provide 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. Competition may reduce our expected growth of future cash
flows. We cannot predict the extent to which competition may affect
our business and results of operations.
If
our required capital expenditures exceed our projections, we may not have
sufficient funding, which could adversely affect our growth, financial condition
and results of operations.
During
the year ended December 31, 2008, we spent approximately $1.2 billion on capital
expenditures. During 2009, 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 broadband services such as
additional high-definition channels, faster high-speed Internet services, DVRs
and other customer premise equipment, as well as the cost of introducing any new
services. We may need additional capital if there is accelerated
growth in high-speed Internet customers, telephone customers or increased need
to respond to competitive pressures by expanding the delivery of other advanced
services. If we cannot provide for such capital spending from
increases in our cash flow from operating activities, additional borrowings,
proceeds from asset sales
or other sources, our growth, competitiveness, financial condition, and results
of operations could suffer materially.
We
may not have the ability to reduce the high growth rates of, or pass on to our
customers, our increasing programming costs, 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, and
at a higher rate than in 2008, because of a variety of factors including amounts
paid for retransmission consent, annual increases imposed by programmers and
additional programming, including high definition 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 associated with the video product. We have
programming contracts that have expired and others that will expire at or before
the end of 2009. 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 are likely to 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.
We face risks
inherent in our telephone
business.
We may
encounter unforeseen difficulties as we increase the scale of our telephone
service offerings. 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. 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 telephone companies. Further, we face increasing
competition for residential telephone services as more consumers in the United
States are replacing traditional telephone service with wireless
service. All of this may limit our ability to grow our telephone
service. 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.
Our
exposure to the credit risks of our customers, vendors and third parties could
adversely affect our cash flow, results of operations and financial
condition.
We are
exposed to risks associated with the potential financial instability of our
customers, many of whom may be adversely affected by the general economic
downturn. Dramatic declines in the housing market over the past year,
including falling home prices and increasing foreclosures, together with
significant increases in unemployment, have severely affected consumer
confidence and may cause increased delinquencies or cancellations by our
customers or lead to unfavorable changes in the mix of products
purchased. The general economic downturn also may affect advertising
sales, as companies seek to reduce expenditures and conserve cash. Any of these
events may adversely affect our cash flow, results of operations and financial
condition.
In
addition, we are susceptible to risks associated with the potential financial
instability of the vendors and third parties on which we rely to provide
products and services or to which we delegate certain functions. The
same economic conditions that may affect our customers, as well as volatility
and disruption in the capital and credit markets, also could adversely affect
vendors and third parties and lead to significant increases in prices, reduction
in output or the bankruptcy of our vendors or third parties upon which we
rely. Any interruption in the services provided by our vendors or by
third parties could adversely affect our cash flow, results of operation and
financial condition.
We depend on
third party service
providers, suppliers and
licensors; thus, if we are unable to procure the necessary services,
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 service providers, suppliers and licensors to supply some of the
services, 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 or which may not be
able to continue to supply the equipment and services we desire. Some of
our hardware, software and operational support vendors, and service providers
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 or
services 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.
In that
regard, we currently purchase set-top boxes from a limited number of
vendors, because each of our cable systems use one or two proprietary
conditional access security schemes, which allows 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. In addition, in 2009, we plan to convert from two
billing service providers to one. We will be dependent on these
vendors for a properly executed conversion and for the ongoing timely and
appropriate service from the single remaining vendor.
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 peer-to-peer file sharing, 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, it is anticipated that we will experience a deemed ownership
change upon emergence from Chapter 11 bankruptcy, resulting in a material
limitation on our future ability to use a substantial amount of our existing net
operating loss carryforwards.
As of
December 31, 2008, we have approximately $8.7 billion of federal tax net
operating losses, resulting in a gross deferred tax asset of approximately $3.1
billion, expiring in the years 2009 through 2028. In addition, we also
have state tax net operating losses, resulting in a gross deferred tax asset
(net of federal tax benefit) of approximately $325 million, generally expiring
in years 2009 through 2028. Due to uncertainties in projected future
taxable
income
and our anticipated bankruptcy filing, 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 most 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 annual limitations on the use of such
net operating losses to offset future taxable income we may
generate. Most notably, our anticipated bankruptcy filing will
generate an ownership change upon emergence from Chapter 11 and our net
operating loss carryforwards will be reduced by the amount of any cancellation
of debt income resulting from the Proposed Restructuring that is allocable to
Charter. A limitation on our ability to use our net operating losses,
in conjunction with the net operating loss expiration provisions, could reduce
our ability to use a significant portion of our net operating losses to offset
any future taxable income. See Note 14 and Note 22 to the
accompanying consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data.”
Our
shares of Class A common stock will likely be delisted from trading on the
NASDAQ Global Select Market following a Chapter 11 bankruptcy
filing.
NASDAQ
rules provide that securities of a company that trades on NASDAQ may be delisted
in the event that such company seeks bankruptcy protection. In
response to a Chapter 11 bankruptcy filing by us discussed previously, NASDAQ
would likely issue a delisting letter immediately following such a
filing. If NASDAQ issued such a letter, Charter's common stock would
soon thereafter be delisted and there would be a very limited market or no
market at all, in which its securities would be traded.
Risks Related to Mr. Allen's
Controlling Position
The
failure by Paul G. Allen, our chairman and controlling stockholder, to maintain
a minimum voting 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
the
majority of our stockholder
votes and may have
interests that conflict with the
interests of the other
holders of Charter’s
Class A
common stock.
As of
December 31, 2008, Mr. Allen owned approximately 91% of the voting power of
our capital stock, entitling him to elect all but one of Charter’s board
members. In addition, Mr. Allen 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 Charter’s Class A common
stock. For example, if Mr. Allen were to elect to exchange his
Charter Holdco membership units for Charter’s 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
“—Transfers of
our equity, or issuances of equity in connection with our restructuring, may
impair our ability to utilize our federal income tax net operating loss
carryforwards in the future.” 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, 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 Charter’s 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 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' operational and
administrative 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 and employee
privacy;
|
·
|
limited
rate regulation;
|
·
|
rules
governing the copyright royalties that must be paid for retransmitting
broadcast signals;
|
·
|
requirements
governing when a cable system must carry a particular broadcast station
and when it must first obtain consent to carry a broadcast
station;
|
·
|
requirements
governing the provision of channel capacity to unaffiliated commercial
leased access programmers;
|
·
|
rules
limiting our ability to enter into exclusive agreements with multiple
dwelling unit complexes and control our inside
wiring;
|
·
|
rules,
regulations, and regulatory policies relating to provision of voice
communications and high-speed Internet
service;
|
·
|
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, and proposals that might make it easier for our employees to unionize.
Certain states and localities are considering new cable and
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. 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, local franchises
have not been renewed at expiration, and we have operated and are operating
under either temporary operating agreements or without a franchise while
negotiating renewal terms with the local franchising authorities.
Approximately 10% of our franchises, covering approximately 11% of our video
customers, were expired as of December 31, 2008. On January 1, 2009, a
number of these expired franchises converted to statewide authorization and were
no longer considered expired. Approximately 4% of additional
franchises, covering approximately an additional 4% of our video customers, will
expire on or before December 31, 2009, if not renewed prior to
expiration.
The
traditional cable franchising regime is currently undergoing significant change
as a result of various federal and state actions. Some of the new state
franchising laws do not allow us to immediately opt into statewide franchising
until (i) we have completed the term of the local franchise, in good standing,
(ii) a competitor has entered the market, or (iii) in limited instances, where
the local franchise allows the state franchise license to apply. In many
cases, state franchising laws, and their varying application to us and new video
providers, will result in less franchise imposed requirements for our
competitors who are new entrants than for us until we are able to opt into the
applicable state franchise.
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 and state
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 and state
franchising authorities can grant additional franchises to competitors in the
same geographic area or operate their own cable systems. In some
cases, local government entities and municipal utilities may legally compete
with us without obtaining a franchise from the local franchising
authority. In addition, certain telephone companies are seeking
authority to operate in communities without first obtaining a local franchise.
As a result, competing operators may build systems in areas in which we
hold franchises.
In a
series of recent rulemakings, the FCC adopted new rules that streamline entry
for new competitors (particularly those affiliated with telephone companies) and
reduce franchising burdens for these new entrants. At the same time,
a substantial number of states recently have adopted new franchising
laws. Again, these new laws were principally designed to streamline
entry for new competitors, and they often provide advantages for these new
entrants that are not immediately available to existing operators. As
a result of these new franchising laws and regulations, we have seen an increase
in the number of competitive cable franchises or operating certificates being
issued, and we anticipate that trend to continue.
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 who are certified to regulate rates in the communities where they
operate generally have the power to reduce rates and order refunds on the rates
charged for basic service and equipment.
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 Congress
continue to be concerned that cable rate increases are exceeding inflation.
It is possible that either the FCC or Congress will further 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 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
previously determined that the lower cable rate was applicable to the mixed use
of a pole attachment for the provision of both cable and Internet access
services. However, in late 2007, the FCC issued an NPRM, in which it
“tentatively concludes” that this approach should be modified. The
change could affect the pole attachment rates we pay when we offer either data
or voice services over our broadband facility. Any changes in the FCC
approach could result in a substantial increase in our pole attachment
costs.
Increasing
regulation of our Internet service product adversely affect our ability to
provide new products and services.
There has
been continued 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 us) to manage
and control their own networks. In August 2005, the FCC issued a
nonbinding policy statement identifying four principles to guide its
policymaking regarding high-speed Internet and related
services. These principles provide that consumers are entitled
to: (i) access lawful Internet content of their choice; (ii) run
applications and services of their choice, subject to the needs of law
enforcement; (iii) connect their choice of legal devices that do not harm the
network; and (iv) enjoy competition among network providers, application and
service providers, and content providers. In August 2008, the FCC
issued an order concerning one Internet network management practice in use by
another cable operator, effectively treating the four principles as rules and
ordering a change in network management practices. Although that
decision is on appeal, additional proposals for new legislation, and for more
expansive conditions associated with the broadband provisions of the new
American Recovery and Reinvestment Act, could impose additional obligations on
high-speed Internet providers. Any such rules or statutes could limit
our ability to manage our cable systems (including use for other services),
obtain value for use of our cable systems and respond to competitive
competitions.
Changes
in channel carriage regulations could impose significant additional costs on
us.
Cable
operators also face significant regulation of their channel
carriage. We can be required to devote substantial capacity to the
carriage of programming that we might not carry voluntarily, including certain
local broadcast signals; local public, educational and government access (“PEG”)
programming; and unaffiliated, commercial leased access programming (required
channel capacity for use by persons unaffiliated with the cable operator who
desire to distribute programming over a cable system). The FCC
adopted a transition plan in 2007 addressing the cable industry’s broadcast
carriage obligations once the broadcast industry migration from analog to
digital
transmission
is completed, which is expected to occur in June 2009. Under the
FCC’s transition plan, most cable systems will be required to offer both an
analog and digital version of local broadcast signals for three years after the
digital transition date. This burden could increase further if we are
required to carry multiple programming streams included within a single digital
broadcast transmission (multicast carriage) or if our broadcast carriage
obligations are otherwise expanded. The FCC also adopted new
commercial leased access rules which dramatically reduce the rate we can charge
for leasing this capacity and dramatically increase our associated
administrative burdens. These regulatory changes could disrupt
existing programming commitments, interfere with our preferred use of limited
channel capacity, and limit our ability to offer services that would maximize
our revenue potential. It is possible that other legal restraints
will be adopted limiting our discretion over programming decisions.
Offering
voice communications service may subject us to additional regulatory burdens,
causing us to incur additional costs.
We offer
voice communications services over our broadband network and 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, Universal Service fund collection, CALEA, Customer
Proprietary Network Information and telephone relay requirements to many VoIP
providers such as us. 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.
Our
subsidiaries generally lease 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 land and building for our principal
executive office.
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.
Patent
Litigation
Ronald A. Katz Technology Licensing,
L.P. v. Charter Communications, Inc. et. al. On September 5,
2006, Ronald A. Katz Technology Licensing, L.P. served a lawsuit on Charter and
a group of other companies in the U. S. District Court for the District of
Delaware alleging that Charter and the other defendants have infringed its
interactive telephone patents. Charter denied the allegations raised
in the complaint. On March 20, 2007, the Judicial Panel on
Multi-District Litigation transferred this case, along with 24 others, to the
U.S. District Court for the Central District of California for coordinated and
consolidated pretrial proceedings. Charter is vigorously contesting
this matter.
Rembrandt Patent
Litigation. On June 1, 2006, Rembrandt Technologies, LP sued
Charter and several other cable companies in the U.S. District Court for the
Eastern District of Texas, alleging that each defendant's high-speed
data
service
infringes three patents owned by Rembrandt and that Charter's receipt and
retransmission of ATSC digital terrestrial broadcast signals infringes a fourth
patent owned by Rembrandt (Rembrandt I). On
November 30, 2006, Rembrandt Technologies, LP again filed suit against Charter
and another cable company in the U.S. District Court for the Eastern District of
Texas, alleging patent infringement of an additional five patents allegedly
related to high-speed Internet over cable (Rembrandt
II). Charter has denied all of Rembrandt’s allegations. On
June 18, 2007, the Rembrandt
I and Rembrandt
II cases were combined
in a multi-district litigation proceeding in the U.S. District Court for the
District of Delaware. On November 21, 2007, certain vendors of the equipment
that is the subject of Rembrandt I and Rembrandt II cases filed an
action against Rembrandt in U.S. District Court for the district of Delaware
seeking a declaration of non-infringement and invalidity on all but one of the
patents at issue in those cases. On January 16, 2008 Rembrandt filed an
answer in that case and a third party counterclaim against Charter and the other
MSOs for infringement of all but one of the patents already at issue in Rembrandt I and Rembrandt II cases. On
February 7, 2008, Charter filed an answer to Rembrandt’s counterclaims and added
a counter-counterclaim against Rembrandt for a declaration of non-infringement
on the remaining patent. Charter is vigorously contesting the Rembrandt I and Rembrandt II
cases.
Verizon Patent Litigation. On
February 5, 2008, four Verizon entities sued Charter and two other Charter
subsidiaries in the U.S. District Court for the Eastern District of Texas,
alleging that the provision of telephone service by Charter infringes eight
patents owned by the Verizon entities (Verizon I). A trial is
scheduled for February 2010. On December 31, 2008, forty-four Charter
entities filed a complaint in the U.S. District Court for the Eastern District
of Virginia alleging that Verizon and two of its subsidiaries infringe four
patents related to television transmission technology (Verizon II). On
February 6, 2009, Verizon responded to the complaint by denying Charter’s
allegations, asserting counterclaims for non-infringement and invalidity of
Charter’s patents and asserting counterclaims against Charter for infringement
of eight patents. On January 15, 2009, Charter filed a complaint in the
U.S. District Court for the Southern District of New York seeking a declaration
of non-infringement on two patents owned by Verizon (Verizon III). Charter
is vigorously contesting the allegations made against it in Verizon I and Verizon II, and is forcefully
prosecuting its claims in Verizon II and Verizon III.
We are
also a defendant or co-defendant in several other 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 including those described above, 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, as well as negotiate royalty or license agreements
with respect to the patents at issue. While we believe the lawsuits are
without merit and intend to defend the actions vigorously, all of these patent
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.
Employment
Litigation
Sjoblom v. Charter Communications,
LLC and Charter Communications, Inc. On August 15, 2007, a
class action complaint was filed against Charter in the United States District
Court for the Western District of Wisconsin, on behalf of both nationwide and
state of Wisconsin classes of certain categories of current and former Charter
technicians, alleging that Charter violated the Fair Labor Standards Act and
Wisconsin wage and hour laws by failing to pay technicians for certain hours
claimed to have been worked. While we believe we have substantial factual
and legal defenses to the claims at issue, in order to avoid the cost and
distraction of continuing to litigate the case, we reached a settlement with the
plaintiffs, which received final approval from the court on January 26,
2009. We have been subjected, in the normal course of business, to
the assertion of other similar claims and could be subjected to additional such
claims. We cannot predict the ultimate outcome of any such
claims.
Other
Proceedings
We also
are 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. Whether or not
we
ultimately prevail in any particular lawsuit or claim, litigation can be time
consuming and costly and injure our reputation.
No
matters were submitted to a vote of security holders during the fourth quarter
of the year ended December 31, 2008.
PART II
Charter’s
Class A common stock is quoted on the NASDAQ Global Select 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 Select Market. There is no
established trading market for Charter’s Class B common stock.
Class A Common
Stock
|
|
High
|
|
|
Low
|
|
2007
|
|
|
|
|
|
|
First
quarter
|
|
$ |
3.52 |
|
|
$ |
2.75 |
|
Second
quarter
|
|
|
4.16 |
|
|
|
2.70 |
|
Third
quarter
|
|
|
4.80 |
|
|
|
2.41 |
|
Fourth
quarter
|
|
|
2.94 |
|
|
|
1.14 |
|
2008
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
1.28 |
|
|
$ |
0.78 |
|
Second
quarter
|
|
|
1.59 |
|
|
|
0.89 |
|
Third
quarter
|
|
|
1.17 |
|
|
|
0.73 |
|
Fourth
quarter
|
|
|
0.69 |
|
|
|
0.08 |
|
As of
December 31, 2008, there were 4,500 holders of record of Charter’s Class A
common stock and one holder of Charter’s Class B common stock.
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, 2008 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
|
|
22,043,636
|
(1)
|
|
$ |
3.82
|
|
8,786,240
|
Equity
compensation plans not
approved
by security holders
|
|
289,268
|
(2)
|
|
$ |
3.91
|
|
--
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
22,332,904
|
|
|
$ |
3.82
|
|
8,786,240
|
(1)
|
This
total does not include 12,008,625 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 33,036,871
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 Charter’s 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 21 to our accompanying
consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data.”
The graph
below shows the cumulative total return on Charter’s Class A common stock
for the period from December 31, 2003 through December 31, 2008, in
comparison to the cumulative total return on Standard & Poor’s 500
Index and a peer group consisting of the national cable operators that are most
comparable to us in terms of size and nature of operations. The Company’s old
peer group consists of Cablevision Systems Corporation, Comcast Corporation,
Insight Communications, Inc. (through third quarter 2005) and Mediacom
Communications Corp., and the new peer group consists of the same companies plus
Time Warner Cable, Inc. beginning in 2007. The results shown assume
that $100 was invested on December 31, 2003 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 Charter’s Class A
common stock.
This
Performance Graph shall not be deemed to be incorporated by reference into our
SEC filings and should not constitute soliciting material or otherwise be
considered filed under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.
(F)
|
Recent Sales of
Unregistered Securities
|
During
2008, 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)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,479 |
|
|
$ |
6,002 |
|
|
$ |
5,504 |
|
|
$ |
5,033 |
|
|
$ |
4,760 |
|
Operating
income (loss) from continuing operations
|
|
$ |
(614 |
) |
|
$ |
548 |
|
|
$ |
367 |
|
|
$ |
304 |
|
|
$ |
(1,942 |
) |
Interest
expense, net
|
|
$ |
(1,903 |
) |
|
$ |
(1,851 |
) |
|
$ |
(1,877 |
) |
|
$ |
(1,818 |
) |
|
$ |
(1,669 |
) |
Loss
from continuing operations before income taxes and
cumulative
effect of accounting change
|
|
$ |
(2,554 |
) |
|
$ |
(1,407 |
) |
|
$ |
(1,399 |
) |
|
$ |
(891 |
) |
|
$ |
(3,575 |
) |
Net
loss applicable to common stock
|
|
$ |
(2,451 |
) |
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
$ |
(970 |
) |
|
$ |
(4,345 |
) |
Basic
and diluted loss from continuing operations before
cumulative
effect of accounting change per common share
|
|
$ |
(6.56 |
) |
|
$ |
(4.39 |
) |
|
$ |
(4.78 |
) |
|
$ |
(3.24 |
) |
|
$ |
(11.47 |
) |
Basic
and diluted loss per common share
|
|
$ |
(6.56 |
) |
|
$ |
(4.39 |
) |
|
$ |
(4.13 |
) |
|
$ |
(3.13 |
) |
|
$ |
(14.47 |
) |
Weighted-average
shares outstanding, basic and diluted
|
|
|
373,464,920 |
|
|
|
368,240,608 |
|
|
|
331,941,788 |
|
|
|
310,209,047 |
|
|
|
300,341,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in cable properties
|
|
$ |
12,371 |
|
|
$ |
14,045 |
|
|
$ |
14,440 |
|
|
$ |
15,666 |
|
|
$ |
16,167 |
|
Total
assets
|
|
$ |
13,882 |
|
|
$ |
14,666 |
|
|
$ |
15,100 |
|
|
$ |
16,431 |
|
|
$ |
17,673 |
|
Total
debt
|
|
$ |
21,666 |
|
|
$ |
19,908 |
|
|
$ |
19,062 |
|
|
$ |
19,388 |
|
|
$ |
19,464 |
|
Note
payable – related party
|
|
$ |
75 |
|
|
$ |
65 |
|
|
$ |
57 |
|
|
$ |
49 |
|
|
$ |
-- |
|
Minority
interest (b)
|
|
$ |
203 |
|
|
$ |
199 |
|
|
$ |
192 |
|
|
$ |
188 |
|
|
$ |
648 |
|
Preferred
stock — redeemable
|
|
$ |
-- |
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
55 |
|
Shareholders’
deficit
|
|
$ |
(10,506 |
) |
|
$ |
(7,892 |
) |
|
$ |
(6,219 |
) |
|
$ |
(4,920 |
) |
|
$ |
(4,406 |
) |
(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 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. Our 70%
interest in the 24,273,943 Class A preferred membership units
(collectively, the "CC VIII interest") is held by CCH
I. See Notes 11 and 23 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. On January 1, 2009, Charter will adopt Statement of
Financial Accounting Standards (“SFAS”) 160 which requires losses to be
allocated to non-controlling (minority) interests even when such amounts
are deficits.
|
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 “Part I. Item 1. Business – Recent Developments” which describes the
Proposed Restructuring and “Part I. Item 1A. Risk Factors” especially the risk
factors “—Risks Relating to Bankruptcy” and “Cautionary Statement Regarding
Forward-Looking Statements,” which describe 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, 2008, 2007, and 2006.
Overview
Charter
is a broadband communications company operating in the United States with
approximately 5.5 million customers at December 31, 2008. We offer
our customers traditional cable video programming (basic and digital, which we
refer to as "video" service), high-speed Internet access, and telephone
services, as well as advanced broadband services (such as OnDemand, high
definition television service and DVR). See "Part I. Item 1. Business
— Products and Services" for further description of these services, including
"customers."
Approximately
86% of our revenues for each of the years ended December 31, 2008 and 2007
are attributable to monthly subscription fees charged to customers for our
video, high-speed Internet, telephone, and commercial services provided by our
cable systems. Generally, these customer subscriptions may be
discontinued by the customer at any time. The remaining 14% of
revenue for fiscal years 2008 and 2007 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 cable
industry's and our most significant competitive challenges stem from DBS
providers and DSL service providers. Telephone companies either
offer, or are making upgrades of their networks that will allow them to offer,
services that provide features and functions similar to our video, high-speed
Internet, and telephone services, and they also offer them in bundles similar to
ours. See "Part I. Item 1. Business — Competition.'' We
believe that competition from DBS and telephone companies has resulted in net
video customer losses. In addition, we face increasingly limited
opportunities to upgrade our video customer base now that approximately 62% of
our video customers subscribe to our digital video service. These
factors have contributed to decreased growth rates for digital video
customers. Similarly, competition from high-speed Internet providers
along with increasing penetration of high-speed Internet service in homes with
computers has resulted in decreased growth rates for high-speed Internet
customers. In the recent past, we have grown revenues by offsetting
video customer losses with price increases and sales of incremental services
such as high-speed Internet, OnDemand, DVR, high definition television, and
telephone. We expect to continue to grow revenues through price
increases and high-speed Internet upgrades, increases in the number of our
customers who purchase bundled services including high-speed Internet and
telephone, and through sales of incremental services including wireless
networking, high definition television, OnDemand, and DVR
services. In addition, we expect to increase revenues by expanding
the sales of our services to our commercial customers. However, we
cannot assure you that we will be able to grow revenues at historical rates, if
at all. Dramatic declines in the housing market over the past year,
including falling home prices and increasing foreclosures, together with
significant increases in unemployment, have severely affected consumer
confidence and may cause increased delinquencies or cancellations by our
customers or lead to unfavorable changes in the mix of products
purchased. The general economic downturn also may affect advertising
sales, as companies seek to reduce expenditures and conserve cash. Any of these
events may adversely affect our cash flow, results of operations and financial
condition.
Our
expenses primarily consist of operating costs, selling, general and
administrative expenses, depreciation and amortization expense, impairment of
franchise intangibles 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. We control our costs of operations by
maintaining strict controls on expenses. More specifically, we are
focused on managing our cost structure by improving workforce productivity, and
leveraging our scale, and increasing the effectiveness of our purchasing
activities.
For the
year ended December 31, 2008, our operating loss from continuing operations was
$614 million and for the years ended December 31, 2007 and 2006, income from
continuing operations was $548 million and $367 million,
respectively. We
had a negative operating margin (defined as operating loss from continuing
operations divided by revenues) of 9% for the year ended December 31, 2008 and
positive operating margins (defined as operating income from continuing
operations divided by revenues) of 9% and 7% for the years ended December 31,
2007 and 2006, respectively. For the year ended December 31, 2008,
the operating loss from continuing operations and negative operating margin is
principally due to impairment of franchises incurred during the fourth
quarter. The improvement in operating income from continuing
operations in 2007 as compared to 2006 and positive operating margin for the
years ended December 31, 2007 and 2006 is principally due to increased sales of
our bundled services and improved cost efficiencies.
We have a
history of net losses. Our net losses are principally attributable to
insufficient revenue to cover the combination of operating expenses and interest
expenses we incur because of our high amounts of debt, depreciation expenses
resulting from the capital investments we have made and continue to make in our
cable properties, and the impairment of our franchise intangibles.
Beginning
in 2004 and continuing through 2008, we sold several cable systems to divest
geographically non-strategic assets and allow for more efficient operations,
while also reducing debt and increasing our liquidity. In 2006, 2007,
and 2008, we closed the sale of certain cable systems representing a total of
approximately 390,300, 85,100, and 14,100 video customers,
respectively. 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. We also made certain geographically
strategic acquisitions in 2006 and 2007, adding 17,600 and 25,500 video
customers, respectively.
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. 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 that are not deemed critical, such as the allowance for
doubtful accounts and valuations of our derivative instruments, but changes in
estimates or judgment 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, 2008 and 2007, the net carrying
amount of our property, plant and equipment (consisting primarily of cable
network assets) was approximately $5.0 billion (representing 36% of total
assets) and $5.1 billion (representing 35% of total assets),
respectively. Total capital expenditures for the years ended
December 31, 2008, 2007, and 2006 were approximately $1.2 billion, $1.2
billion, and $1.1 billion, 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. For assets that are sold or retired, we remove the estimated
applicable cost and accumulated depreciation. Costs capitalized as
part of
initial
customer installations include materials, direct labor, and certain indirect
costs. 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. As our service offerings
mature and our reconnect activity increases, our capitalizable installations
will continue to decrease and therefore our service expenses will
increase. Costs for repairs and maintenance are charged to operating
expense as incurred, while equipment replacement, including replacement of
certain components, 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 annually (or more frequently if circumstances dictate) 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 material in the periods
presented.
Labor
costs directly associated with capital projects are
capitalized. 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 $199 million, $194 million, and $204 million, respectively, for the
years ended December 31, 2008, 2007, and 2006.
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 are reflected prospectively
beginning in the period in which the study is completed. Our analysis
completed in the fourth quarter of 2007 indicated changes in the useful lives of
certain of our property, plant, and equipment based on technological changes in
our plant. As a result, depreciation expense decreased in 2008 by
approximately $81 million. The impact of such changes to our results
in 2007 was not material. Our analysis of useful lives in 2008 did
not indicate a change in useful lives. 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, 2008 of approximately $356 million. The effect of a
one-year increase in the weighted average remaining useful life of our property,
plant and equipment would be a decrease in depreciation expense for the year
ended December 31, 2008 of approximately $244 million.
Depreciation
expense related to property, plant and equipment totaled $1.3 billion for each
of the years ended December 31, 2008, 2007, and 2006, representing approximately
18%, 24%, and 26% of costs and expenses for the years ended December 31,
2008, 2007, and 2006, 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, 2008 and 2007 was
approximately $7.4 billion (representing 53% of total assets) and $8.9 billion
(representing 61% of total assets), respectively. Furthermore, our
noncurrent assets included approximately $68 million and $67 million of
goodwill as of December 31, 2008 and 2007, respectively.
SFAS
No. 142, Goodwill and
Other Intangible Assets, 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,
2008, 2007, and 2006 substantially all of our franchises qualify for
indefinite-life treatment under SFAS No. 142. Costs associated
with franchise renewals are amortized on a straight-line basis over 10 years,
which represents management’s best estimate of the average term of the
franchises. Franchise amortization expense was $2 million, $3
million, and $2 million for the years ended December 31, 2008, 2007, and
2006, respectively. We expect that amortization expense on franchise
assets will be approximately $2 million annually for each of the next five
years. Actual amortization expense in future periods could differ
from these estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives, and other relevant factors.
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 amortizing franchise
assets upon the occurrence of events or changes in circumstances indicating 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 current or expected future 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, 2008,
2007, and 2006. However, approximately $56 million and $159 million
of impairment on assets held for sale were recorded for the years ended December
31, 2007, and 2006, respectively.
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 value as determined in
accordance with accounting principles generally accepted in the United States
(“GAAP”). We determine fair 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 basic 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. 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.
Franchises were aggregated
into essentially inseparable asset groups to conduct the
valuations. We have historically assessed that our divisional
operations were the appropriate level at which our franchises should be
evaluated. Based on certain organizational changes in 2008, we
determined that the appropriate units of accounting for
franchises
are now the individual market area, which is a level below our geographic
divisional groupings previously used. The organizational change in
2008 consolidated our three divisions to two operating groups and put more
management focus on the individual market areas. These asset groups
generally represent geographic clustering of our cable systems into groups by
which such systems are managed. Management believes that as a result
of the organizational changes, such groupings represent the highest and best use
of those assets.
Franchises,
for SFAS No. 142 valuation purposes, are defined as the future economic benefits
of the right to solicit and service potential customers (customer marketing
rights), and the right to deploy and market new services (service marketing
rights). Fair value is determined based on 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.
Customer
relationships, for SFAS No. 142 valuation purposes, represent the value of the
business relationship with our existing customers (less the anticipated customer
churn), and are calculated by projecting future after-tax cash flows from these
customers, including the right to deploy and market additional services to these
customers. The present value of these after-tax cash flows yields the
fair value of the customer relationships. Substantially all our
acquisitions occurred prior to January 1, 2002. We did not
record any value associated with the customer relationship intangibles related
to those acquisitions. For acquisitions subsequent to January 1,
2002, we did assign a value to the customer relationship intangible, which is
amortized over its estimated useful life.
Our SFAS
No. 142 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.
We
completed our impairment assessment as of December 31, 2008 upon completion of
our 2009 budgeting process. Largely driven by the impact of the current economic
downturn along with increased competition, we lowered our projected revenue and
expense growth rates, and accordingly revised our estimates of future cash flows
as compared to those used in prior valuations. See “Part 1. Item 1.
Business — Competition.” As a result, we recorded $1.5 billion of
impairment for the year ended December 31, 2008.
We
recorded $178 million of impairment for the year ended December 31,
2007. The valuation completed for 2006 showed franchise values in
excess of book value, and thus resulted in no impairment.
The
valuations used in our impairment assessments involve numerous assumptions as
noted above. While economic conditions, applicable at the time of the
valuation, indicate the combination of assumptions utilized in the valuations
are reasonable, as market conditions change so will the assumptions, with a
resulting impact on the valuation and consequently the potential impairment
charge. In addition, future franchise valuations could be impacted by
the risks discussed in “Part 1. Item 1A. Risk Factors – Risks Relating to
Bankruptcy.” At December 31, 2008, a 10% and 5% decline in the
estimated fair value of our franchise assets in each of our units of accounting
would have increased our impairment charge by approximately $733 million and
$363 million, respectively. A 10% and 5% increase in the estimated
fair value of our franchise assets in each of our units of accounting would have
reduced our impairment charge by approximately $586 million and $317 million,
respectively.
Income
Taxes. All operations are held through Charter Holdco and its
direct and indirect subsidiaries. Charter Holdco and the majority of
its subsidiaries are generally limited liability companies that are not subject
to income tax. However, certain of these limited liability companies
are subject to state income tax. In addition, the subsidiaries that
are corporations are subject to federal and state income tax. All of
the remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, 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 were 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
in excess of the amount of tax losses that would have been allocated to Charter
had the Regulatory Allocations not been part of the LLC Agreement through the
year ended December 31, 2008 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
$1.0 billion through December 31, 2008.
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 any time 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 a risk that we will experience a
deemed ownership change resulting in a material limitation on our future ability
to use a substantial amount of our existing net operating loss carryforwards,
our future transactions, and the timing of such transactions could cause a
deemed ownership change for U.S. federal income tax purposes”). 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, 2008 and 2007, we have recorded net deferred income tax
liabilities of $558 million and $665 million, respectively. As
part of our net liability, on December 31, 2008 and 2007, we had deferred
tax assets of $6.0 billion and $5.1 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 $5.8 billion and $4.8 billion at
December 31, 2008 and 2007, respectively.
No tax
years for Charter or Charter Holdco are currently under examination by the
Internal Revenue Service. Tax years ending 2006 and 2007 remain subject to
examination.
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 as facts and circumstances change. A
reserve is released when a matter is ultimately brought to closure or the
statute of limitations lapses. We have established reserves for
certain matters. 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 constituted for the periods
presented (dollars in millions, except per share data):
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,479 |
|
|
|
100 |
% |
|
$ |
6,002 |
|
|
|
100 |
% |
|
$ |
5,504 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
2,792 |
|
|
|
43 |
% |
|
|
2,620 |
|
|
|
44 |
% |
|
|
2,438 |
|
|
|
44 |
% |
Selling,
general and administrative
|
|
|
1,401 |
|
|
|
22 |
% |
|
|
1,289 |
|
|
|
21 |
% |
|
|
1,165 |
|
|
|
21 |
% |
Depreciation
and amortization
|
|
|
1,310 |
|
|
|
20 |
% |
|
|
1,328 |
|
|
|
22 |
% |
|
|
1,354 |
|
|
|
25 |
% |
Impairment
of franchises
|
|
|
1,521 |
|
|
|
23 |
% |
|
|
178 |
|
|
|
3 |
% |
|
|
-- |
|
|
|
-- |
|
Asset
impairment charges
|
|
|
-- |
|
|
|
-- |
|
|
|
56 |
|
|
|
1 |
% |
|
|
159 |
|
|
|
3 |
% |
Other
operating (income) expenses, net
|
|
|
69 |
|
|
|
1 |
% |
|
|
(17 |
) |
|
|
-- |
|
|
|
21 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,093 |
|
|
|
109 |
% |
|
|
5,454 |
|
|
|
91 |
% |
|
|
5,137 |
|
|
|
93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from continuing operations
|
|
|
(614 |
) |
|
|
(9 |
%) |
|
|
548 |
|
|
|
9 |
% |
|
|
367 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,903 |
) |
|
|
|
|
|
|
(1,851 |
) |
|
|
|
|
|
|
(1,877 |
) |
|
|
|
|
Change
in value of derivatives
|
|
|
(29 |
) |
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
Gain
(loss) on extinguishment of debt
|
|
|
2 |
|
|
|
|
|
|
|
(148 |
) |
|
|
|
|
|
|
101 |
|
|
|
|
|
Other
income (expense), net
|
|
|
(10 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, before income tax
expense
|
|
|
(2,554 |
) |
|
|
|
|
|
|
(1,407 |
) |
|
|
|
|
|
|
(1,399 |
) |
|
|
|
|
Income
tax benefit (expense)
|
|
|
103 |
|
|
|
|
|
|
|
(209 |
) |
|
|
|
|
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,451 |
) |
|
|
|
|
|
|
(1,616 |
) |
|
|
|
|
|
|
(1,586 |
) |
|
|
|
|
Income
from discontinued operations, net of tax
|
|
|
-- |
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,451 |
) |
|
|
|
|
|
$ |
(1,616 |
) |
|
|
|
|
|
$ |
(1,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(6.56 |
) |
|
|
|
|
|
$ |
(4.39 |
) |
|
|
|
|
|
$ |
(4.78 |
) |
|
|
|
|
Net
loss
|
|
$ |
(6.56 |
) |
|
|
|
|
|
$ |
(4.39 |
) |
|
|
|
|
|
$ |
(4.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
373,464,920 |
|
|
|
|
|
|
|
368,240,608
|
|
|
|
|
|
|
|
331,941,788
|
|
|
|
|
|
Revenues. Average monthly
revenue per basic video customer, measured on an annual basis, has increased
from $82 in 2006 to $93 in 2007 and $105 in 2008. Average monthly
revenue per video customer represents total annual revenue, divided by twelve,
divided by the average number of basic video customers during the respective
period. Revenue growth primarily reflects increases in the number of
telephone, high-speed Internet, and digital video customers, price increases,
and incremental video revenues from OnDemand, DVR, and high-definition
television services, offset by a decrease in basic video
customers. Cable system sales, net of acquisitions, in 2006, 2007,
and 2008 reduced the increase in revenues in 2008 as compared to 2007 by
approximately $31 million and in 2007 as compared to 2006 by approximately $90
million. See “Part I. Item 1A – Risk Factors – Risks Relating to
Bankruptcy – Our operations will be subject to the risks and uncertainties of
bankruptcy.”
Revenues
by service offering were as follows (dollars in millions):
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
over 2007
|
|
|
2007
over 2006
|
|
|
|
Revenues
|
|
|
%
of Revenues
|
|
|
Revenues
|
|
|
%
of Revenues
|
|
|
Revenues
|
|
|
%
of Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
3,463 |
|
|
|
53 |
% |
|
$ |
3,392 |
|
|
|
56 |
% |
|
$ |
3,349 |
|
|
|
61 |
% |
|
$ |
71 |
|
|
|
2 |
% |
|
$ |
43 |
|
|
|
1 |
% |
High-speed
Internet
|
|
|
1,356 |
|
|
|
21 |
% |
|
|
1,243 |
|
|
|
21 |
% |
|
|
1,047 |
|
|
|
19 |
% |
|
|
113 |
|
|
|
9 |
% |
|
|
196 |
|
|
|
19 |
% |
Telephone
|
|
|
555 |
|
|
|
9 |
% |
|
|
345 |
|
|
|
6 |
% |
|
|
137 |
|
|
|
2 |
% |
|
|
210 |
|
|
|
61 |
% |
|
|
208 |
|
|
|
152 |
% |
Commercial
|
|
|
392 |
|
|
|
6 |
% |
|
|
341 |
|
|
|
6 |
% |
|
|
305 |
|
|
|
6 |
% |
|
|
51 |
|
|
|
15 |
% |
|
|
36 |
|
|
|
12 |
% |
Advertising
sales
|
|
|
308 |
|
|
|
5 |
% |
|
|
298 |
|
|
|
5 |
% |
|
|
319 |
|
|
|
6 |
% |
|
|
10 |
|
|
|
3 |
% |
|
|
(21 |
) |
|
|
(7 |
%) |
Other
|
|
|
405 |
|
|
|
6 |
% |
|
|
383 |
|
|
|
6 |
% |
|
|
347 |
|
|
|
6 |
% |
|
|
22 |
|
|
|
6 |
% |
|
|
36 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,479 |
|
|
|
100 |
% |
|
$ |
6,002 |
|
|
|
100 |
% |
|
$ |
5,504 |
|
|
|
100 |
% |
|
$ |
477 |
|
|
|
8 |
% |
|
$ |
498 |
|
|
|
9 |
% |
Video
revenues consist primarily of revenues from basic and digital video services
provided to our non-commercial customers. Basic video customers
decreased by 174,200 and 213,400 customers in 2008 and 2007, respectively, of
which 16,700 in 2008 and 97,100 in 2007 were related to asset sales, net of
acquisitions. Digital video customers increased by 213,000 and
112,000 customers in 2008 and 2007, respectively. The increase in
2008 and 2007 was reduced by the sale, net of acquisitions, of 7,600 and 38,100
digital customers, respectively. The increases in video revenues are
attributable to the following (dollars in millions):
|
|
2008
compared
to
2007
|
|
|
2007
compared
to
2006
|
|
|
|
|
|
|
|
|
Incremental
video services and rate adjustments
|
|
$ |
87 |
|
|
$ |
88 |
|
Increase
in digital video customers
|
|
|
77 |
|
|
|
59 |
|
Decrease
in basic video customers
|
|
|
(72 |
) |
|
|
(41 |
) |
Asset
sales, net of acquisitions
|
|
|
(21 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
71 |
|
|
$ |
43 |
|
High-speed
Internet customers grew by 192,700 and 280,300 customers in 2008 and 2007,
respectively. The increase in 2008 and 2007 was reduced by asset
sales, net of acquisitions, of 5,600 and 8,800 high-speed Internet customers,
respectively. The increases in high-speed Internet revenues from our
residential customers are attributable to the following (dollars in
millions):
|
|
2008
compared
to
2007
|
|
|
2007
compared
to
2006
|
|
|
|
|
|
|
|
|
Increase
in high-speed Internet customers
|
|
$ |
113 |
|
|
$ |
149 |
|
Rate
adjustments and service upgrades
|
|
|
3 |
|
|
|
58 |
|
Asset
sales, net of acquisitions
|
|
|
(3 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
113 |
|
|
$ |
196 |
|
Revenues
from telephone services increased by $220 million and $209 million in 2008 and
2007, respectively, as a result of an increase of 389,500 and 513,500 telephone
customers in 2008 and 2007, respectively, offset by a decrease of $10 million
and $1 million in 2008 and 2007, respectively, related to lower average
rates.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of
increased sales of the Charter Business Bundle® primarily to small and
medium-sized businesses. The increases were reduced by approximately
$2 million in 2008 and $6 million in 2007 as a result of asset
sales.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. In 2008, advertising sales
revenues increased primarily as a result of increases in political advertising
sales and advertising sales to vendors offset by significant decreases in
revenues from the automotive and furniture sectors, and a decrease of $2 million
related to asset sales. In 2007, advertising sales revenues decreased
primarily
as a
result of a decrease in national advertising sales, including political
advertising, and as a result of decreases in advertising sales revenues from
vendors and a decrease of $3 million as a result of system sales. For
the years ended December 31, 2008, 2007, and 2006, we received $39 million, $15
million, and $17 million, respectively, in advertising sales revenues from
vendors.
Other
revenues consist of franchise fees, regulatory fees, customer installations,
home shopping, late payment fees, wire maintenance fees and other miscellaneous
revenues. For the years ended December 31, 2008, 2007, and 2006,
franchise fees represented approximately 46%, 46%, and 51%, respectively, of
total other revenues. The increase in other revenues in 2008 was
primarily the result of increases in franchise and other regulatory fees and
wire maintenance fees. The increase in other revenues in 2007 was
primarily the result of increases in regulatory fee revenues, wire maintenance
fees, and late payment fees. The increases were reduced by
approximately $3 million in 2008 and $7 million in 2007 as a result of asset
sales.
Operating
expenses. The increases in
our operating expenses are attributable to the following (dollars in
millions):
|
|
2008
compared
to
2007
|
|
|
2007
compared
to
2006
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
$ |
90 |
|
|
$ |
106 |
|
Labor
costs
|
|
|
44 |
|
|
|
49 |
|
Franchise
and regulatory fees
|
|
|
23 |
|
|
|
16 |
|
Maintenance
costs
|
|
|
19 |
|
|
|
20 |
|
Costs
of providing high-speed Internet and telephone services
|
|
|
5 |
|
|
|
33 |
|
Other,
net
|
|
|
13 |
|
|
|
7 |
|
Asset
sales, net of acquisitions
|
|
|
(22 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
172 |
|
|
$ |
182 |
|
Programming
costs were approximately $1.6 billion, $1.6 billion, and $1.5 billion,
representing 59%, 60%, and 61% of total operating expenses for the years ended
December 31, 2008, 2007, and 2006, respectively. Programming
costs consist primarily of costs paid to programmers for basic, premium,
digital, OnDemand, and pay-per-view programming. The increases in
programming costs are primarily a result of annual contractual rate adjustments,
offset in part by asset sales and customer losses. Programming costs
were also offset by the amortization of payments received from programmers of
$33 million, $25 million, and $32 million in 2008, 2007, and 2006,
respectively. We expect programming expenses to continue to increase,
and at a higher rate than in 2008, due to a variety of factors, including
amounts paid for retransmission consent, annual increases imposed by
programmers, and additional programming, including high-definition, OnDemand,
and pay-per-view programming, being provided to our customers.
Labor
costs increased primarily due to an increase in employee base salary and
benefits.
Selling, general
and administrative expenses. The increases in
selling, general and administrative expenses are attributable to the following
(dollars in millions):
|
|
2008
compared
to
2007
|
|
|
2007
compared
to
2006
|
|
|
|
|
|
|
|
|
Marketing
costs
|
|
$ |
32 |
|
|
$ |
60 |
|
Customer
care costs
|
|
|
23 |
|
|
|
37 |
|
Bad
debt and collection costs
|
|
|
17 |
|
|
|
36 |
|
Stock
compensation costs
|
|
|
14 |
|
|
|
5 |
|
Employee
costs
|
|
|
7 |
|
|
|
17 |
|
Other,
net
|
|
|
24 |
|
|
|
(16 |
) |
Asset
sales, net of acquisitions
|
|
|
(5 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
112 |
|
|
$ |
124 |
|
Depreciation and
amortization. Depreciation and
amortization expense decreased by $18 million and $26 million in 2008 and 2007,
respectively. During 2008 and 2007, the decrease in depreciation was
primarily the result of asset
sales,
certain assets becoming fully depreciated, and an $81 million and $8 million
decrease in 2008 and 2007, respectively, due to the impact of changes in the
useful lives of certain assets during 2007, offset by depreciation on capital
expenditures.
Impairment of
franchises. We recorded impairment of $1.5 billion and $178 million for
the years ended December 31, 2008 and 2007, respectively. The impairment
recorded in 2008 was largely driven by lower expected revenue growth resulting
from the current economic downturn and increased competition. The
impairment recorded in 2007 was largely driven by increased competition. The
valuation completed in 2006 showed franchise values in excess of book value, and
thus resulted in no impairment.
Asset impairment
charges. Asset impairment charges for the years ended December 31, 2007
and 2006 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
(income) expenses, net. The change in other operating (income)
expenses, net are attributable to the following (dollars in
millions):
|
|
2008
compared
to
2007
|
|
|
2007
compared
to
2006
|
|
|
|
|
|
|
|
|
Increases
(decreases) in losses on sales of assets
|
|
$ |
16 |
|
|
$ |
(11 |
) |
Increases
(decreases) in special charges, net
|
|
|
70 |
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
86 |
|
|
$ |
(38 |
) |
For more
information, see Note 18 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Interest expense,
net. Net
interest expense increased by $52 million in 2008 from 2007 and decreased by $26
million in 2007 from 2006. The increase in net interest expense from
2007 to 2008 was a result of average debt outstanding increasing from $19.6
billion in 2007 to $20.3 billion in 2008, offset by a decrease in our average
borrowing rate from 9.2% in 2007 to 8.8% in 2008. The decrease in net
interest expense from 2006 to 2007 was a result of a decrease in our average
borrowing rate from 9.5% in 2006 to 9.2% in 2007. This was offset by
an increase in average debt outstanding from $19.4 billion in 2006 to $19.6
billion in 2007.
Change in value
of derivatives. Interest rate swaps are held to manage our
interest costs and reduce our exposure to increases in floating interest
rates. We expense the change in fair value of derivatives that do not
qualify for hedge accounting and cash flow hedge ineffectiveness on interest
rate swap agreements. Additionally, certain provisions of our 5.875%
and 6.50% convertible senior notes issued in November 2004 and October 2007,
respectively, were considered embedded derivatives for accounting purposes and
were required to be accounted for separately from the convertible senior notes
and marked to fair value at the end of each reporting period. Change
in value of derivatives consists of the following for the years ended December
31, 2008, 2007, and 2006.
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
(62 |
) |
|
$ |
(46 |
) |
|
$ |
6 |
|
Embedded
derivatives from convertible senior notes
|
|
|
33 |
|
|
|
98 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(29 |
) |
|
$ |
52 |
|
|
$ |
(4 |
) |
Gain (loss) on
extinguishment of debt. Gain (loss) on
extinguishment of debt consists of the following for the years ended December
31, 2008, 2007, and 2006.
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Holdings debt notes repurchases / exchanges
|
|
$ |
3 |
|
|
$ |
(3 |
) |
|
$ |
108 |
|
CCO
Holdings notes redemption
|
|
|
-- |
|
|
|
(19 |
) |
|
|
-- |
|
Charter
Operating credit facilities refinancing
|
|
|
-- |
|
|
|
(13 |
) |
|
|
(27 |
) |
Charter
convertible note repurchases / exchanges
|
|
|
3 |
|
|
|
(113 |
) |
|
|
20 |
|
CCH
II tender offer
|
|
|
(4 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
$ |
(148 |
) |
|
$ |
101 |
|
For more
information, see Notes 9 and 19 to the accompanying consolidated financial
statements contained in “Item 8. Financial Statements and
Supplementary Data.”
Other income
(expense), net. The change in other income (expense), net are
attributable to the following (dollars in millions):
|
|
2008
compared
to
2007
|
|
|
2007
compared
to
2006
|
|
|
|
|
|
|
|
|
Decreases
in minority interest
|
|
$ |
3 |
|
|
$ |
(3 |
) |
Decreases
in investment income
|
|
|
(1 |
) |
|
|
(16 |
) |
Other,
net
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(2 |
) |
|
$ |
(22 |
) |
For more
information, see Note 20 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Income tax
benefit (expense). Income tax benefit for
the year ended December 31, 2008 was realized as a result of the decreases in
certain deferred tax liabilities related to our investment in Charter Holdco and
certain of our subsidiaries, attributable to the write-down of franchise assets
for financial statement purposes and not for tax purposes. 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 tax benefit for the year ended December 31, 2008
included $325 million of deferred tax benefit related to the impairment of
franchises. Income tax expense in 2007 and 2006 was recognized
through increases in deferred tax liabilities related to our investment in
Charter Holdco and certain of our subsidiaries, in addition to current federal
and state income tax expense. Income tax benefit (expense) included
$2 million, $15 million, and $23 million of deferred tax benefit related to
asset acquisitions and sales occurring in 2008, 2007, and 2006,
respectively.
Income from
discontinued operations, net of tax. In 2006, income from
discontinued operations, net of tax, was recognized due to a gain of $182
million (net of $18 million of tax recorded in the fourth quarter of 2006)
recognized on the sale of the West Virginia and Virginia systems.
Net
loss. The
impact to net loss in 2008, 2007, and 2006 as a result of asset impairment
charges, impairment of franchises, extinguishment of debt, and gain on
discontinued operations, net of tax, was to increase net loss by approximately
$1.2 billion and $347 million and decrease net loss by approximately $124
million, respectively.
Loss per common
share. During 2008 and 2007,
net loss per common share increased by $2.17, or 49%, and $0.26, or 6%,
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.
Recent
Developments – Restructuring
On
February 12, 2009, we announced that we had reached an agreement in principle
with the Noteholders holding approximately $4.1 billion in aggregate principal
amount of notes issued by our subsidiaries, CCH I and CCH
II. Pursuant to the Restructuring Agreements, on or prior to April 1,
2009, we and our subsidiaries expect to file voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code to implement the Proposed
Restructuring pursuant to the Plan aimed at improving our capital
structure.
The
Proposed Restructuring is expected to be funded with cash from operations, the
Notes Exchange, the New Debt Commitment, and the Rights Offering for which we
have received a Back-Stop Commitment from certain Noteholders. In
addition to the Restructuring Agreements, the Noteholders have entered into
Commitment Letters with us, pursuant to which they have agreed to exchange
and/or purchase, as applicable, certain securities of Charter, as described in
more detail below.
Under the
Notes Exchange, existing holders of CCH II Notes will be entitled to exchange
their CCH II Notes for New CCH II Notes. CCH II Notes that are not
exchanged in the Notes Exchange will be paid in cash in an amount equal to the
outstanding principal amount of such CCH II Notes plus accrued but unpaid
interest to the bankruptcy petition date plus post-petition interest, but
excluding any call premiums or prepayment penalties and for the avoidance of
doubt, any unmatured interest. The aggregate principal amount of New
CCH II Notes to be issued pursuant to the Plan is expected to be approximately
$1.5 billion plus accrued but unpaid interest to the bankruptcy petition date
plus post-petition interest, but excluding any call premiums or prepayment
penalties (collectively, the “Target Amount”), plus an additional $85
million.
Under the
Commitment Letters, certain holders of CCH II Notes have committed to exchange,
pursuant to the Notes Exchange, an aggregate of approximately $1.2 billion in
aggregate principal amount of CCH II Notes, plus accrued but unpaid interest to
the bankruptcy petition date plus post-petition interest, but excluding any call
premiums or any prepayment penalties. In the event that the aggregate
principal amount of New CCH II Notes to be issued pursuant to the Notes Exchange
would exceed the Target Amount, each Noteholder participating in the Notes
Exchange will receive a pro rata portion of such Target Amount of New CCH II
Notes, based upon the ratio of (i) the aggregate principal amount of CCH II
Notes it has tendered into the Notes Exchange to (ii) the total aggregate
principal amount of CCH II Notes tendered into the Notes
Exchange. Participants in the Notes Exchange will receive a
commitment fee equal to 1.5% of the principal amount plus interest on the CCH II
Notes exchanged by such participant in the Notes Exchange.
Under the
New Debt Commitment, certain holders of CCH II Notes have committed to purchase
an additional amount of New CCH II Notes in an aggregate principal amount of up
to $267 million. Participants in the New Debt Commitment will receive
a commitment fee equal to the greater of (i) 3.0% of their respective portion of
the New Debt Commitment or (ii) 0.83% of its respective portion of the New Debt
Commitment for each month beginning April 1, 2009 during which its New Debt
Commitment remains outstanding.
Under the
Rights Offering, we will offer to existing holders of CCH I Notes that are
accredited investors
(as defined in Regulation D promulgated under the Securities Act) or
qualified institutional buyers (as defined under Rule 144A of the
Securities Act), the Rights to purchase shares of the new Class A Common
Stock of Charter, to be issued upon our emergence from bankruptcy, in
exchange for a cash payment at a discount to the equity value of Charter upon
emergence. Upon emergence from bankruptcy, Charter’s new Class A
Common Stock is not expected to be listed on any public or over-the-counter
exchange or quotation system and will be subject to transfer
restrictions. It is expected, however, that we will thereafter apply
for listing of Charter’s new Class A Common Stock on the NASDAQ Stock Market as
provided in the Term Sheet. The Rights Offering is expected to
generate proceeds of up to approximately $1.6 billion and will be used to pay
holders of CCH II Notes that do not participate in the Notes Exchange, repayment
of certain amounts relating to the satisfaction of certain swap agreement
claims against Charter Operating and for general corporate
purposes.
Under the
Commitment Letters, the Backstop Parties have agreed to subscribe for their
respective pro rata portions of the Rights Offering, and certain of the Backstop
Parties have, in addition, agreed to subscribe for a pro rata portion of any
Rights that are not purchased by other holders of CCH I Notes in the Rights
Offering (the “Excess Backstop”). Noteholders who have committed to
participate in the Excess Backstop will be offered the option to purchase a pro
rata portion of additional shares of Charter’s new Class A Common Stock, at the
same price at which shares of the new Class A Common Stock will be offered in
the Rights Offering, in an amount equal to $400 million less the aggregate
dollar amount of shares purchased pursuant to the Excess
Backstop. The Backstop Parties will receive a commitment fee equal to
3% of its respective equity backstop.
The
Restructuring Agreements further contemplate that upon consummation of the Plan
(i) the notes and bank debt of our subsidiaries, Charter Operating and CCO
Holdings will remain outstanding, (ii) holders of notes issued by CCH II will
receive New CCH II Notes pursuant to the Notes Exchange and/or cash, (iii)
holders of notes issued by CCH I will receive shares of Charter’s new Class A
Common Stock, (iv) holders of notes issued by CIH will receive warrants to
purchase shares of common stock in Charter, (v) holders of notes of Charter
Holdings will receive warrants to purchase shares of Charter’s new Class A
Common Stock, (vi) holders of convertible notes issued by Charter will receive
cash and preferred stock issued by Charter, (vii) holders of common
stock will not receive any amounts on account of their common stock, which will
be cancelled, and (viii) trade creditors will be paid in full. In
addition, as part of the Proposed Restructuring, it is expected that
consideration will be paid by holders of CCH I Notes to other entities
participating in the financial restructuring. The recoveries
summarized above are more fully described in the Term Sheet.
Pursuant
to the Allen Agreement, in settlement of their rights, claims and remedies
against Charter and its subsidiaries, and in addition to any amounts received by
virtue of their holding any claims of the type set forth above, upon
consummation of the Plan, Mr. Allen or his affiliates will be issued a number of
shares of the new Class B Common Stock of Charter such that the aggregate voting
power of such shares of new Class B Common Stock shall be equal to 35% of the
total voting power of all new capital stock of Charter. Each share
of new Class B Common Stock will be convertible, at the option of the holder,
into one share of new Class A Common Stock, and will be subject to significant
restrictions on transfer. Certain holders of new Class A Common Stock
and new Class B Common Stock will receive certain customary registration rights
with respect to their shares. Upon consummation of the Plan, Mr. Allen or his affiliates will
also receive (i) warrants to purchase shares of new Class A common stock of
Charter in an aggregate amount equal to 4%
of the equity value of reorganized Charter, after giving effect to the Rights
Offering, but prior to the issuance of warrants and equity-based awards provided
for by the Plan, (ii) $85 million principal amount of New
CCH II Notes, (iii) $25 million
in cash for amounts owing to CII under a
management agreement, (iv) up to $20
million in cash for reimbursement of fees and expenses in connection with the
Proposed Restructuring, and (v) an additional $150 million in cash.
The warrants described above shall have an exercise price per
share based on a total equity value equal to the sum of the equity value of
reorganized Charter, plus the gross proceeds of the Rights Offering, and shall
expire seven years after the date of issuance. In addition, on the effective date of the Plan, CII will
retain
a 1% equity interest in
reorganized Charter Holdco and a right to exchange such interest into new Class A
common
stock
of Charter.
The
Restructuring Agreements also contemplate that upon emergence from bankruptcy
each holder of 10% or more of the voting power of Charter will have the right to
nominate one member of the initial Board for each 10% of voting power; and that
at least Charter’s current Chief Executive Officer and Chief Operating Officer
will continue in their same positions. The Restructuring Agreements
require Noteholders to cast their votes in favor of the Plan and generally
support the Plan and contain certain customary restrictions on the transfer of
claims by the Noteholders.
In
addition, the Restructuring Agreements contain an agreement by the parties that
prior to commencement of the Chapter 11 cases, if performance by us of any term
of the Restructuring Agreements would trigger a default under the debt
instruments of CCO Holdings and Charter Operating, which debt is to remain
outstanding such performance would be deemed unenforceable solely to the extent
necessary to avoid such default.
The
Restructuring Agreements and Commitment Letters are subject to certain
termination events, including, among others:
·
|
the
commitments set forth in the respective Noteholder’s Commitment Letter
shall have expired or been
terminated;
|
·
|
Charter’s
board of directors shall have been advised in writing by its outside
counsel that continued pursuit of the Plan is inconsistent with its
fiduciary duties, and the board of directors determines in good faith
that,
|
|
(A)
a proposal or offer from a third party is reasonably likely to be more
favorable to the Company than is proposed under the Term Sheet, taking
into account, among other factors, the identity of the third party, the
likelihood
that any such proposal or offer will be negotiated to finality within a
reasonable time, and the potential loss to the company if the proposal or
offer were not accepted and consummated, or (B) the Plan is no longer
confirmable or feasible; |
·
|
the
Plan or any subsequent plan filed by us with the bankruptcy court (or a
plan supported or endorsed by us) is not reasonably consistent in all
material respects with the terms of the Restructuring
Agreements;
|
·
|
Charter
shall not have filed for Chapter 11 relief with the bankruptcy court on or
before April 1, 2009;
|
·
|
a
disclosure statement order reasonably acceptable to Charter, the holders
of a majority of the CCH I Notes held by the Requisite Holders and Mr.
Allen has not been entered by the bankruptcy court on or before the 50th
day following the bankruptcy petition
date;
|
·
|
a
confirmation order reasonably acceptable to Charter, the Requisite Holders
and Mr. Allen is not entered by the bankruptcy court on or before the
130th day following the bankruptcy petition
date;
|
·
|
any
of the Chapter 11 cases of Charter is converted to cases under Chapter 7
of the Bankruptcy Code if as a result of such conversion the Plan is not
confirmable;
|
·
|
any
Chapter 11 cases of Charter is dismissed if as a result of such dismissal
the Plan is not confirmable;
|
·
|
the
order confirming the Plan is reversed on appeal or vacated;
and
|
·
|
any
Restructuring Agreement or the Allen Agreement has terminated or been
breached in any material respect subject to notice and cure
provisions.
|
The Allen Agreement contains similar
provisions to those provisions of the Restructuring Agreements. There is no
assurance that the treatment of creditors outlined above will not change
significantly. For
example, because the Proposed Restructuring is contingent on reinstatement of
the credit facilities and certain notes of Charter Operating and CCO Holdings,
failure to reinstate such debt would require us to revise the Proposed
Restructuring. Moreover, if reinstatement does not occur and current capital
market conditions persist, we may not be able to secure adequate new financing
and the cost of new financing would likely be materially higher. The Proposed Restructuring would result
in the reduction of our debt by approximately $8
billion.
The above
summary of the Restructuring Agreements, Commitment Letters, Term Sheet and
Allen Agreement is qualified in its entirety by the full text of the
Restructuring Agreements, Commitment Letters, Term Sheet and Allen Agreement,
copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively,
to this Annual Report on Form 10-K, and incorporated herein by
reference. See “Part I. Item 1A - Risk Factors – Risks Relating to
Bankruptcy.”
Recent Developments – Interest
Payments
Two of
our subsidiaries, CIH and Charter Holdings, did not make the January Interest
Payment on the Overdue Payment Notes. The Indentures for the Overdue
Payment Notes permits a 30-day grace period for such interest payments through
(and including) February 15, 2009. On February 11, 2009, in
connection with the Commitment Letters and Restructuring Agreements, Charter and
certain of its subsidiaries also entered into the Escrow
Agreement. As required under the Indentures, Charter set a special
record date for payment of such interest payments of February 28,
2009. Under the Escrow Agreement, the Ad-Hoc Holders agreed to
deposit into an escrow account the Escrow Amount and the Escrow Agent will hold
such amounts subject to the terms of the Escrow Agreement. Under the
Escrow Agreement, if the transactions contemplated by the Restructuring
Agreements are consummated on or before December 15, 2009 or such transactions
are not consummated on or before December 15, 2009 due to material breach of the
Restructuring Agreements by Charter or its direct or indirect subsidiaries, then
the Ad-Hoc Holders will be entitled to receive their pro-rata share of the
Escrow Amount. If the transactions contemplated by the Restructuring
Agreements are not consummated on or prior to December 15, 2009 for any reason
other than material breach of the Restructuring Agreements by Charter or its
direct or indirect subsidiaries, then Charter, Charter Holdings, CIH or their
designee shall be entitled to receive the Escrow Amount.
One of
Charter’s subsidiaries, CCH II, will not make its scheduled payment of interest
on March 16, 2009 on certain of its outstanding senior notes. The
governing indenture for such notes permits a 30-day grace period for such
interest payments, and Charter expects to file its voluntary Chapter 11
Bankruptcy prior to the expiration of the grace period.
Recent
Developments – Charter Operating Credit Facility
On
February 3, 2009, Charter Operating made a request to the administrative agent
under the Credit Agreement, to borrow additional revolving loans under the
Credit Agreement. Such borrowing request complied with the provisions
of the Credit Agreement including section 2.2 (“Procedure for Borrowing”)
thereof. On February 5, 2009, we received a notice from the
administrative agent asserting that one or more Events of Default (as defined in
the Credit Agreement) had occurred and was continuing under the Credit
Agreement. In response, we sent a letter to the administrative agent
on February 9, 2009, among other things, stating that no Event of Default under
the Credit Agreement occurred or was continuing and requesting the
administrative agent to rescind its notice of default and fund
Charter Operating’s borrowing request. The administrative agent sent
a letter to us on February 11, 2009, stating that it continues to believe that
one or more events of default occurred and was continuing. As a
result, with the exception of one lender who funded approximately $0.4 million,
the lenders under the Credit Agreement have failed to fund Charter Operating’s
borrowing request.
Overview
of Our Debt and Liquidity
We have
significant amounts of debt. As of December 31, 2008, the
accreted value of our total debt was approximately $21.7 billion, as summarized
below (dollars in millions):
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi-Annual
|
|
|
|
|
Principal
|
|
|
Accreted
|
|
|
Interest
Payment
|
|
Maturity
|
|
|
Amount
|
|
|
Value(a)
|
|
|
Dates
|
|
Date(b)
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due 2009 (c)
|
|
$ |
3 |
|
|
$ |
3 |
|
|
5/16
& 11/16
|
|
11/16/09
|
6.50%
convertible senior notes due 2027 (c)
|
|
|
479 |
|
|
|
373 |
|
|
4/1
& 10/1
|
|
10/1/27
|
Charter
Communications Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior notes due 2009
|
|
|
53 |
|
|
|
53 |
|
|
4/1
& 10/1
|
|
4/1/09
|
10.750%
senior notes due 2009
|
|
|
4 |
|
|
|
4 |
|
|
4/1
& 10/1
|
|
10/1/09
|
9.625%
senior notes due 2009
|
|
|
25 |
|
|
|
25 |
|
|
5/15
& 11/15
|
|
11/15/09
|
10.250%
senior notes due 2010
|
|
|
1 |
|
|
|
1 |
|
|
1/15
& 7/15
|
|
1/15/10
|
11.750%
senior discount notes due 2010
|
|
|
1 |
|
|
|
1 |
|
|
1/15
& 7/15
|
|
1/15/10
|
11.125%
senior notes due 2011
|
|
|
47 |
|
|
|
47 |
|
|
1/15
& 7/15
|
|
1/15/11
|
13.500%
senior discount notes due 2011
|
|
|
60 |
|
|
|
60 |
|
|
1/15
& 7/15
|
|
1/15/11
|
9.920%
senior discount notes due 2011
|
|
|
51 |
|
|
|
51 |
|
|
4/1
& 10/1
|
|
4/1/11
|
10.000%
senior notes due 2011
|
|
|
69 |
|
|
|
69 |
|
|
5/15
& 11/15
|
|
5/15/11
|
11.750%
senior discount notes due 2011
|
|
|
54 |
|
|
|
54 |
|
|
5/15
& 11/15
|
|
5/15/11
|
12.125%
senior discount notes due 2012
|
|
|
75 |
|
|
|
75 |
|
|
1/15
& 7/15
|
|
1/15/12
|
CCH
I Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
217 |
|
|
1/15
& 7/15
|
|
1/15/15
|
CCH
I, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
11.00%
senior notes due 2015
|
|
|
3,987 |
|
|
|
4,072 |
|
|
4/1
& 10/1
|
|
10/1/15
|
CCH
II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due 2010
|
|
|
1,860 |
|
|
|
1,857 |
|
|
3/15
& 9/15
|
|
9/15/10
|
10.250%
senior notes due 2013
|
|
|
614 |
|
|
|
598 |
|
|
4/1
& 10/1
|
|
10/1/13
|
CCO
Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
8
3/4% senior notes due 2013
|
|
|
800 |
|
|
|
796 |
|
|
5/15
& 11/15
|
|
11/15/13
|
Credit
facility
|
|
|
350 |
|
|
|
350 |
|
|
|
|
9/6/14
|
Charter
Communications Operating, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
8.000%
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
|
10.875%
senior second-lien notes due 2014
|
|
|
546 |
|
|
|
527 |
|
|
3/15
& 9/15
|
|
9/15/14
|
Credit
facilities
|
|
|
8,246 |
|
|
|
8,246 |
|
|
|
|
varies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,729 |
|
|
$ |
21,666 |
|
(d)
|
|
|
|
(a)
|
The
accreted values presented above generally represent the principal amount
of the notes less the original issue discount at the time of sale, plus
the accretion to the balance sheet date. However, the current
accreted value for legal purposes and notes indenture purposes (the amount
that is currently payable if the debt becomes immediately due) is equal to
the principal amount of notes.
|
(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 6.50% convertible senior notes due 2027, 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% and 6.50% convertible senior notes
are redeemable if the closing price of Charter’s 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% and 6.50% 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 and 293.3868 shares per $1,000
principal amount of notes, which is equivalent to a price of $2.42 and
$3.41 per share, respectively. Certain anti-dilutive provisions
cause adjustments to occur automatically upon the occurrence of specified
events. Additionally, the conversion ratio may be adjusted by
us under certain circumstances. Each holder of 6.50%
convertible notes will have the right to require us to purchase some or
all of that holder’s 6.50% convertible notes for cash on October 1,
2012, October 1, 2017 and October 1, 2022 at a purchase price
equal to 100% of the principal amount of the 6.50% convertible notes plus
any accrued interest, if any, on the 6.50% convertible notes to but
excluding the purchase date.
|
(d)
|
Not
included within total long-term debt is the $75 million CCHC accreting
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 2009,
$155 million of our debt matures, and in 2010, an additional $1.9 billion
matures. In 2011 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, 2008 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)
|
|
$ |
21,729 |
|
|
$ |
155 |
|
|
$ |
2,283 |
|
|
$ |
4,523 |
|
|
$ |
14,768 |
|
Long-Term
Debt Interest Payments (2)
|
|
|
8,834 |
|
|
|
1,714 |
|
|
|
3,147 |
|
|
|
2,817 |
|
|
|
1,156 |
|
Payments
on Interest Rate Instruments (3)
|
|
|
443 |
|
|
|
127 |
|
|
|
257 |
|
|
|
59 |
|
|
|
-- |
|
Capital
and Operating Lease Obligations (4)
|
|
|
103 |
|
|
|
24 |
|
|
|
40 |
|
|
|
21 |
|
|
|
18 |
|
Programming
Minimum Commitments (5)
|
|
|
687 |
|
|
|
315 |
|
|
|
206 |
|
|
|
166 |
|
|
|
-- |
|
Other
(6)
|
|
|
475 |
|
|
|
368 |
|
|
|
88 |
|
|
|
19 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
32,271 |
|
|
$ |
2,703 |
|
|
$ |
6,021 |
|
|
$ |
7,605 |
|
|
$ |
15,942 |
|
(1)
|
|
The
table presents maturities of long-term debt outstanding as of
December 31, 2008. Refer to Notes 9 and 24 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. The table above does not include the $75 million
CCHC accreting note which is included in note payable – related
party. See Note 10 to the accompanying consolidated financial
statements contained in “Item 8. Financial Statements and Supplementary
Data. 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, 2008 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,
2008. 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 swap 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, 2008. Upon filing of a Chapter 11 bankruptcy,
the counterparties to the interest rate swap agreements will have the
option to terminate the underlying contract and, upon emergence of Charter
from bankruptcy, receive payment for the market value of the interest rate
swap agreement as measured on the date a counterparty so
terminates.
|
|
|
|
(4)
|
|
We
lease certain facilities and equipment under noncancelable operating
leases. Leases and rental costs charged to expense for the
years ended December 31, 2008, 2007, and 2006, were $24 million, $23
million, and $23 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 $1.6 billion, $1.6 billion, and $1.5
billion, for the years ended December 31, 2008, 2007, and 2006,
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, 2008, 2007, and 2006,
was $47 million, $47 million, and $44 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 $179 million, $172 million, and $175 million for the
years ended December 31, 2008, 2007, and 2006,
respectively.
|
|
·
|
We
also have $158 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.
|
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, 2008, we generated $399 million of net cash flows from operating activities,
after paying cash interest of $1.8 billion. In addition, we used $1.2
billion for purchases of property, plant and equipment. Finally, we
generated net cash flows from financing activities of $1.7 billion, as a result
of financing transactions and credit facility borrowings completed during the
year ended December 31, 2008. As of December 31, 2008, we had cash on
hand of $960 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 based on our ability to generate cash flows from operating
activities.
During the fourth quarter of 2008,
Charter Operating drew down all except $27 million of amounts available under
the revolving credit facility. During the first quarter of 2009,
Charter Operating presented a qualifying draw notice to the banks under the
revolving credit facility but was refused those funds. See “Part I.
Item 1. Business – Recent Developments – Charter Operating Credit
Facility.” Additionally, upon filing bankruptcy, Charter Operating
will no longer have access to the revolving credit facility and will rely on
cash on hand and cash flows from operating activities to fund our projected cash
needs. We expect that cash on hand and cash flows from operating
activities will be adequate to fund our projected cash needs through the
pendency of our expected Chapter 11 bankruptcy proceedings. Our
projected cash needs and projected sources of liquidity depend upon, among other
things, our actual results, the timing and amount of our expenditures, and the
outcome of various matters in our expected Chapter 11 bankruptcy proceedings and
financial restructuring. The outcome of the Proposed Restructuring is
subject to substantial risks. See “Part I. Item 1A. Risk Factors —
Risks Relating to Bankruptcy.”
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. Charter’s
ability to make interest payments on its convertible senior notes and to repay
the outstanding principal of its convertible senior notes will depend on its
ability to raise additional capital and/or on receipt of payments or
distributions from Charter Holdco and its subsidiaries. As of
December 31, 2008, Charter Holdco was owed $13 million in intercompany loans
from Charter Operating and had $1 million in cash, which amounts were available
to pay interest and principal on Charter’s convertible senior notes to the
extent not otherwise used, for example, to satisfy maturities at Charter
Holdings. In addition, as long as Charter Holdco continues to hold the
$137 million of
Charter
Holdings’ notes due 2009 and 2010 (as discussed further below), Charter Holdco
will receive interest and principal payments from Charter Holdings to the extent
Charter Holdings is able to make such payments. Such amounts may be
available to pay interest and principal on Charter’s convertible senior notes,
although Charter Holdco may use those amounts for other purposes.
Distributions by Charter’s subsidiaries
to a parent company (including Charter, Charter Holdco and CCHC) for payment of principal on parent
company notes are
restricted under the indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes, Charter Operating notes, and under the CCO Holdings
credit facility, unless
there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage
ratio test is met at the time of such distribution. For the quarter ended December 31,
2008, there was no default under any of these indentures or credit
facilities. However, certain of our subsidiaries did not meet their
applicable leverage ratio tests based on December 31, 2008 financial
results. As a result, distributions from certain of our subsidiaries
to their parent companies would have been restricted at such time and will
continue to be restricted unless those tests are met. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in its credit
facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended December 31,
2008, there was no default under Charter Holdings’ indentures, the other
specified tests were met, and Charter Holdings met its leverage ratio test based
on December 31, 2008 financial results. 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, including the Delaware Limited Liability Company Act, under which our
subsidiaries may only make distributions if they have “surplus” as defined in
the act. It is uncertain whether we will have sufficient surplus at
the relevant subsidiaries to make distributions, including for payment of
interest and principal on the debts of the parents of such
entities. See “Part I. Item 1A. 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.”
Historical Operating, Investing, and
Financing Activities
Cash and Cash
Equivalents. We held $960 million in cash and cash equivalents
as of December 31, 2008 compared to $75 million as of December 31,
2007. The increase in cash was the result of a draw-down on our
revolving credit facility.
Operating
Activities. Net cash provided by
operating activities increased $72 million from $327 million for the year ended
December 31, 2007 to $399 million for the year ended December 31, 2008,
primarily as a result of revenue growth from high-speed Internet and telephone
driven by bundled services, as well as improved cost efficiencies, offset by an
increase of $33 million in interest on cash pay obligations and changes in
operating assets and liabilities that provided $71 million less cash during the
same period.
Net cash
provided by operating activities increased $4 million from $323 million for the
year ended December 31, 2006 to $327 million for the year ended December 31,
2007, primarily as a result of revenues increasing at a faster rate than cash
operating expenses, offset by an increase of $62 million in interest on cash pay
obligations and changes in operating assets and liabilities that provided $67
million less cash during the same period.
Investing
Activities. Net cash used in
investing activities for the years ended December 31, 2008, 2007, and 2006, was
$1.2 billion, $1.1 billion, and $65 million, respectively. The
increase in 2008 compared to 2007 is primarily due to a decrease in proceeds
received from the sale of assets, including cable systems. Investing
activities used $1.1 billion more cash during the year ended December 31, 2007
than the corresponding period in 2006 primarily due to $1.0 billion of proceeds
received in 2006 from the sale of assets, including cable systems.
Financing
Activities. Net cash provided by
financing activities was $1.7 billion and $826 million for the years ended
December 31, 2008 and 2007, respectively, and net cash used in financing
activities was $219 million for the year ended December 31, 2006. The
increase in cash provided during the year ended December 31, 2008 compared to
the corresponding period in 2007 and in 2007 as compared to the corresponding
period in 2006, was primarily the result of an increase in the amount by which
borrowings exceeded repayments of long-term debt.
Capital
Expenditures
We have
significant ongoing capital expenditure requirements. Capital
expenditures were $1.2 billion, $1.2 billion, and $1.1 billion for the years
ended December 31, 2008, 2007, and 2006, respectively. See the table
below for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities and the issuance of debt. In addition, our liabilities
related to capital expenditures decreased by $39 million and $2 million for the
years ended December 31, 2008 and 2007, respectively, and increased by $24
million for the year ended December 31, 2006.
During
2009, we expect capital expenditures to be approximately $1.2
billion. We expect 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. The actual amount of our capital expenditures depends
on the deployment of advanced broadband services and offerings. We
may need additional capital if there is accelerated growth in high-speed
Internet, telephone or digital customers or there is an increased need to
respond to competitive pressures by expanding the delivery of other advanced
services.
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 NCTA. The disclosure is intended to provide more consistency
in the reporting of capital expenditures among peer companies in the cable
industry. These disclosure guidelines 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, 2008,
2007, and 2006 (dollars in millions):
|
|
For
the years ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Customer
premise equipment (a)
|
|
$ |
595 |
|
|
$ |
578 |
|
|
$ |
507 |
|
Scalable
infrastructure (b)
|
|
|
251 |
|
|
|
232 |
|
|
|
214 |
|
Line
extensions (c)
|
|
|
80 |
|
|
|
105 |
|
|
|
107 |
|
Upgrade/rebuild
(d)
|
|
|
40 |
|
|
|
52 |
|
|
|
45 |
|
Support
capital (e)
|
|
|
236 |
|
|
|
277 |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$ |
1,202 |
|
|
$ |
1,244 |
|
|
$ |
1,103 |
|
(a)
|
Customer
premise equipment includes costs incurred at the customer residence to
secure new customers, revenue units and additional bandwidth
revenues. It also includes customer installation costs in
accordance with SFAS No. 51, Financial Reporting by Cable
Television Companies, and customer premise equipment (e.g., set-top
boxes and cable modems, etc.).
|
(b)
|
Scalable
infrastructure includes costs not related to customer premise equipment or
our network, to secure growth of new customers, revenue units, and
additional bandwidth revenues, or provide service enhancements (e.g.,
headend equipment).
|
(c)
|
Line
extensions include network costs associated with entering new service
areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment,
make-ready and design
engineering).
|
(d)
|
Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable networks,
including betterments.
|
(e)
|
Support
capital includes costs associated with the replacement or enhancement of
non-network assets due to technological and physical obsolescence (e.g.,
non-network equipment, land, buildings and
vehicles).
|
Description
of Our Outstanding Debt
Overview
As of
December 31, 2008 and 2007, our total debt was approximately $21.7 billion and
$19.9 billion, respectively. This debt was comprised of approximately
$8.6 billion and $7.2 billion of credit facility debt, $12.7 billion and $12.3
billion accreted amount of high-yield notes and $376 million and $402 million
accreted amount of convertible senior notes at December 31, 2008 and 2007,
respectively. See the organizational chart on page 5 and the first
table under “ — Liquidity and Capital Resources — Overview of Our Debt and
Liquidity” for debt outstanding by issuer.
As of
December 31, 2008 and 2007, the blended weighted average interest rate on our
debt was 8.4% and 9.0%, respectively. The interest rate on
approximately 80% and 85% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate hedge agreements,
as of December 31, 2008 and 2007, respectively. The fair value of our
high-yield notes was $4.4 billion and $10.3 billion at December 31, 2008 and
2007, respectively. The fair value of our convertible senior notes
was $12 million and $332 million at December 31, 2008 and 2007,
respectively. The fair value of our credit facilities was $6.2
billion and $6.7 billion at December 31, 2008 and 2007,
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.
Credit
Facilities – General
Charter
Operating Credit Facilities
Under the
terms of the Proposed Restructuring, the Charter Operating credit facilities
will remain outstanding although the revolving line of credit would no longer be
available for new borrowings. The Charter Operating credit facilities
provide borrowing availability of up to $8.0 billion as
follows:
|
•
|
a
term loan with an initial total principal amount of $6.5 billion, which is
repayable in equal quarterly installments, commencing March 31, 2008, and
aggregating in each loan year to 1% of the original amount of the term
loan, with the remaining balance due at final maturity on March 6, 2014;
and
|
|
•
|
a
revolving line of credit of $1.5 billion, with a maturity date on
March 6, 2013.
|
The
Charter Operating credit facilities also allow us to enter into incremental term
loans in the future with an aggregate amount of up to $1.0 billion, with
amortization as set forth in the notices establishing such term loans, but with
no amortization greater than 1% prior to the final maturity of the existing term
loan. In
March 2008, Charter Operating borrowed $500 million principal amount of
incremental term loans (the “Incremental Term Loans”) under the Charter
Operating credit facilities. The Incremental Term Loans have a final maturity of
March 6, 2014 and prior to that date will amortize in quarterly principal
installments totaling 1% annually beginning on June 30, 2008. The
Incremental Term Loans bear interest at LIBOR plus 5.0%, with a LIBOR floor of
3.5%, and are otherwise governed by and subject to the existing terms of the
Charter Operating credit facilities. Net proceeds from the Incremental
Term Loans were used for general corporate purposes. Although
the Charter Operating credit facilities allow for the incurrence of up to an
additional $500 million in incremental term loans, no assurance can be given
that we could obtain additional incremental term loans in the future if Charter
Operating sought to do so especially after the announcement of Charter’s plan to
file a Chapter 11 bankruptcy proceeding on or before April 1,
2009.
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 2.00% for the revolving credit
facility and 2.00% for the term loan, and quarterly commitment fees of 0.5% per
annum is payable on the average daily unborrowed balance of the revolving credit
facility. If an event of default were to occur, such as
a
bankruptcy
filing, Charter Operating would not be able to elect the Eurodollar rate and
would have to pay interest at the base rate plus the applicable
margin.
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 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), to the extent such lien can be perfected under the Uniform
Commercial Code by the filing of a financing statement, and (ii) a pledge
by CCO Holdings of the equity interests owned by it in Charter Operating or any
of Charter Operating’s subsidiaries, as well as intercompany obligations owing
to it by any of such entities.
CCO
Holdings Credit Facility
In March
2007, CCO Holdings entered into a credit agreement (the “CCO Holdings credit
facility”) which consists of a $350 million term loan facility. Under
the terms of the Proposed Restructuring, the CCO Holdings credit facility will
remain outstanding. The facility matures in September
2014. The CCO Holdings credit facility also allows us to enter into
incremental term loans in the future, maturing on the dates set forth in the
notices establishing such term loans, but no earlier than the maturity date of
the existing term loans. However, no assurance can be given that we
could obtain such incremental term loans if CCO Holdings sought to do
so. Borrowings under the CCO Holdings credit facility bear interest
at a variable interest rate based on either LIBOR or a base rate plus, in either
case, an applicable margin. The applicable margin for LIBOR term
loans, other than incremental loans, is 2.50% above LIBOR. If an
event of default were to occur, such as a bankruptcy filing, CCO Holdings would
not be able to elect the Eurodollar rate and would have to pay interest at the
base rate plus the applicable margin. The applicable margin with
respect to incremental loans is to be agreed upon by CCO Holdings and the
lenders when the incremental loans are established. The CCO Holdings
credit facility is secured by the equity interests of Charter Operating, and all
proceeds thereof.
Credit
Facilities — Restrictive Covenants
Charter
Operating Credit Facilities
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 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 notes, the Charter Holdings notes, the CIH notes, the CCH I
notes, the CCH II notes, the CCO Holdings notes, the CCO Holdings
credit facility, and the Charter Operating second-lien notes, provided that,
among other things, no default has occurred and is continuing under the credit
facilities. Conditions to future borrowings include absence of a default or an
event of default under the 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 for Charter Operating
with an unqualified opinion from our independent accountants
and without a “going concern” or like qualification or
exception;
|
|
•
|
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
$100 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; and
|
|
•
|
Charter
Operating ceasing to be a wholly-owned direct subsidiary of CCO Holdings,
except in certain very limited
circumstances.
|
CCO
Holdings Credit Facility
The CCO
Holdings credit facility contains covenants that are substantially similar to
the restrictive covenants for the CCO Holdings notes except that the leverage
ratio is 5.50 to 1.0. See “-Summary of Restricted Covenants of Our
High Yield Notes.” The CCO Holdings credit facility contains
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 CCO Holdings credit
facility permits CCO Holdings and its subsidiaries to make distributions to pay
interest on the Charter convertible senior 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 CCO
Holdings credit facility.
Outstanding
Notes
Charter
Communications, Inc. 5.875% Convertible Senior Notes due 200
Charter
has issued and outstanding 5.875% convertible senior notes due 2009 with a total
principal amount of $3 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. Under the terms of the Proposed Restructuring, the 5.875%
convertible senior notes will receive cash and preferred stock to be issued by
Charter.
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 Global Select Market.
No holder
of notes will be entitled to receive shares of Charter’s 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 9.9% of the outstanding shares of Charter’s
Class A common stock.
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.
Upon a
change of control and certain other fundamental changes, subject to certain
conditions and restrictions, Charter may be required to repurchase the 5.875%
convertible senior notes, in whole or in part, at 100% of their principal amount
plus accrued interest at the repurchase date.
We may
redeem the 5.875% convertible senior 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
150% of the conversion price, or $3.63 per share. Holders who convert
5.875% convertible senior notes that we have called for redemption shall receive
the present value of the interest on the notes converted that would have been
payable for the period from the redemption date, through the scheduled maturity
date for the notes, plus any accrued deferred interest.
Charter
Communications, Inc. 6.50% Convertible Senior Notes due 2027
On
October 2, 2007, Charter issued $479 million of Charter’s 6.50% convertible
senior notes due 2027 (the “6.50% Convertible Notes”). The 6.50%
Convertible Notes mature on October 1, 2027, subject to earlier conversion
or repurchase at the option of the holders or earlier redemption at our
option. The 6.50% Convertible Notes are unsecured and unsubordinated
obligations and rank equally with Charter’s existing and future senior unsecured
indebtedness, including the 5.875% convertible senior notes. The 6.50%
Convertible Notes rank senior in right of payment to any future subordinated
indebtedness of Charter and are effectively subordinated to any of Charter’s
secured indebtedness and structurally subordinate to indebtedness and other
liabilities of Charter’s subsidiaries. Interest is payable
semi-annually in arrears. Under the terms of the Proposed
Restructuring, the 6.50% Convertible Notes will receive cash and preferred stock
to be issued by Charter.
The 6.50%
Convertible Notes are convertible into Class A common stock at the conversion
rate of 293.3868 shares per $1,000 principal amount of notes which is equivalent
to a conversion price of approximately $3.41 per share, subject to certain
adjustments. The adjustments include anti-dilution provisions, which
cause adjustments to occur automatically based on the occurrence of specified
events. If certain transactions that constitute a change of control
occur on or prior to October 1, 2012, under certain circumstances, we will
increase the conversion rate by a number of additional shares for any conversion
of 6.50% Convertible Notes in connection with such transactions. The
conversion rate may also be increased (but not to exceed 381 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 Global Select Market.
No holder
of 6.50% Convertible Notes will be entitled to receive shares of Charter’s
Class A common stock upon conversion to the extent, but only to the extent,
that such receipt would cause such holder to become, directly or indirectly, a
beneficial owner of more than 4.9% of the shares of Class A common stock
outstanding prior to October 1, 2011, and 9.9% of the shares of Class A
common stock thereafter.
We may
redeem the 6.50% Convertible Notes in whole or in part for cash at any time at a
redemption price equal to 100% of the principal amount, plus accrued and unpaid
interest, if any, but only if for any 20 trading days in any 30 consecutive
trading day period the closing price has exceeded 180% of the conversion price
provided such 30 trading day period begins prior to October 1, 2010, or 150% of
the conversion price provided such 30 trading period begins thereafter and
before October 1, 2012, or at the redemption price regardless of the closing
price of Charter’s Class A common stock thereafter. Holders who
convert any 6.50% Convertible Notes prior to October 1, 2012 that we have called
for redemption shall receive the present value of the interest on the notes
converted that would have been payable for the period from the redemption date
to, but excluding, October 1, 2012.
Upon a
change of control and certain other fundamental changes, subject to certain
conditions and restrictions, we 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.
Each
holder of 6.50% Convertible Notes will have the right to require us to purchase
some or all of that holder’s 6.50% Convertible Notes for cash on October 1,
2012, October 1, 2017 and October 1, 2022 at a purchase price equal to
100% of the principal amount of the 6.50% Convertible Notes plus any accrued
interest, if any, on the 6.50% Convertible Notes to but excluding the purchase
date.
CCHC,
LLC Note
In
October 2005, 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 March 1, 2009, if the closing price of Charter
common stock is at or above the Exchange Rate for 20 trading days within any 30
consecutive trading day period, 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 from
and after February 28, 2009 for cash in an amount equal to the then accreted
value. CCHC has the right to redeem the CCHC note upon certain change
of control events 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 $75 million as of December 31, 2008 and is recorded under
Notes Payable – Related Party in the accompanying consolidated balance
sheets. See Note 10 to the accompanying consolidated financial
statements contained in “Item 8. Financial Statements and Supplementary
Data. Under the terms of the Proposed Restructuring, the CCHC note
will be cancelled.
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 $440 million total principal amount
was outstanding as of December 31, 2008. 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. Under the terms of the Proposed
Restructuring, the holders of the Charter Holdings notes will receive warrants
to purchase shares of new Charter Class A common stock equal to 1% of the fully
diluted shares with an exercise price per share based on a total equity value of
$5.8 billion with an expiration of five years after the date of
issuance.
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. Under the terms of the Proposed Restructuring, the
holders of the CIH notes will receive warrants to purchase shares of new Charter
Class A common stock equal to 5% of the fully diluted shares with an exercise
price per share based on a total equity value of $5.3 billion with an expiration
of five years after the date of issuance.
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. Under
the terms of the Proposed Restructuring, the holders of the CCH I notes will
receive 100% of the shares of new Charter Class A common stock prior to giving
effect to the Rights Offering.
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. In July
2008, CCH II completed a tender offer, in which $338 million of CCH II 2010
Notes were accepted for $364 million of CCH II 2013 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. Under the terms of the Proposed
Restructuring, the holders of the CCH II notes will have the option to receive
new CCH II notes and/or cash in the aggregate amount of principal plus accrued
interest.
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”). The CCOH
2013 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.,
including the CCO Holdings credit facility. The CCOH 2013 Notes are
structurally subordinated to all obligations of subsidiaries of CCO Holdings,
including the Charter Operating notes and the Charter Operating credit
facilities. Under the terms of the Proposed Restructuring, the CCO
Holdings notes will remain outstanding.
Charter
Communications Operating, LLC Notes
In April
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. In March 2006, Charter
Operating exchanged $37 million of Renaissance Media Group LLC 10% senior
discount notes due 2008 for $37 million principal amount of Charter Operating 8
3/8% senior second-lien notes due 2014. In March 2008, Charter
Operating issued $546 million principal amount of 10.875% senior second-lien
notes due 2014, guaranteed by CCO Holdings and certain other subsidiaries of
Charter Operating, in a private transaction. Net proceeds from the
senior second-lien notes were used to reduce borrowings, but not commitments,
under the revolving portion of the Charter Operating credit
facilities.
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. Under the terms of the Proposed
Restructuring, the Charter Operating notes will remain outstanding.
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:
|
|
|
|
|
|
|
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
|
|
At
any time
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2010
|
|
At
any time
|
|
|
100.000
|
%
|
11.125%
senior notes due 2011
|
|
At
any time
|
|
|
100.000
|
%
|
13.500%
senior discount notes due 2011
|
|
At
any time
|
|
|
100.000
|
%
|
9.920%
senior discount notes due 2011
|
|
At
any time
|
|
|
100.000
|
%
|
10.000%
senior notes due 2011
|
|
May
15, 2008 – May 14, 2009
|
|
|
101.667
|
%
|
|
|
Thereafter
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2011
|
|
May
15, 2008 – May 14, 2009
|
|
|
101.958
|
%
|
|
|
Thereafter
|
|
|
100.000
|
%
|
12.125%
senior discount notes due 2012
|
|
January
15, 2009 – January 14, 2010
|
|
|
102.021
|
%
|
|
|
Thereafter
|
|
|
100.000
|
%
|
CIH:
|
|
|
|
|
|
|
11.125%
senior discount notes due 2014
|
|
At
any time
|
|
|
100.000
|
%
|
13.500%
senior discount notes due 2014
|
|
At
any time
|
|
|
100.000
|
%
|
9.920%
senior discount notes due 2014
|
|
At
any time
|
|
|
100.000
|
%
|
10.000%
senior discount notes due 2014
|
|
May
15, 2008 - May 14, 2009
|
|
|
101.667
|
%
|
|
Thereafter
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2014
|
May
15, 2008 - May 14, 2009
|
|
|
101.958
|
%
|
|
Thereafter
|
|
|
100.000
|
%
|
12.125%
senior discount notes due 2015
|
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:
|
|
|
|
|
|
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
|
At
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
|
%
|
10.875%
senior second-lien notes due 2014
|
At
any time
|
|
|
***
|
|
|
*
|
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, 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 an 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.
|
|
***
|
Charter
Operating may redeem the outstanding 10.875% second lien notes due 2014,
at their option, on or after varying dates, in each case at a premium,
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 10.875% senior second-lien note due 2014 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. The Charter Operating 10.875% senior
second-lien notes may be redeemed at any time on or after March 15, 2012
at specified prices.
|
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
CIH, 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
December 2007, the FASB issued SFAS No. 141R, Business Combinations: Applying the
Acquisition Method, which provides guidance on the accounting and
reporting for business combinations. SFAS No. 141R is effective for
fiscal years beginning after December 15, 2008. We will adopt SFAS
No. 141R effective January 1, 2009. We do not expect that the
adoption of SFAS No. 141R will have a material impact on our financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Consolidations, which
provides guidance on the accounting and
reporting for minority interests in consolidated financial
statements. SFAS No. 160 requires losses to be allocated to
non-controlling (minority) interests even when such amounts are
deficits. As such, future losses will be allocated between Charter
and the Charter Holdco non-controlling interest. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. We will
adopt SFAS No. 160 effective January 1, 2009. Had SFAS No. 160 been
effective for our financial statements for the year ended December 31, 2008, our
net loss to Charter shareholders would have been reduced by $1.2
billion.
In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157, which deferred the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. We will apply SFAS No. 157 to nonfinancial assets and
nonfinancial liabilities beginning January 1, 2009. We are in the
process of assessing the impact of SFAS No. 157 on our financial
statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133, which requires companies to disclose their objectives and strategies
for using derivative instruments, whether or not designated as hedging
instruments under SFAS No. 133. SFAS No. 161 is effective for interim
periods and fiscal years beginning after November 15, 2008. We will
adopt SFAS No. 161 effective January 1, 2009. We do not expect that
the adoption of SFAS No. 161 will have a material impact on our financial
statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. We will adopt FSP FAS
142-3 effective January 1, 2009. We do not expect that the adoption
of FSP FAS 142-3 will have a material impact on our financial
statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. We will adopt FSP APB 14-1
effective January 1, 2009. We are in
the process of assessing the impact of the adoption of FSP APB 14-1 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 swap agreements to manage our interest
costs and reduce our exposure to increases in floating interest
rates. Our policy is to manage our exposure to fluctuations in
interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, we agree to
exchange, at specified intervals through 2013, the difference between fixed and
variable interest amounts calculated by reference to agreed-upon notional
principal amounts. At the banks’ option, certain interest rate swap
agreements may be extended through 2014.
As of
December 31, 2008 and 2007, our total debt totaled approximately $21.7
billion and $19.9 billion, respectively. As of December 31, 2008 and
2007, the weighted average interest rate on the credit facility debt was
approximately 5.5% and 6.8%, respectively, the weighted average interest rate on
the high-yield notes was approximately 10.4% and 10.3%, respectively, and the
weighted average interest rate on the convertible senior notes was approximately
6.5% and 6.4%, respectively, resulting in a blended weighted average interest
rate of 8.4% and 9.0%, respectively. The interest rate on
approximately 80% and 85% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate hedge agreements,
as of December 31, 2008 and 2007, 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, 2008, 2007, and 2006,
change in value of derivatives includes gains of $0, $0, and $2 million,
respectively, which represent cash flow hedge ineffectiveness on interest rate
hedge agreements. This ineffectiveness arises from differences
between critical terms of the agreements and the related hedged
obligations.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive loss. For the years ended
December 31, 2008, 2007, and 2006, losses of $180 million, $123 million, and $1
million, respectively, related to derivative instruments designated as cash flow
hedges, were recorded in accumulated other comprehensive loss. The
amounts are subsequently reclassified as an increase or decrease to interest
expense in the same periods in which the related interest on the floating-rate
debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as a change in value of derivatives in our statements of
operations. For the years ended December 31, 2008, 2007, and 2006,
change in value of derivatives includes losses of $62 million and $46 million,
and gains of $4 million, respectively, resulting from 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,
2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value at December 31, 2008
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
$ |
85 |
|
|
$ |
1,862 |
|
|
$ |
281 |
|
|
$ |
1,654 |
|
|
$ |
1,414 |
|
|
$ |
7,837 |
|
|
$ |
13,133 |
|
|
$ |
4,435 |
|
Average
Interest Rate
|
|
|
9.78 |
% |
|
|
10.25 |
% |
|
|
11.25 |
% |
|
|
7.75 |
% |
|
|
9.40 |
% |
|
|
10.93 |
% |
|
|
10.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
|
$ |
70 |
|
|
$ |
70 |
|
|
$ |
70 |
|
|
$ |
70 |
|
|
$ |
1,385 |
|
|
$ |
6,931 |
|
|
$ |
8,596 |
|
|
$ |
6,187 |
|
Average
Interest Rate
|
|
|
4.20 |
% |
|
|
3.52 |
% |
|
|
4.59 |
% |
|
|
4.87 |
% |
|
|
4.76 |
% |
|
|
4.87 |
% |
|
|
4.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to Fixed Swaps
|
|
$ |
-- |
|
|
$ |
500 |
|
|
$ |
300 |
|
|
$ |
2,500 |
|
|
$ |
1,000 |
|
|
$ |
-- |
|
|
$ |
4,300 |
|
|
$ |
(411 |
) |
Average
Pay Rate
|
|
|
-- |
|
|
|
6.99 |
% |
|
|
7.16 |
% |
|
|
7.13 |
% |
|
|
7.12 |
% |
|
|
-- |
|
|
|
7.11 |
% |
|
|
|
|
Average
Receive Rate
|
|
|
-- |
|
|
|
2.82 |
% |
|
|
3.41 |
% |
|
|
4.86 |
% |
|
|
4.86 |
% |
|
|
-- |
|
|
|
4.52 |
% |
|
|
|
|
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
adjusted for Charter Operating’s credit risk. Interest rates on
variable debt are estimated using the average implied forward LIBOR for the year
of maturity based on the yield curve in effect at December 31, 2008 including
applicable bank spread.
At
December 31, 2008 and 2007, we had outstanding $4.3 billion and $4.3 billion,
respectively, in notional amounts of interest rate swaps. The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts.
Our
consolidated financial statements, the related notes thereto, and the reports of
independent accountants 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, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have 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 certifications provided by a number of
executives. Based upon, and as of the date of that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
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, we believe that our
controls provide such reasonable assurances.
There was
no change in our internal control over financial reporting during the fourth
quarter of 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) for the Company. 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.
Management
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2008. 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, 2008, our internal control over financial reporting was effective.
Our
independent auditors, KPMG LLP have audited our internal control over financial
reporting as stated in their report on page F-2.
Item
9B. Other
Information.
None.
PART
III
The
information required by Item 10 will be included in Charter's 2009 Proxy
Statement (the “Proxy Statement”) under the headings “Election of Class A/Class
B Director,” "Election of Class B Directors," “Section 16(a) Beneficial
Ownership Reporting Requirements,” and “Code of Ethics,” or in amendment to this
Annual Report on Form 10-K and is incorporated herein by reference.
Item 11. Executive
Compensation.
The
information required by Item 11 will be included in the Proxy Statement
under the headings “Executive Compensation,” “Election of Class B Directors –
Director Compensation,” and “Compensation Discussion and Analysis,” or in
amendment to this Annual Report on Form 10-K and is incorporated herein by
reference. Information contained in the Proxy Statement or
amendment to this Annual Report on Form 10-K under the caption “Report of
Compensation and Benefits Committee” is furnished and not deemed filed with the
SEC.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
The
information required by Item 12 will be included in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management" or in amendment to this Annual Report on Form 10-K and is
incorporated herein by reference.
Item 13.
Certain Relationships and
Related Transactions, and Director Independence.
The
information required by Item 13 will be included in the Proxy Statement
under the heading “Certain Relationships and Related Transactions” and “Election
of Class B Directors” or in amendment to this Annual Report on Form 10-K and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and
Services.
The
information required by Item 14 will be included in the Proxy Statement
under the heading “Accounting Matters” or in amendment to this Annual Report on
Form 10-K and is incorporated herein by reference.
(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 E-1 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:
|
|
|
|
|
|
|
Neil
Smit
|
|
|
|
|
President
and Chief Executive Officer
|
Date:
March 16, 2009
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board of Directors
|
|
March
9, 2009
|
|
Paul
G. Allen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President,
Chief Executive
|
|
March
16, 2009
|
|
Neil
Smit
|
|
Officer,
Director (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Eloise E. Schmitz |
|
Chief
Financial Officer |
|
March
13, 2009 |
|
Eloise
E. Schmitz |
|
(Principal
Financial Officer) |
|
|
|
|
|
|
|
|
|
/s/
Kevin D. Howard |
|
Vice
President, Controller and Chief Accounting Officer |
|
March
16, 2009 |
|
Kevin
D. Howard |
|
(Principal
Accounting Officer) |
|
|
|
|
|
|
|
|
|
/s/
W. Lance Conn |
|
Director |
|
March
5, 2009 |
|
W.
Lance Conn |
|
|
|
|
|
|
|
|
|
|
|
/s/
Rajive Johri
|
|
Director
|
|
March
7, 2009
|
|
Rajive
Johri
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
16, 2009
|
|
Robert
P. May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
10, 2009
|
|
David
C. Merritt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
4, 2009
|
|
Jo
Allen Patton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
16, 2009
|
|
John
H. Tory
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Larry W. Wangberg
|
|
Director
|
|
March
16, 2009
|
|
Larry
W. Wangberg
|
|
|
|
|
(Exhibits
are listed by numbers corresponding to the Exhibit Table of Item 601
in Regulation S-K).
Exhibit
|
|
Description
|
|
|
|
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)).
|
3.1(c)
|
|
Certificate
of Amendment of Restated Certificate of Incorporation of Charter
Communications, Inc. filed October 11, 2007 (incorporated by reference to
Exhibit 3.1(c) to the quarterly report of Form 10-Q of Charter
Communications, Inc. filed on November 8, 2007 (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)).
|
3.4
|
|
Certificate
of Designation of Series B Junior Preferred Stock of Charter
Communications, Inc., as filed with the Secretary of State of the State of
Delaware on August 14, 2007 (incorporated by reference to Exhibit 3.1 to
the current report on Form 8-K of Charter Communications, Inc. filed on
August 15, 2007 (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
|
|
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)).
|
4.2
|
|
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)).
|
4.3
|
|
Form
of Rights Certificate (incorporated by reference to Exhibit 4.1 to the
current report on Form 8-K of Charter Communications, Inc. filed on August
15, 2007 (File No. 000-27927)).
|
4.4(a)
|
|
Rights
Agreement, dated as of August 14, 2007, by and between Charter
Communications, Inc. and Mellon Investor Services LLC, as Rights Agent
(incorporated by reference to Exhibit 4.2 to the current report on Form
8-K of Charter Communications, Inc. filed on August 15, 2007 (File No.
000-27927)).
|
4.4(b)
|
|
First
Amendment to Rights Agreement, dated as of December 23, 2008, by and
between Charter Communications, Inc. and Mellon Investor Services LLC, as
Rights Agent (incorporated by reference to Exhibit 4.01 to the amended
registration statement on Form 8-A/A of Charter Communications, Inc. filed
on December 23, 2008 (File No. 000-27927)).
|
4.5(a)
|
|
Letter
Agreement for Mirror Rights, dated as of August 14, 2007, by and among
Charter Communications, Inc., Charter Investment, Inc., and Vulcan Cable
III Inc. (incorporated by reference to Exhibit 4.3 to the current report
on Form 8-K of Charter Communications, Inc. filed on August 15, 2007
(File No. 000-27927)).
|
4.5(b)
|
|
First
Amendment to Letter Agreement for Mirror Rights, dated as of December 23,
2008, by and among Charter Communications, Inc., Charter Investment, Inc.,
and Vulcan Cable III Inc. (incorporated by reference to Exhibit 4.02 to
the amended registration statement on Form 8-A/A of Charter
Communications, Inc. filed on December 23, 2008 (File No.
000-27927)).
|
4.6
|
|
Indenture
relating to the 6.50% Convertible Senior Notes due 2027, dated as of
October 2, 2007, between Charter Communications, Inc., as Issuer, and The
Bank of New York Trust Company, N.A., as Trustee (incorporated by
reference to Exhibit 4.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on October 5, 2007 (File No.
000-27927)).
|
10.1
|
|
Form
of Restructuring Agreement (incorporated by reference to Exhibit 10.1 to
the current report on Form 8-K of Charter Communications, Inc. filed on
February 13, 2009 (File No.
000-27927)).
|
10.2
|
|
Form
of Commitment Letter (incorporated by reference to Exhibit 10.2 to the
current report on Form 8-K of Charter Communications, Inc. filed on
February 13, 2009 (File No. 000-27927)).
|
10.3
|
|
Term
Sheet (incorporated by reference to Exhibit 10.3 to the current report on
Form 8-K of Charter Communications, Inc. filed on February 13, 2009 (File
No. 000-27927)).
|
10.4
|
|
Restructuring
Agreement, dated as of February 11, 2009, by and among Paul G. Allen,
Charter Investment, Inc. and Charter Communications, Inc. (incorporated by
reference to Exhibit 10.4 to the current report on Form 8-K of Charter
Communications, Inc. filed on February 13, 2009 (File No.
000-27927)).
|
10.5
|
|
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 10.7 to the current report on
Form 8-K of Charter Communications, Inc. filed on November 30, 2004 (File
No. 000-27927)).
|
10.6
|
|
6.50%
Mirror Convertible Senior Note due 2027 in the principal amount of $479
million, dated as of October 2, 2007, made by Charter Communications
Holding Company, LLC in favor of Charter Communications, Inc.
(incorporated by reference to Exhibit 10.3 to the current report on Form
8-K of Charter Communications, Inc. filed on October 5, 2007 (File No.
000-27927)).
|
10.7(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)).
|
10.7(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)).
|
10.8(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)).
|
10.8(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)).
|
10.9(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)).
|
10.9(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)).
|
10.10(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)).
|
10.10(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)).
|
10.11(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 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)).
|
10.11(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 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)).
|
10.12(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)).
|
10.12(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)).
|
10.13(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)).
|
10.13(b)
|
|
First
Supplemental Indenture dated as of September 28, 2005, between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing 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)).
|
10.14(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 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)).
|
10.14(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)).
|
10.14(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)).
|
10.14(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)).
|
10.15(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)).
|
10.15(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)).
|
10.15(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)).
|
10.15(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)).
|
10.16(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)).
|
10.16(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)).
|
10.17(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)).
|
10.17(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)).
|
10.17(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)).
|
10.18
|
|
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)).
|
10.19(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)).
|
10.19(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)).
|
10.20(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)).
|
10.20(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)).
|
10.21
|
|
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)).
|
10.22(a)
|
|
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)).
|
10.22(b)
|
|
First
Supplemental Indenture relating to the 10.25% Senior Notes due 2013, dated
as of July 2, 2008, by and between CCH II, LLC, CCH II Capital
Corporation, as Issuers, Charter Communications Holdings, LLC as Parent
Guarantor and The Bank of New York Mellon Trust Company, N.A. as trustee
(incorporated by reference to Exhibit 10.1 to the current report on Form
8-K of Charter Communications, Inc. on July 3, 2008 (File No.
000-027927)).
|
10.22(c)
|
|
Exchange
and Registration Rights Agreement relating to the issuance of the 10.25%
Senior Notes due 2013, dated as of July 2, 2008, by and between CCH II,
LLC, CCH II Capital Corporation, Charter Communications Holdings, LLC,
|
|
|
Banc
of America Securities LLC and Citigroup Global Markets, Inc. (incorporated
by reference to Exhibit 10.2 to the current report on Form 8-K of Charter
Communications, Inc. on July 3, 2008 (File No.
000-027927)).
|
10.23
|
|
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)).
|
10.24
|
|
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)).
|
10.25(a)
|
|
Indenture
relating to the 10.875% senior second lien notes due 2014 dated as of
March 19, 2008, by and among Charter Communications Operating, LLC,
Charter Communications Operating Capital Corp. and Wilmington Trust
Company, trustee (incorporated by reference to Exhibit 10.1 to the
quarterly report filed on Form 10-Q of Charter Communications, Inc. filed
on May 12, 2008 (File No. 000-027927)).
|
10.25(b)
|
|
Collateral
Agreement, dated as of March 19, 2008 by and among Charter Communications
Operating, LLC, Charter Communications Operating Capital Corp., CCO
Holdings, LLC and certain of its subsidiaries in favor of Wilmington Trust
Company, as trustee (incorporated by reference to Exhibit 10.2 to the
quarterly report filed on Form 10-Q of Charter Communications, Inc. filed
on May 12, 2008 (File No. 000-027927)).
|
10.26
|
|
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)).
|
10.27
|
|
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)).
|
10.28
|
|
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)).
|
10.29
|
|
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)).
|
10.30
|
|
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)).
|
10.31(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)).
|
10.31(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)).
|
10.32
|
|
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)).
|
10.33
|
|
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)).
|
10.34
|
|
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)).
|
10.35
|
|
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)).
|
10.36
|
|
Amended
and Restated Credit Agreement, dated as of March 6, 2007, 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 March 12, 2007 (File No.
000-27927)).
|
10.37
|
|
Amended
and Restated Guarantee and Collateral Agreement made by CCO Holdings, LLC,
Charter Communications Operating, LLC and certain of its subsidiaries in
favor of JPMorgan Chase Bank, N.A., as administrative agent, dated as of
March 18, 1999, as amended and restated as of March 6, 2007 (incorporated
by reference to Exhibit 10.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on March 12, 2007 (File No.
000-27927)).
|
10.38
|
|
Credit
Agreement, dated as of March 6, 2007, among CCO Holdings, LLC, the lenders
from time to time parties thereto and Bank of America, N.A., as
administrative agent (incorporated by reference to Exhibit 10.3 to the
current report on Form 8-K of Charter Communications, Inc. filed on March
12, 2007 (File No. 000-27927)).
|
10.39
|
|
Pledge
Agreement made by CCO Holdings, LLC in favor of Bank of America, N.A., as
Collateral Agent, dated as of March 6, 2007 (incorporated by reference to
Exhibit 10.4 to the current report on Form 8-K of Charter Communications,
Inc. filed on March 12, 2007 (File No. 000-27927)).
|
10.40
|
|
Amended
and Restated Share Lending Agreement, dated October 2, 2007, between
Charter Communications, Inc., Citigroup Global Markets Limited, through
Citigroup Global Markets, Inc. (incorporated by reference to Exhibit 10.1
to the current report on Form 8-K of Charter Communications, Inc. filed on
October 5, 2007 (File No. 000-27927)).
|
10.41
|
|
Amended
and Restated Unit Lending Agreement, dated as of October 2, 2007, between
Charter Communications Holding Company, LLC as Lender and Charter
Communications, Inc. as Borrower (incorporated by reference to Exhibit
10.2 to the current report on Form 8-K of Charter Communications, Inc.
filed on October 5, 2007(File No. 000-27927)).
|
10.42
|
|
Holdco
Mirror Notes Agreement, dated as of October 2, 2007, by and between
Charter Communications, Inc. and Charter Communications Holding Company,
LLC (incorporated by reference to Exhibit 10.37 to the annual report on
Form 10-K filed on February 27, 2008 (File No.
000-27927).
|
10.43(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)).
|
10.43(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)).
|
10.43(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)).
|
10.43(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)).
|
10.43(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)).
|
10.43(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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)).
|
10.44(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 Holdings, LLC.
on March 31, 2005 (File No. 333-77499)).
|
10.44(j)+
|
|
Description
of 2008 Incentive Program to the Charter Communications, Inc. 2001 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the quarterly
report on Form 10-Q filed by Charter Communications, Inc. on August 5,
2008 (File No. 000-27927)).
|
10.45+
|
|
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)).
|
10.46+
|
|
Amended
and Restated Executive Cash Award Plan (incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K of Charter Communications,
Inc. filed December 6, 2007 (File No. 000-27927)).
|
10.47+
|
|
Amended
and Restated Employment Agreement, dated as of July 1, 2008, by and
between Neil Smit and Charter Communications, Inc. (incorporated by
reference to Exhibit 1010.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on September 30, 2008 (File No.
000-27927)).
|
10.48(a)+
|
|
Amended
and Restated Employment Agreement between Jeffrey T. Fisher and Charter
Communications, Inc., dated as of August 1, 2007 (incorporated by
reference to Exhibit 10.2 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on August 2, 2007 (File No.
000-27927)).
|
10.48(b)+
|
|
Separation
Agreement and Release between Jeffrey T. Fisher and Charter
Communications, inc., dated as of April 4, 2008 (incorporated by reference
to Exhibit 10.3 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on May 12, 2008 (File No.
000-27927)).
|
10.49+
|
|
Amended
and Restated Employment Agreement between Eloise E. Schmitz and Charter
Communications, Inc., dated as of July 1, 2008 (incorporated by reference
to Exhibit 10.4 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on August 5, 2008 (File No.
000-27927)).
|
10.50(a)+
|
|
Amended
and Restated Employment Agreement between Michael J. Lovett and Charter
Communications, Inc., dated as of August 1, 2007 (incorporated by
reference to Exhibit 10.3 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on August 2, 2007 (File No.
000-27927)).
|
10.50(b)+
|
|
Amendment
to the Amended and Restated Employment Agreement between Michael J. Lovett
and Charter Communications, Inc., dated as of March 5, 2008 (incorporated
by reference to Exhibit 10.5 to the quarterly report on Form 10-Q of
Charter Communications, Inc., filed on May 12, 2008 (File No.
000-27927)).
|
10.51(a)+
|
|
Amended
and Restated Employment Agreement between Grier C. Raclin and Charter
Communications, Inc., dated as of August 1, 2007 (incorporated by
reference to Exhibit 10.4 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on August 2, 2007 (File No.
000-27927)).
|
10.51(b)+
|
|
Amendment
to the Amended and Restated Employment Agreement between Grier C. Raclin
and Charter Communications, Inc., dated as of March 5, 2008 (incorporated
by reference to Exhibit 10.6 to the quarterly report on Form 10-Q of
Charter Communications, Inc. filed on May 12, 2008 (File No.
000-27927)).
|
10.52(a)*+
|
|
Amended
and Restated Employment Agreement between Marwan Fawaz and Charter
Communications, Inc. dated August 1, 2007.
|
10.52(b)*+ |
|
Amendment
to Amended and Restated Employment Agreement between Marwan Fawaz and
Charter Communications, Inc. dated as of March 5,
2008. |
12.1*
|
|
Computation
of Ratio of Earnings to Fixed Charges.
|
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
|
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
|
F-4
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007,
and 2006
|
|
F-5
|
Consolidated
Statements of Changes in Shareholders’ Deficit for the Years Ended
December 31, 2008, 2007, and 2006
|
|
F-6
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007,
and 2006
|
|
F-7
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
Report
of Independent Registered Public Accounting Firm
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,
2008 and 2007, and the related consolidated statements of operations, changes in
shareholders' deficit, and cash flows for each of the years in the three-year
period ended December 31, 2008. We also have audited the Company’s internal
control over financial reporting as of December 31, 2008, 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 these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting
(Item 9A). Our responsibility is to express an opinion on these consolidated
financial statements and an opinion on the Company's internal control over
financial reporting 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
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, 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has announced that it expects to
file voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code, primarily as a result of the following matters: (i) the
Company’s significant indebtedness; (ii) the Company’s ability to raise
additional capital given its current leverage; and (iii) the potential inability
of the Company’s subsidiaries to make distributions for payments of interest and
principal on the debts of the parents of such subsidiaries due in 2009 based
on the availability of
funds and restrictions under the Company’s applicable debt instruments and under
applicable law. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG
LLP
St.
Louis, Missouri
March 13,
2009
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in millions, except share data)
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
960 |
|
|
$ |
75 |
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$18
and $18, respectively
|
|
|
222 |
|
|
|
225 |
|
Prepaid
expenses and other current assets
|
|
|
36 |
|
|
|
36 |
|
Total
current assets
|
|
|
1,218 |
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $7,225 and $6,462, respectively
|
|
|
4,987 |
|
|
|
5,103 |
|
Franchises,
net
|
|
|
7,384 |
|
|
|
8,942 |
|
Total
investment in cable properties, net
|
|
|
12,371 |
|
|
|
14,045 |
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
293 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
13,882 |
|
|
$ |
14,666 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,310 |
|
|
$ |
1,332 |
|
Current
portion of long-term debt
|
|
|
155 |
|
|
|
-- |
|
Total
current liabilities
|
|
|
1,465 |
|
|
|
1,332 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
21,511 |
|
|
|
19,908 |
|
NOTE
PAYABLE – RELATED PARTY
|
|
|
75 |
|
|
|
65 |
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
|
|
14 |
|
|
|
14 |
|
OTHER
LONG-TERM LIABILITIES
|
|
|
1,120 |
|
|
|
1,035 |
|
MINORITY
INTEREST
|
|
|
203 |
|
|
|
199 |
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
|
shares
authorized; 0 and 36,713 shares issued and outstanding,
respectively
|
|
|
-- |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
|
|
|
|
|
|
|
|
411,737,894
and 398,226,468 shares issued and outstanding,
respectively
|
|
|
-- |
|
|
|
-- |
|
Class
B Common stock; $.001 par value; 4.5 billion
|
|
|
|
|
|
|
|
|
shares
authorized; 50,000 shares issued and outstanding
|
|
|
-- |
|
|
|
-- |
|
Preferred
stock; $.001 par value; 250 million shares
|
|
|
|
|
|
|
|
|
authorized;
no non-redeemable shares issued and outstanding
|
|
|
-- |
|
|
|
-- |
|
Additional
paid-in capital
|
|
|
5,344 |
|
|
|
5,327 |
|
Accumulated
deficit
|
|
|
(15,547 |
) |
|
|
(13,096 |
) |
Accumulated
other comprehensive loss
|
|
|
(303 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(10,506 |
) |
|
|
(7,892 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
13,882 |
|
|
$ |
14,666 |
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
6,479 |
|
|
$ |
6,002 |
|
|
$ |
5,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
2,792 |
|
|
|
2,620 |
|
|
|
2,438 |
|
Selling,
general and administrative
|
|
|
1,401 |
|
|
|
1,289 |
|
|
|
1,165 |
|
Depreciation
and amortization
|
|
|
1,310 |
|
|
|
1,328 |
|
|
|
1,354 |
|
Impairment
of franchises
|
|
|
1,521 |
|
|
|
178 |
|
|
|
-- |
|
Asset
impairment charges
|
|
|
-- |
|
|
|
56 |
|
|
|
159 |
|
Other
operating (income) expenses, net
|
|
|
69 |
|
|
|
(17 |
) |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,093 |
|
|
|
5,454 |
|
|
|
5,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from continuing operations
|
|
|
(614 |
) |
|
|
548 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,903 |
) |
|
|
(1,851 |
) |
|
|
(1,877 |
) |
Change
in value of derivatives
|
|
|
(29 |
) |
|
|
52 |
|
|
|
(4 |
) |
Gain
(loss) on extinguishment of debt
|
|
|
2 |
|
|
|
(148 |
) |
|
|
101 |
|
Other
income (expense), net
|
|
|
(10 |
) |
|
|
(8 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,940 |
) |
|
|
(1,955 |
) |
|
|
(1,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, before income tax expense
|
|
|
(2,554 |
) |
|
|
(1,407 |
) |
|
|
(1,399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
|
|
103 |
|
|
|
(209 |
) |
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,451 |
) |
|
|
(1,616 |
) |
|
|
(1,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM DISCONTINUED OPERATIONS,
NET
OF TAX
|
|
|
-- |
|
|
|
-- |
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,451 |
) |
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(6.56 |
) |
|
$ |
(4.39 |
) |
|
$ |
(4.78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(6.56 |
) |
|
$ |
(4.39 |
) |
|
$ |
(4.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
373,464,920 |
|
|
|
368,240,608 |
|
|
|
331,941,788 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(123 |
) |
|
|
(123 |
) |
Option
compensation expense, net
|
|
|
-- |
|
|
|
-- |
|
|
|
12 |
|
|
|
-- |
|
|
|
-- |
|
|
|
12 |
|
Cumulative
adjustment to Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
for the adoption of FIN48
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
56 |
|
|
|
-- |
|
|
|
56 |
|
Other
|
|
|
-- |
|
|
|
-- |
|
|
|
2 |
|
|
|
-- |
|
|
|
(4 |
) |
|
|
(2 |
) |
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,616 |
) |
|
|
-- |
|
|
|
(1,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
|
-- |
|
|
|
-- |
|
|
|
5,327 |
|
|
|
(13,096 |
) |
|
|
(123 |
) |
|
|
(7,892 |
) |
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(180 |
) |
|
|
(180 |
) |
Option
compensation expense, net
|
|
|
-- |
|
|
|
-- |
|
|
|
12 |
|
|
|
-- |
|
|
|
-- |
|
|
|
12 |
|
Preferred
stock redemption
|
|
|
-- |
|
|
|
-- |
|
|
|
5 |
|
|
|
-- |
|
|
|
-- |
|
|
|
5 |
|
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(2,451 |
) |
|
|
-- |
|
|
|
(2,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
5,344 |
|
|
$ |
(15,547 |
) |
|
$ |
(303 |
) |
|
$ |
(10,506 |
) |
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,451 |
) |
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,310 |
|
|
|
1,328 |
|
|
|
1,362 |
|
Impairment
of franchises
|
|
|
1,521 |
|
|
|
178 |
|
|
|
-- |
|
Asset
impairment charges
|
|
|
-- |
|
|
|
56 |
|
|
|
159 |
|
Noncash
interest expense
|
|
|
59 |
|
|
|
40 |
|
|
|
128 |
|
Change
in value of derivatives
|
|
|
29 |
|
|
|
(52 |
) |
|
|
4 |
|
Deferred
income taxes
|
|
|
(107 |
) |
|
|
198 |
|
|
|
202 |
|
(Gain)
loss on sale of assets, net
|
|
|
13 |
|
|
|
(3 |
) |
|
|
(192 |
) |
(Gain)
loss on extinguishment of debt
|
|
|
(3 |
) |
|
|
136 |
|
|
|
(101 |
) |
Other,
net
|
|
|
39 |
|
|
|
2 |
|
|
|
4 |
|
Changes
in operating assets and liabilities, net of effects from acquisitions and
dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
3 |
|
|
|
(36 |
) |
|
|
24 |
|
Prepaid
expenses and other assets
|
|
|
(1 |
) |
|
|
45 |
|
|
|
55 |
|
Accounts
payable, accrued expenses and other
|
|
|
(13 |
) |
|
|
51 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
399 |
|
|
|
327 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(1,202 |
) |
|
|
(1,244 |
) |
|
|
(1,103 |
) |
Change
in accrued expenses related to capital expenditures
|
|
|
(39 |
) |
|
|
(2 |
) |
|
|
24 |
|
Proceeds
from sale of assets, including cable systems
|
|
|
43 |
|
|
|
104 |
|
|
|
1,020 |
|
Other,
net
|
|
|
(12 |
) |
|
|
4 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(1,210 |
) |
|
|
(1,138 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
3,105 |
|
|
|
7,877 |
|
|
|
6,322 |
|
Repayments
of long-term debt
|
|
|
(1,354 |
) |
|
|
(7,017 |
) |
|
|
(6,938 |
) |
Proceeds
from issuance of debt
|
|
|
-- |
|
|
|
-- |
|
|
|
440 |
|
Payments
for debt issuance costs
|
|
|
(42 |
) |
|
|
(42 |
) |
|
|
(44 |
) |
Other,
net
|
|
|
(13 |
) |
|
|
8 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
1,696 |
|
|
|
826 |
|
|
|
(219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
885 |
|
|
|
15 |
|
|
|
39 |
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
75 |
|
|
|
60 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
960 |
|
|
$ |
75 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$ |
1,847 |
|
|
$ |
1,792 |
|
|
$ |
1,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
adjustment to Accumulated Deficit for the adoption of FIN
48
|
|
$ |
-- |
|
|
$ |
56 |
|
|
$ |
-- |
|
Issuance
of Charter 6.50% convertible notes
|
|
$ |
-- |
|
|
$ |
479 |
|
|
$ |
-- |
|
Issuances
of Charter Class A common stock
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
68 |
|
Issuance
of debt by CCH I, LLC
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
419 |
|
Issuance
of debt by CCH II, LLC
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
410 |
|
Issuance
of debt by Charter Communications Operating, LLC
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
37 |
|
Retirement
of Charter 5.875% convertible notes
|
|
$ |
-- |
|
|
$ |
(364 |
) |
|
$ |
(255 |
) |
Retirement
of Charter Communications Holdings, LLC debt
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
(796 |
) |
Retirement
of Renaissance Media Group LLC debt
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
(37 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(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, 2008 are the 55% controlling common equity interest (53% 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." All significant intercompany
accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (basic and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™, and digital
video recorder (“DVR”) service. The Company sells its cable video
programming, high-speed Internet, telephone, and advanced broadband services
primarily on a subscription basis. The Company also sells local
advertising on cable networks.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Areas 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 2008
presentation.
2.
|
Liquidity
and Capital
Resources
|
The
Company’s consolidated financial statements have been prepared assuming that it
will continue as a going concern. The conditions noted below raise
substantial doubt about the Company’s ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
On
February 12, 2009, Charter announced that it had reached an agreement in
principle with holders of certain of its subsidiaries’ senior notes (the
“Noteholders”) holding approximately $4.1 billion in aggregate principal amount
of notes issued by Charter’s subsidiaries, CCH I and CCH II. Pursuant
to separate restructuring agreements, dated February 11, 2009, entered into with
each Noteholder (the “Restructuring Agreements”), on or prior to April 1, 2009,
Charter and its subsidiaries expect to file voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code to implement a restructuring
pursuant to a joint plan of reorganization (the “Plan”) aimed at improving its
capital structure (the “Proposed Restructuring”). Refer to discussion
of subsequent events regarding the Proposed Restructuring in Note
29.
During
the fourth quarter of 2008, Charter Operating drew down all except $27 million
of amounts available under the revolving credit facility. During the
first quarter of 2009, Charter Operating presented a qualifying draw notice to
the banks under the revolving credit facility but was refused those
funds. Additionally, upon filing bankruptcy, Charter Operating will
no longer have access to the revolving credit facility and will rely on cash on
hand and cash flows from operating activities to fund our projected cash
needs. The Company’s projected cash needs and projected sources of
liquidity depend upon, among other things, its actual results, the timing and
amount of its expenditures, and the outcome of various matters in its expected
Chapter 11 bankruptcy proceedings and financial restructuring. The
outcome of the Proposed Restructuring is subject to substantial
risks. See Note 29.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
The
Company incurred net losses of $2.5 billion, $1.6 billion, and $1.4 billion in
2008, 2007, and 2006, respectively. The Company’s net cash flows from
operating activities were $399 million, $327 million, and $323 million for the
years ending December 31, 2008, 2007, and 2006, respectively.
The
Company has a significant amount of debt. The Company's total debt as
of December 31, 2008 totaled $21.7 billion, consisting of $8.6 billion of credit
facility debt, $12.7 billion accreted value of high-yield notes, and $376
million accreted value of convertible senior notes. In 2009, $155
million of the Company’s debt matures and in 2010, an additional $1.9 billion
matures. In 2011 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, 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, 2008, the Company generated $399 million of net cash flows from
operating activities, after paying cash interest of $1.8 billion. In addition, the Company
used $1.2 billion for purchases of property, plant and
equipment. Finally, the Company generated net cash flows from
financing activities of $1.7 billion, as a result of financing transactions and
credit
facility borrowings completed during the year ended December 31,
2008. As of December 31, 2008, the Company had cash on hand of $960
million.
Although
the Company has been able to refinance or otherwise fund the repayment of debt
in the past, it may not be able to access additional sources of refinancing on
similar terms or pricing as those that are currently in place, or at all, or
otherwise obtain other sources of funding, especially given the recent
volatility and disruption of the capital and credit markets and the
deterioration of general economic conditions in recent months.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. Charter’s
ability to make interest payments on its convertible senior notes, and to repay
the outstanding principal of its convertible senior notes will depend on its
ability to raise additional capital and/or on receipt of payments or
distributions from Charter Holdco and its subsidiaries. As of December 31,
2008, Charter Holdco was owed $13 million in intercompany loans from Charter
Communications Operating, LLC (“Charter Operating”) and had $1 million in cash,
which amounts were available to pay interest and principal on Charter's
convertible senior notes to the extent not otherwise used, for example, to
satisfy maturities at Charter Holdings. In addition, as long as Charter
Holdco continues to hold the $137 million of Charter Holdings’ notes due 2009
and 2010 (as discussed further below), Charter Holdco will receive interest and
principal payments from Charter Holdings to the extent Charter Holdings is able
to make such payments. Such amounts may be available to pay interest
and principal on Charter’s convertible senior notes, although Charter Holdco may
use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings, LLC (“CCO Holdings”)
notes, Charter Operating notes, and under the CCO Holdings credit facility,
unless there is no default under the applicable indenture and credit facilities,
and unless each applicable subsidiary’s leverage ratio test is met at the time
of such distribution. For the quarter ended December 31, 2008, there
was no default under any of these indentures or credit
facilities. However, certain of the Company’s subsidiaries did not
meet their applicable leverage ratio tests based on December 31, 2008 financial
results. As a result, distributions from certain of the Company’s
subsidiaries to their parent companies would have been restricted at such time
and will continue to be restricted unless those tests are
met. Distributions by Charter Operating for payment of principal on
parent company notes are further restricted by the covenants in its credit
facilities.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(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 CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended December 31,
2008, there was no default under Charter Holdings’ indentures, the other
specified tests were met, and Charter Holdings met its leverage ratio test based
on December 31, 2008 financial results. 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 the Company’s subsidiaries may be limited by
applicable law. Under the Delaware Limited Liability Company Act, the
Company’s subsidiaries may only make distributions if they have “surplus” as
defined in the act. Under fraudulent transfer laws, the Company’s
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.
|
It is
uncertain whether the Company will have, at the relevant times, sufficient
surplus at the relevant subsidiaries to make distributions, including for
payments of interest and principal on the debts of the parents of such entities,
and there can otherwise be no assurance that the Company’s subsidiaries will not
become insolvent or will be permitted to make distributions in the future in
compliance with these restrictions in amounts needed to service the Company’s
indebtedness.
3.
|
Summary
of Significant Accounting
Policies
|
Consolidation
of Variable Interest Entities
The
Company consolidates variable interest entities according to the principles and
guidance contained in FIN 46(R), based upon evaluation of the Company’s ability
to make decisions about another entity’s activities, its obligation to absorb
the expected losses of the entity, and its right to receive the expected
residual returns of the entity.
The
Company has a 55% controlling common equity interest (53% for accounting
purposes) in Charter Holdco. The Company is the sole manager of
Charter Holdco and has 100% of its voting membership units. The
Company determined that Charter Holdco is a variable interest entity based upon
Charter Holdco’s owners holding voting rights disproportionate to their economic
interest and the Company’s obligation to absorb all of the expected losses of
Charter Holdco. At December 31, 2008, membership units of Charter
Holdco were also owned by Vulcan Cable III Inc. (“Vulcan Cable”) and Charter
Investment, Inc. (“CII”), which were both owned by Mr. Paul G. Allen, the
Company’s chairman and majority shareholder, and were considered related parties
of the Company.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
There are
no restrictions over the Company’s control of Charter Holdco’s operations or
assets. As a result of being the most closely associated with Charter
Holdco, the Company has determined that it is the primary beneficiary
within the related party group and that the financial results of Charter
Holdco should be consolidated with the Company. For the year ended
December 31, 2008, the Company has not experienced any reconsideration events
that would indicate any other variable interest entities that would require
consolidation under FIN 46(R).
Charter
Holdco holds broadband communication businesses that are managed by the
Company. All income and expenses generated by Charter Holdco are
consolidated into the Company. Charter Holdco also holds all of the
cash flows reported by the Company. All liabilities held by Charter
Holdco are consolidated into the Company. The Company has not
provided financial or other support to Charter Holdco that it was not previously
contractually required to provide.
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. Cash and cash
equivalents consist primarily of money market funds and commercial
paper.
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost, including all material, labor and
certain indirect costs associated with the construction of cable transmission
and distribution facilities. While the Company’s capitalization is
based on specific activities, once capitalized, costs are tracked by fixed asset
category at the cable system level and not on a specific asset
basis. For assets that are sold or retired, the estimated historical
cost and related accumulated depreciation is removed. 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 Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”) No. 47, Accounting for Conditional Asset
Retirement Obligations – an Interpretation of FASB Statement No. 143,
requires
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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 or more frequently as warranted by events or
changes in circumstances (see Note 7). The Company concluded that
substantially all of its franchises qualify for indefinite-life
treatment. Costs incurred in renewing cable franchises are deferred
and amortized over 10 years.
Other Noncurrent
Assets
Other
noncurrent assets primarily include deferred financing costs, 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.
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 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 2008, 2007, and 2006; however, approximately $56 million
and $159 million of impairment on assets held for sale was recorded for the
years ended December 31, 2007 and 2006, 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 (loss). For
all other derivative instruments, the related gains or losses are recorded in
the statements of operations. The Company uses interest rate swap
agreements to manage its interest costs and reduce the Company’s exposure to
increases in floating interest rates. The Company’s policy is to
manage its exposure to fluctuations in interest rates by maintaining a mix of
fixed and variable rate debt within a targeted range. Using interest
rate swap agreements, the Company agrees to exchange, at specified intervals
through 2013, the difference between fixed and variable interest amounts
calculated by reference to agreed-upon notional principal amounts. At
the banks’ option, certain interest rate swap agreements may be extended through
2014. The Company does not hold or issue any derivative financial
instruments for trading purposes.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Certain
provisions of the Company’s 5.875% and 6.50% convertible senior notes issued in
November 2004 and October 2007, respectively, were considered embedded
derivatives for accounting purposes and were required to be accounted for
separately from the convertible senior notes. In accordance with SFAS
No. 133, these derivatives are marked to market with gains or losses recorded as
the change in value of derivatives on the Company’s consolidated statements of
operations. For the years ended December 31, 2008, 2007, and 2006,
the Company recognized $33 million and $98 million in gains, and $10 million in
losses, respectively, related to these derivatives. At December 31,
2008 and 2007, $0 and $33 million is recorded on the Company’s balance sheets
related to these derivatives.
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 $187 million, $177 million, and $179
million for the years ended December 31, 2008, 2007, and 2006, respectively, are
reported in other 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.
The
Company’s revenues by product line are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
3,463 |
|
|
$ |
3,392 |
|
|
$ |
3,349 |
|
High-speed
Internet
|
|
|
1,356 |
|
|
|
1,243 |
|
|
|
1,047 |
|
Telephone
|
|
|
555 |
|
|
|
345 |
|
|
|
137 |
|
Commercial
|
|
|
392 |
|
|
|
341 |
|
|
|
305 |
|
Advertising
sales
|
|
|
308 |
|
|
|
298 |
|
|
|
319 |
|
Other
|
|
|
405 |
|
|
|
383 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,479 |
|
|
$ |
6,002 |
|
|
$ |
5,504 |
|
Programming
Costs
The
Company has various contracts to obtain basic, 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 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
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 $33 million, $25 million, and $32 million for the years ended
December 31, 2008, 2007, and 2006, respectively. As of
December 31, 2008 and 2007, the deferred amounts of such economic
consideration, included in other long-term liabilities, were $61 million and $90
million, respectively. Programming costs included in the accompanying
statement of operations were $1.6 billion, $1.6 billion, and $1.5 billion for
the years ended December 31, 2008, 2007, and 2006,
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 $229 million, $187 million, and $131 million for the years ended
December 31, 2008, 2007, and 2006, respectively.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Multiple-Element
Transactions
In the
normal course of business, the Company enters into multiple-element transactions
where it is simultaneously both a customer and a vendor with the same
counterparty or in which it purchases multiple products and/or services, or
settles outstanding items contemporaneous with the purchase of a product or
service from a single counterparty. Transactions, although negotiated
contemporaneously, may be documented in one or more contracts. The
Company’s policy for accounting for each transaction negotiated
contemporaneously is to record each element of the transaction based on the
respective estimated fair values of the products or services purchased and the
products or services sold. In determining the fair value of the
respective elements, the Company refers to quoted market prices (where
available), historical transactions or comparable cash
transactions.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with SFAS No.
123(R), Share – Based
Payment, which addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of that company or (b) liabilities that are based on the fair
value of the company’s equity instruments or that may be settled by the issuance
of such equity instruments. The Company recorded $33 million, $18
million, and $13 million of option compensation expense which is included in
general and administrative expenses for the years ended December 31, 2008, 2007,
and 2006, respectively.
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, 2008, 2007,
and 2006, respectively; risk-free interest rates of 3.5%, 4.6%, and 4.6%;
expected volatility of 88.1%, 70.3%, and 87.3% based on historical volatility;
and expected lives of 6.3 years, 6.3 years, and 6.3 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 22).
Minority
Interest
Minority
interest on the consolidated balance sheets represents preferred membership
interests in CC VIII, LLC (“CC VIII”), an indirect subsidiary of Charter held by
Mr. Paul G. Allen. Minority interest totaled $203 million and $199
million as of December 31, 2008 and 2007, respectively, on the accompanying
consolidated balance sheets.
Reported
losses allocated to minority interest on the statement of operations, recorded
within other expense, reflect the minority interests in CC
VIII. Because minority interest in Charter Holdco was eliminated,
Charter absorbs all losses before income taxes that otherwise would have been
allocated to minority interest. On January 1, 2009, the Company will
adopt SFAS No. 160, which requires losses to be allocated to non-controlling
minority interests even when such amounts are deficits (see Note
11).
Loss per Common
Share
Basic
loss per common share is computed by dividing the net loss by 373,464,920
shares, 368,240,608 shares, and 331,941,788 shares for the years ended December
31, 2008, 2007, and 2006, 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, 2008,
Charter
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Holdco
had 750,919,925 membership units outstanding. Should the holders
exchange units for shares, the effect would not be dilutive to earnings per
share because the Company incurred net losses.
The 21.8
million and 24.8 million shares outstanding as of December 31, 2008 and 2007,
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 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
operations. Each geographic 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 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
operating structure, management has determined that the Company has one
reportable segment, broadband services.
In 2006, the Company sold certain cable
television systems serving approximately 356,000 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. The Company determined that the West Virginia and
Virginia cable systems comprise operations and cash flows that for financial
reporting purposes meet the criteria for discontinued
operations. Accordingly, the results of operations for the West
Virginia and Virginia cable systems have been presented as discontinued
operations, net of tax, for the year ended December 31, 2006, including a gain
of $200 million on the sale of cable systems.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Summarized
consolidated financial information for the years ended December 31, 2006 for the
West Virginia and Virginia cable systems is as follows:
|
|
Year
Ended
December
31, 2006
|
|
Revenues
|
|
$ |
109 |
|
Income
before income taxes
|
|
$ |
238 |
|
Income
tax expense
|
|
$ |
(22 |
) |
Net
income
|
|
$ |
216 |
|
Earnings
per common share, basic and diluted
|
|
$ |
0.65 |
|
In 2007
and 2006, the Company recorded asset impairment charges of $56 million and $60
million, respectively, related to other cable systems meeting the criteria of
assets held for sale.
5.
|
Allowance
for Doubtful Accounts
|
Activity
in the allowance for doubtful accounts is summarized as follows for the years
presented:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
18 |
|
|
$ |
16 |
|
|
$ |
17 |
|
Charged
to expense
|
|
|
122 |
|
|
|
107 |
|
|
|
89 |
|
Uncollected
balances written off, net of recoveries
|
|
|
(122 |
) |
|
|
(105 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$ |
18 |
|
|
$ |
18 |
|
|
$ |
16 |
|
6.
|
Property,
Plant and Equipment
|
Property,
plant and equipment consists of the following as of December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cable
distribution systems
|
|
$ |
7,008 |
|
|
$ |
6,697 |
|
Customer
equipment and installations
|
|
|
4,057 |
|
|
|
3,740 |
|
Vehicles
and equipment
|
|
|
256 |
|
|
|
257 |
|
Buildings
and leasehold improvements
|
|
|
497 |
|
|
|
483 |
|
Furniture,
fixtures and equipment
|
|
|
394 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,212 |
|
|
|
11,565 |
|
Less:
accumulated depreciation
|
|
|
(7,225 |
) |
|
|
(6,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
4,987 |
|
|
$ |
5,103 |
|
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. In 2007, the Company changed the useful lives of certain
property, plant, and equipment based on technological changes. The
change in useful lives reduced depreciation expense by approximately $81 million
and $8 million during 2008 and 2007, respectively.
Depreciation
expense for each of the years ended December 31, 2008, 2007, and 2006 was $1.3
billion.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
7.
|
Franchises, Goodwill and Other Intangible
Assets
|
Franchise
rights represent the value attributed to agreements or authorizations with local
and state authorities that allow access to homes in cable service
areas. Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite life or an
indefinite-life as defined by SFAS No. 142, Goodwill and Other Intangible
Assets. Franchises that qualify for indefinite-life treatment
under SFAS No. 142 are tested for impairment annually, or more frequently as
warranted by events or changes in circumstances. Franchises are
aggregated into essentially inseparable units of accounting to conduct the
valuations. The units of accounting generally represent geographical
clustering of the Company’s cable systems into groups by which such systems are
managed. Management believes such grouping represents the highest and
best use of those assets. The Company has historically assessed that
its divisional operations were the appropriate level at which the Company’s
franchises should be evaluated. Based on certain organizational
changes in 2008, the Company determined that the appropriate units of accounting
for franchises are now the individual market area, which is a level below the
Company’s geographic divisional groupings previously used. The
organizational change in 2008 consolidated the Company’s three divisions to two
operating groups and put more management focus on the individual market
areas. The Company completed its impairment assessment as of December
31, 2008 upon completion of its 2009 budgeting process. Largely
driven by the impact of the current economic downturn along with increased
competition, the Company lowered its projected revenue and expense growth rates,
and accordingly revised its estimates of future cash flows as compared to those
used in prior valuations. As a result, the Company recorded $1.5
billion of impairment for the year ended December 31, 2008. The
Company recorded $178 million of impairment for the year ended December 31,
2007. The valuation completed for 2006 showed franchise fair values
in excess of book value, and thus resulted in no impairment.
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.
Customer
relationships, for valuation purposes, represent the value of the business
relationship with existing customers (less the anticipated customer churn), and
are calculated by projecting future after-tax cash flows from these customers,
including the right to deploy and market additional services to these
customers. The present value of these after-tax cash flows yields the
fair value of the customer relationships. Substantially all
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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
As of
December 31, 2008 and 2007, indefinite-lived and finite-lived intangible
assets are presented in the following table:
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$ |
7,377 |
|
|
$ |
-- |
|
|
$ |
7,377 |
|
|
$ |
8,929 |
|
|
$ |
-- |
|
|
$ |
8,929 |
|
Goodwill
|
|
|
68 |
|
|
|
-- |
|
|
|
68 |
|
|
|
67 |
|
|
|
-- |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,445 |
|
|
$ |
-- |
|
|
$ |
7,445 |
|
|
$ |
8,996 |
|
|
$ |
-- |
|
|
$ |
8,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$ |
16 |
|
|
$ |
9 |
|
|
$ |
7 |
|
|
$ |
23 |
|
|
$ |
10 |
|
|
$ |
13 |
|
Other
intangible assets
|
|
|
71 |
|
|
|
41 |
|
|
|
30 |
|
|
|
97 |
|
|
|
73 |
|
|
|
24 |
|
|
|
$ |
87 |
|
|
$ |
50 |
|
|
$ |
37 |
|
|
$ |
120 |
|
|
$ |
83 |
|
|
$ |
37 |
|
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. During the year ended December
31, 2008, the net carrying amount of indefinite-lived franchises was reduced by
$1.5 billion as a result of the impairment of franchises discussed above, $32
million related to cable asset sales completed in 2008, and $4 million as a
result of the finalization of purchase accounting related to cable asset
acquisitions. Additionally, during the year ended December 31, 2008,
approximately $5 million of franchises that were previously classified as
finite-lived were reclassified to indefinite-lived, based on management’s
assessment when these franchises migrated to state-wide
franchising. For the year ended December 31, 2007, the net carrying
amount of indefinite-lived franchises was reduced by $178 million as a result of
the impairment of franchises discussed above, $77 million related to cable asset
sales completed in 2007, and $56 million as a result of the asset impairment
charges recorded related to these cable asset sales. These decreases
were offset by $33 million of franchises added as a result of acquisitions of
cable assets.
Franchise
amortization expense for the years ended December 31, 2008, 2007, and 2006
was $2 million, $3 million, and $2 million, respectively. During the
year ended December 31, 2008, the net carrying amount of finite-lived franchises
increased $1 million as a result of costs incurred associated with franchise
renewals. Other intangible assets amortization expense for the years
ended December 31, 2008, 2007 and 2006 was $5 million, $4 million, and $4
million, respectively. The Company expects that amortization expense
on franchise assets and other intangible assets will be approximately $7 million
annually for each of the next five years. Actual amortization expense
in future periods could differ from these estimates as a result of new
intangible asset acquisitions or divestitures, changes in useful lives and other
relevant factors.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
8.
|
Accounts Payable and Accrued
Expenses
|
Accounts
payable and accrued expenses consist of the following as of December 31, 2008
and 2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$ |
99 |
|
|
$ |
127 |
|
Accrued
capital expenditures
|
|
|
56 |
|
|
|
95 |
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
408 |
|
|
|
418 |
|
Programming
costs
|
|
|
305 |
|
|
|
273 |
|
Franchise
related fees
|
|
|
60 |
|
|
|
66 |
|
Compensation
|
|
|
124 |
|
|
|
116 |
|
Other
|
|
|
258 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,310 |
|
|
$ |
1,332 |
|
Long-term
debt consists of the following as of December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
|
|
Principal
|
|
|
Accreted
|
|
|
Principal
|
|
|
Accreted
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due November 16, 2009
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
49 |
|
|
$ |
49 |
|
6.50%
convertible senior notes due October 1, 2027
|
|
|
479 |
|
|
|
373 |
|
|
|
479 |
|
|
|
353 |
|
Charter
Communications Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior notes due April 1, 2009
|
|
|
53 |
|
|
|
53 |
|
|
|
88 |
|
|
|
88 |
|
10.750%
senior notes due October 1, 2009
|
|
|
4 |
|
|
|
4 |
|
|
|
63 |
|
|
|
63 |
|
9.625%
senior notes due November 15, 2009
|
|
|
25 |
|
|
|
25 |
|
|
|
37 |
|
|
|
37 |
|
10.250%
senior notes due January 15, 2010
|
|
|
1 |
|
|
|
1 |
|
|
|
18 |
|
|
|
18 |
|
11.750%
senior discount notes due January 15, 2010
|
|
|
1 |
|
|
|
1 |
|
|
|
16 |
|
|
|
16 |
|
11.125%
senior notes due January 15, 2011
|
|
|
47 |
|
|
|
47 |
|
|
|
47 |
|
|
|
47 |
|
13.500%
senior discount notes due January 15, 2011
|
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
9.920%
senior discount notes due April 1, 2011
|
|
|
51 |
|
|
|
51 |
|
|
|
51 |
|
|
|
51 |
|
10.000%
senior notes due May 15, 2011
|
|
|
69 |
|
|
|
69 |
|
|
|
69 |
|
|
|
69 |
|
11.750%
senior discount notes due May 15, 2011
|
|
|
54 |
|
|
|
54 |
|
|
|
54 |
|
|
|
54 |
|
12.125%
senior discount notes due January 15, 2012
|
|
|
75 |
|
|
|
75 |
|
|
|
75 |
|
|
|
75 |
|
CCH
I Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due January 15, 2014
|
|
|
151 |
|
|
|
151 |
|
|
|
151 |
|
|
|
151 |
|
13.500%
senior discount notes due January 15, 2014
|
|
|
581 |
|
|
|
581 |
|
|
|
581 |
|
|
|
581 |
|
9.920%
senior discount notes due April 1, 2014
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
10.000%
senior notes due May 15, 2014
|
|
|
299 |
|
|
|
299 |
|
|
|
299 |
|
|
|
299 |
|
11.750%
senior discount notes due May 15, 2014
|
|
|
815 |
|
|
|
815 |
|
|
|
815 |
|
|
|
815 |
|
12.125%
senior discount notes due January 15, 2015
|
|
|
217 |
|
|
|
217 |
|
|
|
217 |
|
|
|
217 |
|
CCH
I, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.000%
senior notes due October 1, 2015
|
|
|
3,987 |
|
|
|
4,072 |
|
|
|
3,987 |
|
|
|
4,083 |
|
CCH
II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due September 15, 2010
|
|
|
1,860 |
|
|
|
1,857 |
|
|
|
2,198 |
|
|
|
2,192 |
|
10.250%
senior notes due October 1, 2013
|
|
|
614 |
|
|
|
598 |
|
|
|
250 |
|
|
|
260 |
|
CCO
Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
3/4% senior notes due November 15, 2013
|
|
|
800 |
|
|
|
796 |
|
|
|
800 |
|
|
|
795 |
|
Credit
facility
|
|
|
350 |
|
|
|
350 |
|
|
|
350 |
|
|
|
350 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Charter
Communications Operating, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
8.000%
senior second-lien notes due April 30, 2012
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
8
3/8% senior second-lien notes due April 30, 2014
|
|
|
770 |
|
|
|
770 |
|
|
|
770 |
|
|
|
770 |
|
10.875%
senior second-lien notes due September 15, 2014
|
|
|
546 |
|
|
|
527 |
|
|
|
-- |
|
|
|
-- |
|
Credit
facilities
|
|
|
8,246 |
|
|
|
8,246 |
|
|
|
6,844 |
|
|
|
6,844 |
|
Total
Debt
|
|
$ |
21,729 |
|
|
$ |
21,666 |
|
|
$ |
19,939 |
|
|
$ |
19,908 |
|
Less:
Current Portion
|
|
|
155 |
|
|
|
155 |
|
|
|
-- |
|
|
|
-- |
|
Long-Term
Debt
|
|
$ |
21,574 |
|
|
$ |
21,511 |
|
|
$ |
19,939 |
|
|
$ |
19,908 |
|
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, the current accreted value for
legal purposes and notes indenture purposes (the amount that is currently
payable if the debt becomes immediately due) is equal to the principal amount of
notes. See Note 29 related to the proposed
restructuring.
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
5.875% convertible senior notes are convertible at any time at the option of the
holder into shares of Class A common stock at an initial conversion rate of
413.2231 shares per $1,000 principal amount of notes, which is equivalent to a
conversion price of approximately $2.42 per share, subject to certain
adjustments. Specifically, the adjustments include anti-dilutive
provisions, which cause adjustments to occur automatically based on the
occurrence of specified events to provide protection rights to holders of the
notes. The conversion rate may also be increased (but not to exceed
462 shares per $1,000 principal amount of notes) upon a specified change of
control transaction. Additionally, Charter may elect to increase the
conversion rate under certain circumstances when deemed appropriate, and subject
to applicable limitations of the NASDAQ Global Select Market. Upon
conversion, the Company shall have the right to deliver, in lieu of shares of
Class A common stock, cash, or a combination of cash and common
stock.
Charter
may redeem the 5.875% convertible senior 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, if any, but only if for any 20 trading days in
any 30 consecutive trading day period the closing price has exceeded 150% of the
conversion price. Holders who convert 5.875% convertible senior notes
that Charter has called for redemption shall receive the present value of the
interest on the notes converted that would have been payable for the period from
the redemption date through the scheduled maturity date for the notes, plus any
accrued interest.
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions,
from a small number of institutional holders, a total of approximately $46
million principal amount of Charter’s 5.875% convertible senior notes due 2009,
for approximately $42 million of cash. The purchased 5.875%
convertible senior notes were cancelled resulting in approximately $3 million
principal amount of such notes remaining outstanding. The
transactions resulted in a gain on extinguishment of debt of approximately $3
million for the year ended December 31, 2008, included in gain (loss) on
extinguishment of debt on the Company’s consolidated statements of
operations.
The 6.50%
convertible senior notes are convertible into Class A common stock at the
conversion rate of 293.3868 shares per $1,000 principal amount of notes which is
equivalent to a conversion price of approximately $3.41 per share, subject to
certain adjustments. The adjustments include anti-dilution
provisions, which cause adjustments to occur automatically based on the
occurrence of specified events. If certain transactions that
constitute a change of control occur on or prior to October 1, 2012, under
certain circumstances, Charter will increase the conversion rate by a number of
additional shares for any conversion of 6.50% convertible senior notes in
connection with such transactions. The conversion rate may also be
increased (but not to exceed 381 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 Global
Select Market. The 6.50% convertible senior notes provide the holders
with the right to require Charter to
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
repurchase
some or all of the 6.50% convertible senior notes for cash on October 1, 2012,
2017, and 2022 at a repurchase price equal to the principal amount plus accrued
interest.
Charter
may redeem the 6.50% convertible senior notes in whole or in part for cash at
any time at a redemption price equal to 100% of the principal amount, plus
accrued and unpaid interest, if any, but only if for any 20 trading days in any
30 consecutive trading day period the closing price has exceeded 180% of the
conversion price provided such 30 trading day period begins prior to October 1,
2010, or 150% of the conversion price provided such 30 trading period begins
thereafter and before October 1, 2012, or at the redemption price regardless of
the closing price of Charter’s Class A common stock
thereafter. Holders who convert any 6.50% convertible senior notes
prior to October 1, 2012 that Charter has called for redemption shall receive
the present value of the interest on the notes converted that would have been
payable for the period from the redemption date to, but excluding, October 1,
2012.
Certain
provisions of the Company’s 6.50% convertible senior notes issued in October
2007 were considered embedded derivatives for accounting purposes and were
required to be separately accounted for from the convertible senior notes.
At the time of issuance, the embedded derivative was valued at approximately
$131 million which was bifurcated from the principal amount of the convertible
senior notes and recorded in other long-term liabilities. The convertible
senior notes will accrete to face value over five years (the date holders can
first require Charter to repurchase the notes) and the embedded derivative will
be marked to market with gains or losses recorded as the change in value of
derivatives on the Company’s consolidated statement of
operations.
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.
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 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 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 2008 through 2010.
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 the
second quarter of 2008, Charter Holdco repurchased, in private transactions from
a small number of institutional holders, a total of approximately $35 million
principal amount of various Charter Holdings notes due 2009 and 2010 for
approximately $35 million of cash. Charter Holdco continues to hold
the Charter Holdings notes. The transactions resulted in a gain on
extinguishment of debt of approximately $1 million for the year ended December
31, 2008, included in gain (loss) on extinguishment of debt on the Company’s
consolidated statements of operations.
In
October 2008, Charter Holdco completed a tender offer, in which a total of
approximately $102 million principal amount of various Charter Holdings notes
due 2009 and 2010 were exchanged for approximately $99 million of
cash. Charter Holdco continues to hold the Charter Holdings
notes. The transactions resulted in a gain on extinguishment of debt
of approximately $2 million for the year ended December 31, 2008, included in
gain (loss) on extinguishment of debt on the Company’s consolidated statements
of operations.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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.
The CIH
notes may be redeemed at any time 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 generally 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.
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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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.
In July
2008, CCH II completed a tender offer, in which $338 million of CCH II’s 10.25%
senior notes due 2010 were accepted for $364 million of CCH II’s 10.25% senior
notes due 2013, which were issued as part of the same series of notes as CCH
II’s $250 million aggregate principal amount of 10.25% senior notes due 2013,
which were issued in September 2006. The transactions resulted in a
loss on extinguishment of debt of approximately $4 million for the year ended
December 31, 2008, included in gain (loss) on extinguishment of debt on the
Company’s consolidated statements of operations.
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.
In the
event of specified change of control events, CCO Holdings must offer to purchase
the outstanding CCO Holdings senior notes from the holders at a purchase price
equal to 101% of the total principal amount of the notes, plus any accrued and
unpaid interest.
Charter Operating
Notes
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, 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 an
8% senior second-lien note 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 March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014, guaranteed by CCO Holdings and certain other
subsidiaries of Charter Operating, in a private transaction. Net
proceeds from the senior second-lien notes were used to reduce borrowings, but
not commitments, under the revolving portion of the Charter Operating credit
facilities.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
The
Charter Operating 10.875% senior second-lien notes may be redeemed at the option
of Charter Operating on or after varying dates, in each case at a premium, 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 10.875% senior second-lien note due 2014 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. The Charter Operating 10.875% senior second-lien notes may be
redeemed at any time on or after March 15, 2012 at specified
prices. In the event of specified change of control events, Charter
Operating must offer to purchase the Charter Operating 10.875% senior
second-lien 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.
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;
|
|
·
|
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
|
CCO
Holdings Credit Facility
The CCO
Holdings credit facility consists of a $350 million term loan. The
term loan matures on September 6, 2014. The CCO Holdings credit
facility also allows the Company to enter into incremental term loans in the
future, maturing on the dates set forth in the notices establishing such term
loans, but no earlier than the maturity date of the existing term
loans. However, no assurance can be given that the Company could
obtain such incremental term loans if CCO Holdings sought to do
so. Borrowings under the CCO Holdings credit facility bear interest
at a variable interest rate based on either LIBOR or a base rate plus, in either
case, an applicable margin. The applicable margin for LIBOR term
loans, other than incremental loans, is 2.50% above LIBOR. The
applicable margin with respect to the incremental loans is to be agreed upon by
CCO Holdings and the lenders when the incremental loans are
established. The CCO Holdings credit facility is secured by the
equity interests of Charter Operating, and all proceeds thereof.
Charter
Operating Credit Facilities
The
Charter Operating credit facilities provide borrowing availability of up to $8.0
billion as follows:
·
|
a
term loan with an initial total principal amount of $6.5 billion, which is
repayable in equal quarterly installments, commencing March 31, 2008, and
aggregating in each loan year to 1% of the original amount of the term
loan, with the remaining balance due at final maturity on March 6, 2014;
and
|
·
|
a
revolving line of credit of $1.5 billion, with a maturity date on
March 6, 2013.
|
The
Charter Operating credit facilities also allow the Company to enter into
incremental term loans in the future with an aggregate amount of up to $1.0
billion, with amortization as set forth in the notices establishing such term
loans, but with no amortization greater than 1% prior to the final maturity of
the existing term loan. In March 2008, Charter
Operating borrowed $500 million principal amount of incremental term loans (the
“Incremental Term
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Loans”)
under the Charter Operating credit facilities. The Incremental Term Loans have a
final maturity of March 6, 2014 and prior to this date will amortize in
quarterly principal installments totaling 1% annually beginning on June 30,
2008. The Incremental Term Loans bear interest at LIBOR plus 5.0%, with a
LIBOR floor of 3.5%, and are otherwise governed by and subject to the existing
terms of the Charter Operating credit facilities. Net proceeds from the
Incremental Term Loans were used for general corporate purposes. Although the
Charter Operating credit facilities allow for the incurrence of up to an
additional $500 million in incremental term loans, no assurance can be given
that additional incremental term loans could be obtained in the future if
Charter Operating sought to do so especially after the announcement of Charter’s
plan to file a Chapter 11 bankruptcy proceeding on or before April 1,
2009. See Note 29.
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate (1.46% to
3.50% as of December 31, 2008 and 4.87% to 5.24% as of December 31, 2007), as
defined, plus a margin for Eurodollar loans of up to 2.00% for the revolving
credit facility and 2.00% for the term loan, and quarterly commitment fee of
0.5% per annum is payable on the average daily unborrowed balance of the
revolving credit 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 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 or any of Charter Operating’s subsidiaries, as well
as intercompany obligations owing to it by any of such
entities.
As of
December 31, 2008, outstanding borrowings under the Charter Operating credit
facilities were approximately $8.2 billion and the unused total potential
availability was approximately $27 million.
Credit Facilities
— Restrictive Covenants
Charter
Operating Credit Facilities
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 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 Charter Holdings notes, the CIH notes, the CCH I notes, the CCH II
notes, the CCO Holdings notes, the CCO Holdings credit facility, 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, 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 the Company’s 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 for Charter Operating
with an unqualified opinion from the Company’s independent accountants
and without a “going concern” or like qualification or
exception.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
|
·
|
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
$100 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, and
|
|
·
|
Charter
Operating ceasing to be a wholly-owned direct subsidiary of CCO Holdings,
except in certain very limited
circumstances.
|
CCO
Holdings Credit Facility
The CCO
Holdings credit facility contains covenants that are substantially similar to
the restrictive covenants for the CCO Holdings notes. The CCO
Holdings credit facility contains 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 CCO Holdings credit facility permits CCO Holdings and
its subsidiaries to make distributions to pay interest on the Charter
convertible senior 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 CCO Holdings credit facility.
Based
upon outstanding indebtedness as of December 31, 2008, 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, 2008, are as follows:
Year
|
|
Amount
|
|
|
|
|
|
2009
|
|
$ |
155 |
|
2010
|
|
|
1,932 |
|
2011
|
|
|
351 |
|
2012
|
|
|
1,724 |
|
2013
|
|
|
2,799 |
|
Thereafter
|
|
|
14,768 |
|
|
|
|
|
|
|
|
$ |
21,729 |
|
10.
|
Note
Payable – Related
Party
|
In
October 2005, CCHC issued a subordinated exchangeable note (the “CCHC Note”) to
CII. The CCHC Note has a 15-year maturity. The CCHC Note
has an initial accreted value of $48 million accreting at 14% compounded
quarterly, except that from and after February 28, 2009, CCHC may pay any
increase in the accreted value of the CCHC 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 March 1, 2009, if the closing
price of Charter common stock is at or above the Exchange Rate for 20 trading
days within any 30
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
consecutive
trading day period, 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 from
and after February 28, 2009 for cash in an amount equal to the then accreted
value. CCHC has the right to redeem the CCHC Note upon certain change
of control events for cash in an amount equal to the then accreted value, such
amount, if redeemed prior to February 28, 2009, would also include a make whole
up to the accreted value through February 28, 2009. CCHC must redeem
the CCHC Note at its maturity for cash in an amount equal to the initial stated
value plus the accreted return through maturity. The accreted value
of the CCHC Note as of December 31, 2008 and 2007 is $75 million and $65
million, respectively. If not redeemed prior to maturity in 2020,
$380 million would be due under this note. See Note 29.
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 $482
million and $528 million at December 31, 2008 and 2007, respectively, of mirror
notes payable by Charter Holdco to Charter, and which have the same principal
amount and terms as those of Charter’s 5.875% and 6.50% convertible senior
notes. Minority interest on the Company’s consolidated balance sheets
as of December 31, 2008 and 2007 represents Mr. Paul G. Allen’s, Charter’s
chairman and controlling shareholder, 5.6% preferred membership interests in CC
VIII, an indirect subsidiary of Charter Holdco, of $203 million and $199
million, respectively.
Minority
interest historically included the portion of Charter Holdco’s member’s equity
not owned by Charter. However, members’ deficit of Charter Holdco was
$10.1 billion, $7.3 billion, and $5.9 billion as of December 31, 2008, 2007, and
2006, respectively, thus minority interest in Charter Holdco has been
eliminated. Minority ownership, for accounting purposes, was 47%,
48%, and 48% as of December 31, 2008, 2007, and 2006,
respectively. Because minority interest in Charter Holdco is
substantially eliminated, Charter absorbs all losses of Charter
Holdco. On January 1, 2009, Charter will adopt SFAS No. 160 which
requires losses to be allocated to non-controlling (minority) interests even
when such amounts are deficits. As such, future losses will be allocated between
Charter and the non-controlling interest. Changes to minority
interest consist of the following for the periods presented:
|
|
Minority
|
|
|
|
Interest
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
$ |
188 |
|
Minority
interest in income of subsidiary
|
|
|
4 |
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
192 |
|
Minority
interest in income of subsidiary
|
|
|
7 |
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
199 |
|
Minority
interest in income of subsidiary
|
|
|
4 |
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
$ |
203 |
|
12.
|
Preferred Stock –
Redeemable
|
In August
2008, Charter entered into exchange agreements with each of the four holders
(the "Holders") of Charter’s Series A Convertible Redeemable Preferred Stock
("Preferred Stock"). Pursuant to the exchange agreements, the Holders
exchanged 36,713 shares of Preferred Stock having a liquidation preference of
approximately $5 million for approximately 4.7 million shares of Charter’s Class
A Common Stock ("Common Stock") based on the closing price of the Common Stock
on August 25, 2008. The shares of Preferred Stock were cancelled by
Charter and no shares of Preferred Stock remain outstanding as of December 31,
2008.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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.
The
following table summarizes our share activity for the three years ended December
31, 2008:
|
|
Class
A
|
|
|
Class
B
|
|
|
|
Common
|
|
|
Common
|
|
|
|
Stock
|
|
|
Stock
|
|
|
|
|
|
|
|
|
BALANCE,
January 1, 2006
|
|
|
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 |
|
Option
exercises
|
|
|
2,724,271 |
|
|
|
-- |
|
Restricted
stock issuances, net of cancellations
|
|
|
2,507,612 |
|
|
|
-- |
|
Returns
pursuant to share lending agreement
|
|
|
(15,000,000 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
|
398,226,468 |
|
|
|
50,000 |
|
Option
exercises and performance share vesting
|
|
|
1,616,906 |
|
|
|
-- |
|
Restricted
stock issuances, net of cancellations
|
|
|
10,194,534 |
|
|
|
-- |
|
Issuances
in exchange for preferred shares
|
|
|
4,699,986 |
|
|
|
-- |
|
Returns
pursuant to share lending agreement
|
|
|
(3,000,000 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008
|
|
|
411,737,894 |
|
|
|
50,000 |
|
Charter
issued 45 million shares of Class A Common Stock in September 2006 in connection
with the Charter, CCHC and CCH II exchange.
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, 2008, 95.1 million shares had
been returned under the share lending agreement.
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. In connection with the tender offer completed in October 2007
in which Charter exchanged certain of the 5.875% convertible senior notes due
2009 for 6.5% convertible senior notes due 2027, Charter amended the share
lending agreement to allow for the borrowed shares to remain outstanding through
the maturity of the new convertible notes.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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 21.8 million
loaned shares outstanding is approximately $2 million as of December 31,
2008. 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 issued.
In August
2007, Charter’s board of directors adopted a rights plan and declared a dividend
of one preferred share purchase right for each issued and outstanding share of
Charter’s Class A common stock and Class B common stock (a “Right”). The
dividend was payable to stockholders of record as of August 31, 2007 and
403,219,728 Rights were issued. In connection with the adoption of the rights
plan, the Company increased the authorized Class A common stock and Class B
common stock to 10.5 billion and 4.5 billion shares, respectively. The
terms of the Rights and rights plan were set forth in a Rights Agreement, by and
between Charter and Mellon Investor Services LLC, dated as of August 14, 2007
(the “Rights Plan” or “Rights Agreement”).
The
Rights Plan was adopted in an attempt to protect against a possible limitation
on Charter’s ability to use its net operating loss carryforwards, which could
significantly impair the value of that asset. See Note 22. The
Rights Plan is intended to act as a deterrent to any person or group from
acquiring 5.0% or more of Charter’s Class A common stock or any person or group
holding 5.0% or more of Charter’s Class A common stock (“Acquiring Person”) from
acquiring more shares without the approval of Charter’s board of
directors. The Rights will not be exercisable until 10 days after a
public announcement by Charter that a person or group has become an Acquiring
Person. Upon such a triggering event, except as may be determined by
Charter’s board of directors, with the consent of the holders of the majority of
the Class B common stock, all outstanding, valid, and exercisable Rights, except
for those Rights held by any Acquiring Person, will be exchanged for 2.5 shares
of Class A common stock and/or Class B common stock, as applicable, or an
equivalent security. If Charter’s board of directors and holders of the
Class B common stock determine that such an exchange does not occur upon such a
triggering event, all holders of Rights, except any Acquiring Person, may
exercise their Rights upon payment of the purchase price to purchase five shares
of Charter’s Class A common stock and/or Class B common stock, as applicable (or
other securities or assets as determined by Charter’s board of directors) at a
50% discount to the then current market price. The Rights and Rights
Agreement will expire on December 31, 2009, if not terminated
earlier.
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. Comprehensive loss for the years ended December 31, 2008,
2007, and 2006 was $2.6 billion, $1.7 billion, and $1.4 billion,
respectively.
16.
|
Accounting for Derivative Instruments and Hedging
Activities
|
The
Company uses interest rate swap agreements to manage its interest costs and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, the Company
agrees to exchange, at specified intervals through 2013, the difference between
fixed and variable interest amounts calculated by reference to agreed-upon
notional principal amounts. At the banks’ option, certain interest
rate swap agreements may be extended through 2014.
The
Company’s hedging policy does not permit it to hold or issue derivative
instruments for speculative 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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, 2008, 2007, and 2006,
change in value of derivatives includes gains of $0, $0, and $2 million,
respectively, which represent cash flow hedge ineffectiveness on interest rate
hedge agreements. This ineffectiveness arises from differences
between critical terms of the agreements and the related hedged
obligations.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria specified by SFAS No. 133
are reported in accumulated other comprehensive loss. For the years
ended December 31, 2008, 2007, and 2006, losses of $180 million, $123 million
and $1 million, respectively, related to derivative instruments designated as
cash flow hedges, were recorded in accumulated other comprehensive
loss. The amounts are subsequently reclassified as an increase or
decrease to interest expense in the same periods in which the related interest
on the floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS
No. 133. However, management believes such instruments are
closely correlated with the respective debt, thus managing associated
risk. Interest rate derivative instruments not designated as hedges
are marked to fair value, with the impact recorded as a change in value of
derivatives in the Company’s consolidated statements of
operations. For the years ended December 31, 2008, 2007, and
2006, change in value of derivatives includes losses of $62 million and $46
million and gains of $4 million, respectively, resulting from interest rate
derivative instruments not designated as hedges.
As of
December 31, 2008, 2007, and 2006, the Company had outstanding $4.3
billion, $4.3 billion, and $1.7 billion, in notional amounts of interest rate
swaps outstanding. The notional amounts of interest rate instruments
do not represent amounts exchanged by the parties and, thus, are not a measure
of exposure to credit loss. The amounts exchanged are determined by
reference to the notional amount and the other terms of the
contracts.
17.
|
Fair Value of Financial
Instruments |
The
Company has estimated the fair value of its financial instruments as of
December 31, 2008 and 2007 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 fair
value of interest rate agreements represents the estimated amount the Company
would receive or pay upon termination of the agreements adjusted for Charter
Operating’s credit risk. 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 at December 31, 2008 and 2007
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, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
A summary
of the carrying value and fair value of the Company’s debt at December 31,
2008 and 2007 is as follows:
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
convertible notes
|
|
$ |
376 |
|
|
$ |
12 |
|
|
$ |
402 |
|
|
$ |
332 |
|
Charter
Holdings debt
|
|
|
440 |
|
|
|
159 |
|
|
|
578 |
|
|
|
471 |
|
CIH
debt
|
|
|
2,534 |
|
|
|
127 |
|
|
|
2,534 |
|
|
|
1,627 |
|
CCH
I debt
|
|
|
4,072 |
|
|
|
658 |
|
|
|
4,083 |
|
|
|
3,225 |
|
CCH
II debt
|
|
|
2,455 |
|
|
|
1,051 |
|
|
|
2,452 |
|
|
|
2,390 |
|
CCO
Holdings debt
|
|
|
796 |
|
|
|
505 |
|
|
|
795 |
|
|
|
761 |
|
Charter
Operating debt
|
|
|
2,397 |
|
|
|
1,923 |
|
|
|
1,870 |
|
|
|
1,807 |
|
Credit
facilities
|
|
|
8,596 |
|
|
|
6,187 |
|
|
|
7,194 |
|
|
|
6,723 |
|
The
Company adopted SFAS No. 157, Fair Value Measurements, on
its financial assets and liabilities effective January 1, 2008, and has an
established process for determining fair value. The Company has
deferred adoption of SFAS No. 157 on its nonfinancial assets and liabilities
including fair value measurements under SFAS No. 142 and SFAS No. 144 of
franchises, goodwill, property, plant, and equipment, and other long-term assets
until January 1, 2009 as permitted by FASB Staff Position (“FSP”)
157-2. Fair value is based upon quoted market prices, where
available. If such valuation methods are not available, fair value is
based on internally or externally developed models using market-based or
independently-sourced market parameters, where available. Fair value
may be subsequently adjusted to ensure that those assets and liabilities are
recorded at fair value. The Company’s methodology may produce a fair
value that may not be indicative of net realizable value or reflective of future
fair values, but the Company believes its methods are appropriate and consistent
with other market peers. The use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different fair value estimate as of the Company’s reporting
date.
SFAS No.
157 establishes a three-level hierarchy for disclosure of fair value
measurements, based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date, as follows:
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Interest
rate derivatives are valued using a present value calculation based on an
implied forward LIBOR curve (adjusted for Charter Operating’s credit risk) and
are classified within level 2 of the valuation hierarchy. The fair
values of the embedded derivatives within Charter’s 5.875% and 6.50% convertible
senior notes issued in November 2004 and October 2007, respectively, are derived
from valuations using a simulation technique with market based inputs, including
Charter’s Class A common stock price, implied volatility of Charter’s Class A
common stock, Charter’s credit risk and costs to borrow Charter’s Class A common
stock. These valuations are classified within level 3 of the
valuation hierarchy.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
The
Company’s financial liabilities that are accounted for at fair value on a
recurring basis are presented in the table below:
|
|
Fair
Value As of December 31, 2008
|
|
|
Fair
Value As of December 31, 2007
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
$ |
-- |
|
|
$ |
411 |
|
|
$ |
-- |
|
|
$ |
411 |
|
|
$ |
-- |
|
|
$ |
169 |
|
|
$ |
-- |
|
|
$ |
169 |
|
Embedded
derivatives
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
33 |
|
|
|
33 |
|
|
|
$ |
-- |
|
|
$ |
411 |
|
|
$ |
-- |
|
|
$ |
411 |
|
|
$ |
-- |
|
|
$ |
169 |
|
|
$ |
33 |
|
|
$ |
202 |
|
The
weighted average interest pay rate for the Company’s interest rate swap
agreements was 4.93% and 4.93% at December 31, 2008 and 2007,
respectively.
18.
|
Other Operating (Income) Expenses,
Net |
Other
operating (income) expenses, net consist of the following for the years
presented:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)
loss on sale of assets, net
|
|
$ |
13 |
|
|
$ |
(3 |
) |
|
$ |
8 |
|
Special
charges, net
|
|
|
56 |
|
|
|
(14 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69 |
|
|
$ |
(17 |
) |
|
$ |
21 |
|
(Gain)
loss on sale of assets, net
(Gain)
loss on sale of assets represents the (gain) loss recognized on the sale of
fixed assets and cable systems.
Special
charges, net
Special
charges, net for the year ended December 31, 2008 includes severance charges and
litigation related items, including settlement costs associated with the Sjoblom litigation (see Note
24), offset by favorable insurance settlements related to hurricane Katrina
claims. Special charges, net for the year ended December 31, 2007,
primarily represents favorable legal settlements of approximately $20 million
offset by severance associated with the closing of call centers and divisional
restructuring. Special charges, net for the year ended December 31,
2006 primarily represent severance associated with the closing of call centers
and divisional restructuring.
19.
|
Gain (Loss) on Extinguishment of
Debt |
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Holdings debt notes repurchases / exchanges
|
|
$ |
3 |
|
|
$ |
(3 |
) |
|
$ |
108 |
|
CCO
Holdings notes redemption
|
|
|
-- |
|
|
|
(19 |
) |
|
|
-- |
|
Charter
Operating credit facilities refinancing
|
|
|
-- |
|
|
|
(13 |
) |
|
|
(27 |
) |
Charter
convertible note repurchases / exchanges
|
|
|
3 |
|
|
|
(113 |
) |
|
|
20 |
|
CCH
II tender offer
|
|
|
(4 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
$ |
(148 |
) |
|
$ |
101 |
|
See Note
9 for discussion of 2008 debt transactions.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
In
October 2007, Charter Holdco completed a tender offer in which $364 million of
Charter’s 5.875% convertible senior notes due 2009 were accepted for $479
million of Charter’s 6.50% convertible senior notes due 2027. The
tender offer resulted in a loss on extinguishment of debt of approximately $113
million for the year ended December 31, 2007, included in gain (loss) on
extinguishment of debt on the Company’s consolidated statements of
operations.
In April
2007, Charter Holdings completed a tender offer in which $97 million of Charter
Holdings’ notes were accepted in exchange for $100 million of total
consideration, including premiums and accrued interest. In addition,
Charter Holdings redeemed $187 million of its 8.625% senior notes due April 1,
2009 and CCO Holdings redeemed $550 million of its senior floating rate notes
due December 15, 2010. These redemptions closed in April
2007. The redemptions and tender resulted in a loss on extinguishment
of debt for the CCH transactions and the CCOH transaction of approximately $3
million and $19 million, respectively, for the year ended December 31, 2007,
included in gain (loss) on extinguishment of debt on the Company’s consolidated
statements of operations.
In March
2007, Charter Operating refinanced its facilities resulting in a loss on
extinguishment of debt for the year ended December 31, 2007 of approximately $13
million included in gain (loss) on extinguishment of debt on the Company’s
consolidated statements of operations.
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 resulted in a gain on extinguishment of debt of approximately $108
million for the year ended December 31, 2006.
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 held by CCHC,
were transferred to Charter Holdco in August 2007, and subsequently cancelled in
November 2007. The exchange resulted in a gain on extinguishment of
debt of approximately $20 million for the year ended December 31,
2006.
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 for the year ended December 31, 2006 of approximately $27
million.
20.
|
Other
Income (Expense),
Net |
Other
income (expense), net consists of the following for years
presented:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest (Note 11)
|
|
$ |
(4 |
) |
|
$ |
(7 |
) |
|
$ |
(4 |
) |
Gain
(loss) on investment
|
|
|
(1 |
) |
|
|
-- |
|
|
|
16 |
|
Other,
net
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10 |
) |
|
$ |
(8 |
) |
|
$ |
14 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
21.
|
Stock Compensation
Plans |
The
Company has stock compensation 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 (shares of restricted stock not to exceed 20.0
million shares of Charter Class A common stock), as each term is defined in the
Plans. Employees, officers, consultants and directors of the Company
and its subsidiaries and affiliates are eligible to receive grants under the
Plans. The 2001 Stock Incentive Plan allows for the issuance of up to
a total of 90.0 million shares of Charter Class A common stock (or units
convertible into Charter Class A common stock).
Under
Charter's Long-Term Incentive Program (“LTIP”), a program administered under the
2001 Stock Incentive Plan, employees of Charter and its subsidiaries whose pay
classifications exceeded a
certain level were eligible in 2006 and 2007 to receive stock options, and more
senior level employees were eligible to receive stock options and performance
units. The stock options vest 25% on each of the first four
anniversaries of the date of grant. Generally, options expire
10 years from the grant date. The performance units became
performance shares on or about the first anniversary of the grant date,
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. The performance shares become shares of Class
A common stock on the third anniversary of the grant date of the performance
units. In March 2008, the Company adopted the 2008 incentive program
to allow for the issuance of performance units and restricted stock under the
2001 Stock Incentive Plan and for the issuance of performance
cash. Under the 2008 incentive program, subject to meeting
performance criteria, performance units and performance cash are deposited into
a performance bank of which one-third of the balance is paid out each
year. Restricted stock granted under this program vests annually over
a three-year period beginning from the date of grant. During the year
ended December 31, 2008, Charter granted $8 million of performance cash under
Charter’s 2008 incentive program and recognized $2 million of expense for the
year ended December 31, 2008.
A summary
of the activity for the Company’s stock options for the years ended
December 31, 2008, 2007, and 2006, is as follows (amounts in thousands,
except per share data):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
25,682 |
|
|
$ |
4.02 |
|
|
|
26,403 |
|
|
$ |
3.88 |
|
|
|
29,127 |
|
|
$ |
4.47 |
|
Granted
|
|
|
45 |
|
|
|
1.19 |
|
|
|
4,549 |
|
|
|
2.77 |
|
|
|
6,065 |
|
|
|
1.28 |
|
Exercised
|
|
|
(53 |
) |
|
|
1.18 |
|
|
|
(2,759 |
) |
|
|
1.57 |
|
|
|
(1,049 |
) |
|
|
1.41 |
|
Cancelled
|
|
|
(3,630 |
) |
|
|
5.27 |
|
|
|
(2,511 |
) |
|
|
2.98 |
|
|
|
(7,740 |
) |
|
|
4.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
22,044 |
|
|
$ |
3.82 |
|
|
|
25,682 |
|
|
$ |
4.02 |
|
|
|
26,403 |
|
|
$ |
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining contractual life
|
|
6
years
|
|
|
|
|
|
|
7
years
|
|
|
|
|
|
|
8
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, end of period
|
|
|
15,787 |
|
|
$ |
4.53 |
|
|
|
13,119 |
|
|
$ |
5.88 |
|
|
|
10,984 |
|
|
$ |
6.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$ |
0.90 |
|
|
|
|
|
|
$ |
1.86 |
|
|
|
|
|
|
$ |
0.96 |
|
|
|
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2008 (amounts in thousands, except per share
data):
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.00
|
|
—
|
|
$
|
1.36
|
|
8,278
|
|
7
years
|
|
|
1.17
|
|
5,528
|
|
7
years
|
|
|
1.17
|
$
|
1.53
|
|
—
|
|
$
|
1.96
|
|
2,821
|
|
6
years
|
|
|
1.55
|
|
2,178
|
|
6
years
|
|
|
1.55
|
$
|
2.66
|
|
—
|
|
$
|
3.35
|
|
4,981
|
|
7
years
|
|
|
2.89
|
|
2,229
|
|
6
years
|
|
|
2.92
|
$
|
4.30
|
|
—
|
|
$
|
5.17
|
|
3,566
|
|
5
years
|
|
|
5.00
|
|
3,454
|
|
5
years
|
|
|
5.02
|
$
|
9.13
|
|
—
|
|
$
|
12.27
|
|
1,008
|
|
3
years
|
|
|
11.19
|
|
1,008
|
|
3
years
|
|
|
11.19
|
$
|
13.96
|
|
—
|
|
$
|
20.73
|
|
1,168
|
|
1
year
|
|
|
18.41
|
|
1,168
|
|
1
year
|
|
|
18.41
|
$
|
21.20
|
|
—
|
|
$
|
23.09
|
|
222
|
|
2
years
|
|
|
22.86
|
|
222
|
|
2
years
|
|
|
22.86
|
A summary
of the activity for the Company’s restricted Class A common stock for the years
ended December 31, 2008, 2007, and 2006, is as follows (amounts in
thousands, except per share data):
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Grant
|
|
|
|
Grant
|
|
|
|
Grant
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
4,112
|
|
$
|
2.87
|
|
|
3,033
|
|
$
|
1.96
|
|
|
4,713
|
|
$
|
2.08
|
Granted
|
|
|
10,761
|
|
|
0.85
|
|
|
2,753
|
|
|
3.64
|
|
|
906
|
|
|
1.28
|
Vested
|
|
|
(2,298)
|
|
|
2.36
|
|
|
(1,208)
|
|
|
1.83
|
|
|
(2,278)
|
|
|
1.62
|
Cancelled
|
|
|
(566)
|
|
|
1.57
|
|
|
(466)
|
|
|
4.37
|
|
|
(308)
|
|
|
4.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
12,009
|
|
$
|
1.21
|
|
|
4,112
|
|
$
|
2.87
|
|
|
3,033
|
|
$
|
1.96
|
A summary
of the activity for the Company’s performance units and shares for the years
ended December 31, 2008, 2007, and 2006, is as follows (amounts in
thousands, except per share data):
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Grant
|
|
|
|
Grant
|
|
|
|
Grant
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of period
|
|
|
28,013
|
|
$
|
2.16
|
|
|
15,206
|
|
$
|
1.27
|
|
|
5,670
|
|
$
|
3.09
|
Granted
|
|
|
10,137
|
|
|
0.84
|
|
|
14,797
|
|
|
2.95
|
|
|
13,745
|
|
|
1.22
|
Vested
|
|
|
(1,562)
|
|
|
1.49
|
|
|
(41)
|
|
|
1.23
|
|
|
--
|
|
|
--
|
Cancelled
|
|
|
(3,551)
|
|
|
2.08
|
|
|
(1,949)
|
|
|
1.51
|
|
|
(4,209)
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
33,037
|
|
$
|
1.80
|
|
|
28,013
|
|
$
|
2.
16
|
|
|
15,206
|
|
$
|
1.27
|
As of
December 31, 2008, deferred compensation remaining to be recognized in future
periods totaled $41 million.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
In the
first quarter of 2009, the majority of restricted stock and performance units
and shares were forfeited, and the remaining will be cancelled in connection
with the Proposed Restructuring. See Note 29.
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are
generally limited liability companies that are not subject to income
tax. However, certain of these limited liability companies are
subject to state income tax. In addition, the subsidiaries that are
corporations are subject to federal and state income tax. All of the
remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, CII, and 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 investment 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. 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 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 in excess of the amount of tax losses that would have
been allocated to Charter had the Regulatory Allocations not been part of the
LLC Agreement through the year ended December 31, 2008 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
proportion
to their respective percentage ownership of Charter Holdco common membership
units. The cumulative amount of such excess losses was approximately
$1.0 billion through December 31, 2008.
In
certain situations, the Special Loss Allocations, Special Profit Allocations,
Regulatory Allocations and Curative Allocation Provisions described above could
result in Charter paying taxes in an amount that is more or less than if Charter
Holdco had allocated net tax profits and net tax losses among its members based
generally on the number of common membership units owned by such
members. This could occur due to differences in (i) the
character of the allocated income (e.g., ordinary versus capital), (ii) the
allocated amount and timing of tax depreciation and tax amortization expense due
to the application of section 704(c) under the Internal Revenue Code,
(iii) the potential interaction between the Special Profit Allocations and
the Curative Allocation Provisions, (iv) the amount and timing of alternative
minimum taxes paid by Charter, if any, (v) the apportionment of the
allocated income or loss among the states in which Charter Holdco does business,
and (vi) future federal and state tax laws. Further, in the
event of new capital contributions to Charter Holdco, it is possible that the
tax effects of the Special Profit Allocations, Special Loss Allocations,
Regulatory Allocations and Curative Allocation Provisions will change
significantly pursuant to the provisions of the income tax regulations or the
terms of a contribution agreement with respect to such
contribution. Such change could defer the actual tax benefits to be
derived by Charter with respect to the net tax losses allocated to it or
accelerate the actual taxable income to Charter with respect to the net tax
profits allocated to it. As a result, it is possible under certain
circumstances, that Charter could receive future allocations of taxable income
in excess of its currently allocated tax deductions and available tax loss
carryforwards. The ability to utilize net operating loss
carryforwards is potentially subject to certain limitations as discussed
below.
In
addition, under their exchange agreement with Charter, Vulcan Cable and CII have
the right at any time 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, 2008, 2007, and 2006, 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. The tax provision in future periods will vary based on
current and future temporary differences, as well as future operating
results.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Current
and deferred income tax benefit (expense) is as follows:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
expense:
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
$ |
(2 |
) |
|
$ |
(3 |
) |
|
$ |
(2 |
) |
State
income taxes
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
income tax expense
|
|
|
(4 |
) |
|
|
(11 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
95 |
|
|
|
(188 |
) |
|
|
(177 |
) |
State
income taxes
|
|
|
12 |
|
|
|
(10 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax benefit (expense)
|
|
|
107 |
|
|
|
(198 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income benefit (expense)
|
|
$ |
103 |
|
|
$ |
(209 |
) |
|
$ |
(209 |
) |
Income
tax benefit for the year ended December 31, 2008 included $325 million of
deferred tax benefit related to the impairment of franchises. A
portion of income tax expense was recorded as a reduction of income (loss) from
discontinued operations in the year ended December 31, 2006. 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
5.9%, 5.3%, and 5% for the years ended December 31, 2008, 2007, and 2006,
respectively, as follows:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income taxes
|
|
$ |
894 |
|
|
$ |
493 |
|
|
$ |
407 |
|
Statutory
state income taxes, net
|
|
|
151 |
|
|
|
74 |
|
|
|
58 |
|
Franchises
|
|
|
107 |
|
|
|
(198 |
) |
|
|
(202 |
) |
Valuation
allowance provided and other
|
|
|
(1,049 |
) |
|
|
(578 |
) |
|
|
(472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|
(209 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
discontinued operations
|
|
|
-- |
|
|
|
-- |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
$ |
103 |
|
|
$ |
(209 |
) |
|
$ |
(187 |
) |
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(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, 2008 and
2007 which are included in long-term liabilities are presented
below.
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$ |
3,379 |
|
|
$ |
3,155 |
|
Investment
in Charter Holdco
|
|
|
2,594 |
|
|
|
1,888 |
|
Other
|
|
|
43 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
6,016 |
|
|
|
5,062 |
|
Less:
valuation allowance
|
|
|
(5,803 |
) |
|
|
(4,786 |
) |
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$ |
213 |
|
|
$ |
276 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Investment
in Charter Holdco
|
|
$ |
(579 |
) |
|
$ |
(707 |
) |
Indirect
Corporate Subsidiaries:
|
|
|
|
|
|
|
|
|
Property,
plant & equipment
|
|
|
(23 |
) |
|
|
(29 |
) |
Franchises
|
|
|
(169 |
) |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
(771 |
) |
|
|
(941 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$ |
(558 |
) |
|
$ |
(665 |
) |
As of
December 31, 2008, the Company had deferred tax assets of $6.0 billion,
which included $2.6 billion of financial losses in excess of tax losses
allocated to Charter from Charter Holdco. The deferred tax assets
also included $3.4 billion of tax net operating loss carryforwards (generally
expiring in years 2009 through 2028) of Charter and its indirect
subsidiaries. Valuation allowances of $5.8 billion exist with respect
to these deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. Because of the uncertainties in projecting future taxable
income of Charter Holdco, valuation allowances have been established except for
deferred benefits available to offset certain deferred tax liabilities that will
reverse over time.
The
amount of any benefit from the Company’s tax net operating losses is dependent
on: (1) Charter and its subsidiaries’ ability to generate future
taxable income and (2) the unexpired amount of net operating loss carryforwards
available to offset amounts payable on such taxable income. Any
future “ownership changes” of Charter's common stock, such as that which will
occur upon emergence from Chapter 11 bankruptcy, would place limitations, on an
annual basis, on the use of such net operating losses to offset any future
taxable income the Company may generate and will be reduced by the amount of any
cancellation of debt income resulting from the Proposed Restructuring that is
allocable to Charter. See Note 29. Such limitations, in
conjunction with the net operating loss expiration provisions, could reduce the
Company’s ability to use a substantial portion of its net operating losses to
offset future taxable income.
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.
No tax
years for Charter or Charter Holdco are currently under examination by the
Internal Revenue Service. Tax years ending 2006 and 2007 remain subject to
examination.
In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
not” that
the position is sustainable based on its technical merits. The
Company does not believe it has taken any significant positions that would not
meet the “more likely than not” criteria and require disclosure.
23.
|
Related Party
Transactions |
The
following sets forth certain transactions in which the Company and the
directors, executive officers, and affiliates of the Company are
involved. Unless otherwise disclosed, management believes each of the
transactions described below was on terms no less favorable to the Company than
could have been obtained from independent third parties.
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 2008, 2007, and 2006, Charter Holdco paid to
Charter $32 million, $51 million, and $51 million, respectively, related to
interest on the mirror 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 $213 million, $213 million, and $231
million for the years ended December 31, 2008, 2007, and 2006,
respectively. All other costs incurred on 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, 2008, 2007, and 2006, 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 previous credit facilities prohibited
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 was not paid, it would be deferred by Charter and accrued as
a liability of such subsidiaries. Any deferred amount of the
management fee would bear interest at the rate of 10% per year, compounded
annually, from the date it was due and payable until the date 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, 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 Oxygen Media Corporation (“Oxygen Media”), Digeo, Inc. (“Digeo”),
and Microsoft Corporation. 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 of
the Company and the President and Chief Executive Officer of Vulcan Inc. and is
a director and Vice President of Vulcan Ventures. Mr. Lance Conn is a
director of the Company and is Executive Vice President of Vulcan Inc. and
Vulcan Ventures. The various cable, media, Internet and telephone
companies in which Mr. Allen has invested may mutually benefit one
another. The Company can give no assurance, nor should you expect,
that any of these business relationships will be successful,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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 provide any assurance 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.
In 2009,
pursuant to indemnification provisions in the October 2005 settlement with Mr.
Allen regarding the CC VIII interest, the Company reimbursed Vulcan
Inc. approximately $3 million in legal expenses.
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 $6 million, $8 million, and $8 million for the years ended
December 31, 2008, 2007, and 2006, 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. In November 2007,
Oxygen was sold to an unrelated third party and the Company received
approximately $35 million representing its liquidation preference on its
preferred stock. Mr. Allen and his affiliates also no longer have an
interest in Oxygen.
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. In
December 2007, the Digeo, Inc. common stock was transferred to Charter
Operating, and DBroadband Holdings, LLC was dissolved.
The
Company paid Digeo Interactive approximately $0, $0, and $2 million for the
years ended December 31, 2008, 2007, and 2006, 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 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 $1 million, $2 million, and $3 million in license and
maintenance fees in 2008, 2007, and 2006, respectively.
Charter
paid approximately $1 million, $10 million, and $11 million for the years ended
December 31, 2008, 2007, and 2006, 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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.
In May
2008, Charter Operating entered into an agreement with Digeo Interactive, LLC, a
subsidiary of Digeo, Inc., for the minimum purchase of high-definition DVR units
for approximately $21 million. This minimum purchase commitment is
subject to reduction as a result of certain specified events such as the failure
to deliver units timely and catastrophic failure. The software
for these units is being supplied under a software license agreement with Digeo
Interactive, LLC; the cost of which is expected to be approximately $2 million
for the initial licenses and on-going maintenance fees of approximately $0.3
million annually, subject to reduction to coincide with any reduction in the
minimum purchase commitment. For the year ended December 31, 2008,
Charter has purchased approximately $1 million of DVR units from Digeo
Interactive, LLC under these agreements.
Certain
related parties, including members of the board of directors, hold interests in
the Company’s senior notes and discount notes of the Company’s subsidiaries of
approximately $199 million of face value at December 31, 2008.
24.
|
Commitments and
Contingencies |
Commitments
The
following table summarizes the Company’s payment obligations as of December 31,
2008 for its contractual obligations.
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
and Operating Lease Obligations (1)
|
|
$ |
103 |
|
|
$ |
24 |
|
|
$ |
25 |
|
|
$ |
15 |
|
|
$ |
12 |
|
|
$ |
9 |
|
|
$ |
18 |
|
Programming
Minimum Commitments (2)
|
|
|
687 |
|
|
|
315 |
|
|
|
101 |
|
|
|
105 |
|
|
|
110 |
|
|
|
56 |
|
|
|
-- |
|
Other
(3)
|
|
|
475 |
|
|
|
368 |
|
|
|
66 |
|
|
|
22 |
|
|
|
19 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,265 |
|
|
$ |
707 |
|
|
$ |
192 |
|
|
$ |
142 |
|
|
$ |
141 |
|
|
$ |
65 |
|
|
$ |
18 |
|
|
(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, 2008, 2007, and 2006, were $24
million, $23 million, and $23 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 $1.6 billion, $1.6 billion, and $1.5 billion, for the
years ended December 31, 2008, 2007, and 2006,
respectively. Certain of the Company’s programming agreements
are based on a flat fee per month or have guaranteed minimum
payments. The table sets forth the aggregate guaranteed minimum
commitments under the Company’s programming
contracts.
|
|
(3) “Other”
represents other guaranteed minimum commitments, which consist primarily
of commitments to the Company’s billing services
vendors.
|
The
following items are not included in the contractual obligation table due to
various factors discussed below. However, the Company incurs these
costs as part of its operations:
|
·
|
The
Company also rents utility poles used in its
operations. Generally, pole rentals are cancelable on short
notice, but the Company anticipates that such rentals will
recur. Rent expense incurred for pole rental attachments for
the years ended December 31, 2008, 2007, and 2006, was $47 million,
$47 million, and $44 million,
respectively.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
|
·
|
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 $179 million,
$172 million, and $175 million for the years ended December 31, 2008,
2007, and 2006, respectively. |
|
·
|
The
Company also has $158 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
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.
In the
ordinary course of business, the Company may face employment law claims,
including claims under the Fair Labor Standards Act and wage and hour laws of
the states in which we operate. On August 15, 2007, a complaint was
filed, on behalf of both nationwide and state of Wisconsin classes of certain
categories of current and former Charter technicians, against Charter in the
United States District Court for the Western District of Wisconsin (Sjoblom v. Charter Communications,
LLC and Charter Communications, Inc.), alleging that Charter violated the
Fair Labor Standards Act and Wisconsin wage and hour laws by failing to pay
technicians for certain hours claimed to have been worked. While the
Company believes it has substantial factual and legal defenses to the claims at
issue, in order to avoid the cost and distraction of continuing to litigate the
case, the Company reached a settlement with the plaintiffs, which received final
approval from the court on January 26, 2009. The Company has accrued
settlement costs associated with the Sjoblom case. The
Company has been subjected, in the normal course of business, to the assertion
of other similar claims and could be subjected to additional such
claims. The Company can not predict the ultimate outcome of any such
claims.
Charter
is a party to lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal
matters pending against the Company 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 telephone market. Among other things, it
reduced the scope of cable rate regulation and encouraged additional competition
in the video programming industry by allowing telephone companies to provide
video programming in their own telephone service areas.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
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.
25.
|
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. For each payroll
period, the Company will contribute to the 401(k) Plan (a) the total amount of
the salary reduction the employee elects to defer between 1% and 50% and (b) a
matching contribution equal to 50% of the amount of the salary reduction the
participant elects to defer (up to 5% of the participant’s payroll
compensation), excluding any catch-up contributions. The Company made
contributions to the 401(k) plan totaling $8 million, $7 million, and $8 million
for the years ended December 31, 2008, 2007, and 2006,
respectively.
26.
|
Recently Issued Accounting
Standards |
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations: Applying the
Acquisition Method, which provides guidance on the accounting and
reporting for business combinations. SFAS No. 141R is effective for
fiscal years beginning after December 15, 2008. The Company will
adopt SFAS No. 141R effective January 1, 2009. We do not expect that
the adoption of SFAS No. 141R will have a material impact on the Company’s
financial statements.
In
December 2007, the FASB issued SFAS No. 160, Consolidations, which
provides guidance on the accounting and
reporting for minority interests in consolidated financial
statements. SFAS No. 160 requires losses to be allocated to
non-controlling (minority) interests even when such amounts are
deficits. As such, future losses will be allocated between Charter
and the Charter Holdco non-controlling interest. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. The
Company will adopt SFAS No. 160 effective January 1, 2009. Had SFAS
No. 160 been effective for the Company’s financial statements for the year ended
December 31, 2008, our net loss to Charter shareholders would have been reduced
by $1.2 billion.
In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157, which deferred the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. The Company will apply SFAS No. 157 to nonfinancial
assets and nonfinancial liabilities beginning January 1, 2009. The
Company is in the process of assessing the impact of the adoption of SFAS No.
157 on its financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133, which requires companies to disclose their objectives and strategies
for using derivative instruments, whether or not designated as hedging
instruments under SFAS No. 133. SFAS No. 161 is effective for interim
periods and fiscal years beginning after November 15, 2008. The
Company will adopt SFAS No. 161 effective January 1, 2009. The
Company does not expect that the adoption of SFAS No. 161 will have a material
impact on its financial statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. The Company will
adopt FSP FAS 142-3 effective January 1, 2009. The Company does not
expect that the adoption of FSP FAS 142-3 will have a material impact on its
financial statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company will adopt FSP
APB 14-1 effective January 1, 2009. The
Company is in the process of assessing the impact of the adoption of FSP APB
14-1 on its financial statements.
The
Company does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its
accompanying financial statements.
27.
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Receivable
from related party
|
$ |
18 |
|
|
$ |
27 |
|
Notes
receivable from Charter Holdco
|
|
|
376 |
|
|
|
402 |
|
Other
assets
|
|
|
-- |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
394 |
|
|
$ |
462 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
16 |
|
|
$ |
22 |
|
Convertible
notes
|
|
|
376 |
|
|
|
402 |
|
Deferred
income taxes
|
|
|
364 |
|
|
|
425 |
|
Other
long term liabilities
|
|
|
-- |
|
|
|
27 |
|
Preferred
stock — redeemable
|
|
|
-- |
|
|
|
5 |
|
Losses
in excess of investment
|
|
|
10,144 |
|
|
|
7,473 |
|
Shareholders’
deficit
|
|
|
(10,506 |
) |
|
|
(7,892 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
394 |
|
|
$ |
462 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Condensed
Statement of Operations
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
52 |
|
|
$ |
64 |
|
|
$ |
59 |
|
Management
fees
|
|
|
21 |
|
|
|
15 |
|
|
|
30 |
|
Gain
on extinguishment of notes
receivable
from Charter Holdco
|
|
|
4 |
|
|
|
63 |
|
|
|
-- |
|
Change
in value of derivative
|
|
|
33 |
|
|
|
98 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income
|
|
|
110 |
|
|
|
240 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in losses of Charter Holdco
|
|
|
(2,514 |
) |
|
|
(1,443 |
) |
|
|
(1,168 |
) |
General
and administrative expenses
|
|
|
(21 |
) |
|
|
(15 |
) |
|
|
(30 |
) |
Interest
expense
|
|
|
(52 |
) |
|
|
(64 |
) |
|
|
(59 |
) |
Loss
on extinguishment of convertible
notes
|
|
|
(4 |
) |
|
|
(63 |
) |
|
|
-- |
|
Change
in value of derivative
|
|
|
(33 |
) |
|
|
(98 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
(2,624 |
) |
|
|
(1,683 |
) |
|
|
(1,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(2,514 |
) |
|
|
(1,443 |
) |
|
|
(1,168 |
) |
Income
tax benefit (expense)
|
|
|
63 |
|
|
|
(173 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,451 |
) |
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
Condensed
Statements of Cash Flows
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,451 |
) |
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
Equity
in losses of Charter Holdco
|
|
|
2,514 |
|
|
|
1,443 |
|
|
|
1,168 |
|
Changes
in operating assets and liabilities
|
|
|
-- |
|
|
|
-- |
|
|
|
1 |
|
Deferred
income taxes
|
|
|
(63 |
) |
|
|
172 |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
-- |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
from Charter Holdco
|
|
|
-- |
|
|
|
-- |
|
|
|
20 |
|
Investment
in Charter Holdco
|
|
|
-- |
|
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
-- |
|
|
|
(4 |
) |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydown
of convertible notes
|
|
|
-- |
|
|
|
-- |
|
|
|
(20 |
) |
Net
proceeds from issuance of common stock
|
|
|
-- |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
-- |
|
|
|
4 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
28.
|
Unaudited Quarterly Financial
Data |
The
following table presents quarterly data for the periods presented on the
consolidated statement of operations:
|
|
Year
Ended December 31, 2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,564 |
|
|
$ |
1,623 |
|
|
$ |
1,636 |
|
|
$ |
1,656 |
|
Operating
income (loss) from continuing operations
|
|
$ |
205 |
|
|
$ |
230 |
|
|
$ |
208 |
|
|
$ |
(1,257 |
) |
Net
loss
|
|
$ |
(358 |
) |
|
$ |
(276 |
) |
|
$ |
(322 |
) |
|
$ |
(1,495 |
) |
Basic
and diluted net loss per common share
|
|
$ |
(0.97 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.86 |
) |
|
$ |
(3.96 |
) |
Weighted-average
shares outstanding, basic and diluted
|
|
|
370,085,187 |
|
|
|
371,652,070 |
|
|
|
374,145,243 |
|
|
|
377,920,301 |
|
|
|
Year
Ended December 31, 2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,425 |
|
|
$ |
1,499 |
|
|
$ |
1,525 |
|
|
$ |
1,553 |
|
Operating
income from continuing operations
|
|
$ |
156 |
|
|
$ |
200 |
|
|
$ |
107 |
|
|
$ |
85 |
|
Net
loss
|
|
$ |
(381 |
) |
|
$ |
(360 |
) |
|
$ |
(407 |
) |
|
$ |
(468 |
) |
Basic
and diluted net loss per common share
|
|
$ |
(1.04 |
) |
|
$ |
(0.98 |
) |
|
$ |
(1.10 |
) |
|
$ |
(1.27 |
) |
Weighted-average
shares outstanding, basic and diluted
|
|
|
366,120,096 |
|
|
|
367,582,677 |
|
|
|
369,239,742 |
|
|
|
369,916,556 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
29.
|
Subsequent Events
(unaudited) |
Proposed
Restructuring
The
Proposed Restructuring is expected to be funded with cash from operations, an
exchange of debt of CCH II for other debt at CCH II, the issuance of $267
million of additional debt and estimated proceeds of $1.6 billion of an equity
rights offering for which Charter has received a back-stop commitment from
certain Noteholders. In addition to the Restructuring Agreements, the
Noteholders have entered into commitment letters with Charter pursuant to which
they have agreed to exchange and/or purchase, as applicable, certain securities
of Charter.
The
Restructuring Agreements further contemplate that upon consummation of the Plan
(i) the notes and bank debt of Charter’s subsidiaries, Charter Operating and CCO
Holdings will remain outstanding, (ii) holders of notes issued by CCH II will
receive new CCH II notes and/or cash, (iii) holders of notes issued by CCH I
will receive shares of Charter’s new Class A Common Stock, (iv) holders of notes
issued by CIH will receive warrants to purchase shares of common stock in
Charter, (v) holders of notes of Charter Holdings will receive warrants to
purchase shares of Charter’s new Class A Common Stock, (vi) holders of
convertible notes issued by Charter will receive cash and preferred stock issued
by Charter, (vii) holders of common stock will not receive any
amounts on account of their common stock, which will be cancelled, and (viii)
trade creditors will be paid in full. In addition, as part of the
Proposed Restructuring, it is expected that consideration will be paid by
holders of CCH I notes to other entities participating in the financial
restructuring.
Pursuant
to a separate restructuring agreement among Charter, Mr. Allen, and an entity
controlled by Mr. Allen (the “Allen Agreement”), in settlement of their rights,
claims and remedies against Charter and its subsidiaries, and in addition to any
amounts received by virtue of their holding any claims of the type set forth
above, upon consummation of the Plan, Mr. Allen or his affiliates will be issued
a number of shares of the new Class B Common Stock of Charter such that the
aggregate voting power of such shares of new Class B Common Stock shall be equal
to 35% of the total voting power of all new capital stock of Charter. Each
share of new Class B Common Stock will be convertible, at the option of the
holder, into one share of new Class A Common Stock, and will be subject to
significant restrictions on transfer. Certain holders of new Class A
Common Stock and new Class B Common Stock will receive certain customary
registration rights with respect to their shares. Upon consummation of the Plan, Mr. Allen or his
affiliates will also receive (i) warrants to purchase shares of new
Class A common stock of Charter in an aggregate amount equal to 4% of
the equity value of reorganized Charter, after giving effect to the rights offering, but prior to the issuance of warrants and equity-based awards provided for by the
Plan,
(ii) $85 million principal amount of new CCH II
notes,
(iii) $25 million in cash for amounts owing to CII under a
management agreement, (iv) up to $20
million in cash for reimbursement of fees and expenses in connection with the Proposed Restructuring,
and (v) an additional $150 million in cash. The warrants
described above shall have an exercise price per share based on a total equity
value equal to the sum of the equity value of reorganized Charter, plus the
gross proceeds of the rights offering, and shall expire seven years after the
date of issuance. In addition, on the effective date of the Plan, CII will
retain
a 1% equity interest in
reorganized Charter Holdco and a right to exchange such interest into new Class A
common
stock
of Charter.
The Allen Agreement contains similar
provisions to those provisions of the Restructuring Agreements. There is no
assurance that the treatment of creditors outlined above will not change
significantly. For
example, because the Proposed Restructuring is contingent on reinstatement of
the credit facilities and certain notes of Charter Operating and CCO Holdings,
failure to reinstate such debt would require us to revise the Proposed
Restructuring. Moreover, if reinstatement does not occur and current capital
market conditions persist, we may not be able to secure adequate new financing
and the cost of new financing would likely be materially higher. The Proposed Restructuring would result
in the reduction of our debt by approximately $8
billion.
Interest
Payments
Two of
the Company’s subsidiaries, CIH and Charter Holdings, did not make scheduled
payments of interest due on January 15, 2009 on certain of their outstanding
senior notes (the “Overdue Payment Notes”). Each of the respective
governing indentures (the “Indentures”) for the Overdue Payment Notes permits a
30-day grace period for such interest payments through (and including) February
15, 2009. On February 13, 2009, the Company paid the
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
full
amount of the January interest payment to the paying agent for the members of
the ad-hoc committee of holders of the Overdue Payment Notes, which constitutes
payment under the Indentures.
One of
the Company’s subsidiaries, CCH II, will not make its scheduled payment of
interest on March 16, 2009 on certain of its outstanding senior notes. The
governing indenture for such notes permits a 30-day grace period for such
interest payments, and the Company expects to file its voluntary Chapter 11
Bankruptcy prior to the expiration of the grace period.
Charter
Operating Credit Facility
On
February 3, 2009, Charter Operating made a request to the administrative agent
under the Charter Operating credit facilities credit agreement (the “Credit
Agreement”), to borrow additional revolving loans under the Credit
Agreement. Such borrowing request complied with the provisions of the
Credit Agreement including section 2.2 (“Procedure for Borrowing”)
thereof. Subsequently, Charter received a notice from the
administrative agent asserting that one or more Events of Default (as defined in
the Credit Agreement) had occurred and was continuing under the Credit
Agreement. In response, Charter sent a letter to the administrative
agent, among other things, stating that no Event of Default under the Credit
Agreement occurred or was continuing and requesting the administrative agent to
rescind its notice of default and fund Charter Operating’s borrowing
request. The administrative agent subsequently sent a letter stating
that it continues to believe that one or more events of default occurred and was
continuing. As a result, with the exception of one lender who
funded approximately $0.4 million, the lenders under the Credit Agreement have
failed to fund Charter Operating’s borrowing request.