body.htm
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, 2007
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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 þ Accelerated
filer o 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, 2007 was
approximately $1.5 billion, 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 398,227,512 shares of Class A Common Stock outstanding as of January
31, 2008. There were 50,000 shares of Class B Common Stock
outstanding as of the same date.
Documents
Incorporated By Reference
Portions
of the Proxy Statement for the annual meeting of stockholders to be held on
April 29, 2008 are incorporated by reference into Part III.
CHARTER
COMMUNICATIONS, INC.
FORM 10-K — FOR THE YEAR ENDED
DECEMBER 31, 2007
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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20
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Item
1B
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Unresolved
Staff Comments
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33
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Item 2
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Properties
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33
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Item 3
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Legal
Proceedings
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33
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Item 4
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Submission
of Matters to a Vote of Security Holders
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34
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PART
II
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Item 5
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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35
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Item 6
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Selected
Financial Data
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37
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Item 7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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38
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Item 7A
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Quantitative
and Qualitative Disclosure About Market Risk
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67
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Item 8
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Financial
Statements and Supplementary Data
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69
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Item 9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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69
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Item
9A
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Controls
and Procedures
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69
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Item
9B
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Other
Information
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69
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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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70
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Item 11
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Executive
Compensation
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70
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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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70
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Item 13
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Certain
Relationships and Related Transactions, and Director
Independence
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70
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Item 14
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Principal
Accounting Fees and Services
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70
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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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71
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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,
2007. The Securities and Exchange Commission (“SEC”) allows us
to “incorporate by reference” information that we file with the SEC, which means
that we can disclose important information to you by referring you directly to
those documents. Information incorporated by reference is considered
to be part of this 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
availability, in general, of funds to meet interest payment obligations
under our debt and to fund our operations and necessary capital
expenditures, either through cash flows from operating activities, further
borrowings or other sources and, in particular, our ability to fund debt
obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
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·
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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 pay or refinance debt prior to or when it becomes due and/or
refinance that debt through new issuances, exchange offers or otherwise,
including restructuring our balance sheet and leverage
position;
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the
impact of competition from other distributors, including incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers, and digital subscriber line (“DSL”)
providers;
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difficulties
in growing, further introducing, 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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·
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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 slowdown, including the
recent significant slowdown in the new 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 5.60 million customers at December 31,
2007. Through our hybrid fiber and coaxial cable network, we offer
traditional cable video programming (analog and digital, which we refer to as
"video" service), high-speed Internet access, and telephone service, as well as,
advanced broadband services (such as Charter OnDemand™ video service
(“OnDemand”), high definition television service, and digital video recorder
(“DVR”) service). See "Item 1. Business — Products and Services" for
further description of these terms, including "customers."
At
December 31, 2007, we served approximately 5.22 million video customers, of
which approximately 2.92 million were also digital video
customers. We also served approximately 2.68 million high-speed
Internet customers (including approximately 289,600 who received only high-speed
Internet services). We also provided telephone service to
approximately 959,300 customers (including approximately 38,700 who received
only telephone service).
At
December 31, 2007, our investment in cable properties, long-term debt,
accumulated deficit, and total shareholders’ deficit were $14.0 billion, $19.9
billion, $13.1 billion and $7.9 billion, respectively. Our working
capital deficit was $996 million as of December 31, 2007. For
the year ended December 31, 2007, our revenues, net loss, and net loss per
common share were approximately $6.0 billion, $1.6 billion, and $4.39,
respectively.
We have a
history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally
attributable to insufficient revenue to cover the combination of operating
expenses and interest expenses we incur because of our high level of debt, and
depreciation expenses that we incur resulting from the capital investments we
have made and continue to make in our cable properties. We expect
that these expenses will remain significant.
Charter
was organized as a Delaware corporation in 1999 and completed an initial public
offering of its Class A common stock in November 1999. Charter is a
holding company whose principal assets at December 31, 2007 are the 54%
controlling common equity interest (52% for accounting purposes) and a 100%
voting interest in Charter Communications Holding Company, LLC (“Charter
Holdco”), the direct parent of CCHC, LLC (“CCHC”), which is the direct parent of
Charter Communications Holdings, LLC ("Charter Holdings"). Charter
also holds certain preferred equity and indebtedness of Charter Holdco that
mirror the terms of securities issued by Charter. Charter's only
business is to act as the sole manager of Charter Holdco and its
subsidiaries. As sole manager, Charter controls the affairs of
Charter Holdco and its limited liability company subsidiaries.
Paul G.
Allen controls Charter through a voting control interest of 91% as of December
31, 2007. He also owns 46% of Charter Holdco and a note convertible
into Charter Holdco membership units through affiliated entities. His
membership units in Charter Holdco are convertible at any time for shares of
Charter’s Class B common stock on a one-for-one basis, which shares are in turn
convertible into Charter’s Class A common stock on a one-for-one
basis. Mr. Allen would hold a common equity interest of approximately
50% on an as-converted basis as of December 31, 2007. Each share of
Class A common stock is entitled to one vote. Mr. Allen is entitled
to ten votes for each share of Class B common stock and for each membership unit
in Charter Holdco held by him and his affiliates.
Our
principal executive offices are located at Charter Plaza, 12405 Powerscourt
Drive, St. Louis, Missouri 63131. Our telephone number is (314)
965-0555, and we have a website accessible at www.charter.com. Since
January 1, 2002, our annual reports, quarterly reports and current reports
on Form 8-K, and all amendments thereto, have been made available on our
website free of charge as soon as reasonably practicable after they have been
filed. The information posted on our website is not incorporated into
this annual report.
Certain
Significant Developments in 2007
We
continue to pursue opportunities to improve our liquidity. Our
efforts in this regard resulted in the completion of a number of financing
transactions in 2007, as follows:
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the
March 2007 entry by our subsidiary, Charter Communications Operating, LLC
(“Charter Operating”) into an Amended and Restated Credit Agreement which
provided a $1.5 billion senior secured revolving
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line
of credit, a continuation of the existing $5.0 billion term loan facility,
and a $1.5 billion new term loan facility; |
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the
March 2007 entry by our subsidiary, CCO Holdings, LLC (“CCO Holdings”)
into a credit agreement consisting of a $350 million term loan facility
maturing September 2014;
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the
April 2007 cash tender offer and purchase of $97 million of outstanding
notes of our subsidiary, Charter Holdings, and subsequent redemption of
$187 million of its 8.625% senior notes due April 1, 2009 and $550 million
of CCO Holdings senior floating rate notes due December 15, 2010;
and
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the
October 2007 exchange offer, in which we issued $479 million of our 6.50%
convertible senior notes due 2027 in exchange for $364 million of our
5.875% convertible senior notes due
2009.
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Company
Focus
We strive
to provide value to our customers by offering a suite of services which include
video, high-speed Internet, and telephone service as well as advanced broadband
service offerings including OnDemand, high-definition television service, and
DVR service. We believe that customers value our ability to combine
video, high-speed Internet, and telephone services into attractively priced
bundled offerings that distinguish us from the direct broadcast satellite
(“DBS”) competition. Bundling of services, by combining two or more
Charter services for one value-based price, is fundamental to our marketing
strategy because we believe bundled offerings increase customer acceptance of
our services and improve customer retention and satisfaction. We will
pursue further growth in our customer base through targeted marketing of bundled
services and continually improving the end-to-end customer
experience. By continually focusing on the needs of our customers -
raising customer service levels and investing in products and services they
desire - our goal is to be the premier provider of in-home entertainment and
communications services in the communities we serve.
The
Company’s continuing strategic priorities include:
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improving
the end-to-end customer experience and increasing customer
loyalty;
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growing
sales and retention for all our products and
services;
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improving
operating and capital effectiveness and efficiency; and
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continuing
an opportunistic approach to enhancing liquidity, extending maturities,
and reducing debt.
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We
believe our focus on these strategic priorities will enable us to provide
greater value to our customers and thereby generate future growth opportunities
for us. We are making service improvements to our technical
operations to further enhance the operating effectiveness and efficiencies of
our operating platform.
Charter
markets its services by employing a segmented, targeted marketing
approach. We determine which marketing and sales programs have been
the most effective using management tools that track, analyze, and report the
results of our marketing campaigns. We then pursue the programs
demonstrating the highest expected returns.
During
2007, we extended the deployment of our telephone capabilities to approximately
2.2 million additional homes passed, to reach a total of approximately 9.0
million homes passed across our network, and we expect to make telephone service
available to approximately 85% of our estimated total homes passed by year-end
2008. During 2008, we plan to continue our marketing and sales
efforts to attract additional customers to our telephone service, primarily
through bundled offers with our video and high-speed Internet
services.
In
addition to serving and growing our residential customer base, we will increase
efforts to market video, high-speed Internet and telephone services to the
business community. We believe that small businesses will find our
bundled service offerings provide value and convenience, and that we can
continue to grow this portion of our business.
We expect
to continue a disciplined approach to managing capital expenditures by directing
resources to initiatives and opportunities offering the highest expected
returns.
Our
sales, acquisitions, and exchange of systems in 2007 have improved the density
of our geographic service areas, while operational initiatives provide a more
efficient operating platform. We will continue to evaluate our
geographic service areas for further opportunities to improve operating and
capital efficiencies, through sales, exchanges of systems
with other providers, and/or acquisitions of cable systems.
In 2008,
we will continue to evaluate potential financial transactions that can enhance
our liquidity, extend debt maturities, and/or reduce our debt.
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, 2007, and do not give effect to any exercise, conversion or
exchange of then outstanding options, preferred stock, convertible notes, and
other convertible or exchangeable securities. Indebtedness amounts
shown below are accreted values for financial reporting purposes as of December
31, 2007. See “Item 8. Financial Statements and
Supplementary Data,” which also includes the principal amount of the
indebtedness described below.
(1)
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Charter
acts as the sole manager of Charter Holdco and its direct and indirect
limited liability company subsidiaries. Charter’s certificate
of incorporation requires that its principal assets be securities of
Charter Holdco, the terms of which mirror the terms of securities issued
by Charter. See “Item 1. Business — Corporate Organizational
Structure — Charter Communications, Inc.” below.
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(2)
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These
membership units are held by Charter Investment, Inc. (“CII”) and Vulcan
Cable III Inc., each of which is 100% owned by Paul G. Allen, 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.
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(3)
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The
percentages shown in this table reflect the 24.8 million shares of
Class A common stock outstanding as of December 31, 2007 issued pursuant to the
Share Lending Agreement. However, for accounting
purposes, Charter’s common equity interest in Charter Holdco is 52%, and
Paul G. Allen’s ownership of Charter Holdco through CII and Vulcan
Cable III Inc. is 48%. These percentages exclude the 24.8
million mirror membership units outstanding as of December 31, 2007
issued pursuant to the Share Lending Agreement. See Note
13 to the accompanying consolidated financial statements contained in
“Item 8. Financial Statements and Supplementary Data.”
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(4)
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Represents
preferred membership interests in CC VIII, LLC (“CC VIII”), a subsidiary
of CC V Holdings, LLC, and an exchangeable accreting note issued by
CCHC. See Notes 10 and 11 to the accompanying consolidated
financial statements contained in “Item 8. Financial Statements and
Supplementary Data.”
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Charter
Communications, Inc. Certain provisions of Charter’s certificate of
incorporation and Charter Holdco’s limited liability company agreement
effectively require that Charter’s investment in Charter Holdco replicate, on a
“mirror” basis, Charter’s outstanding equity and debt structure. As a
result of these coordinating provisions, whenever Charter issues equity or debt,
Charter transfers the proceeds from such issuance to Charter Holdco, and Charter
Holdco issues a “mirror” security to Charter that replicates the characteristics
of the security issued by Charter. Consequently, Charter’s principal
assets are an approximate 54% common equity interest (52% for accounting
purposes) and a 100% voting interest in Charter Holdco, “mirror” notes that are
payable by Charter Holdco to Charter that have the same principal amount and
terms as Charter’s convertible senior notes and preferred units in Charter
Holdco that mirror the terms and liquidation preferences of Charter’s
outstanding preferred stock. Charter Holdco, through its
subsidiaries, owns cable systems and certain strategic
investments. As sole manager under applicable operating agreements,
Charter controls the affairs of Charter Holdco and its limited liability company
subsidiaries. In addition, Charter provides management services to
Charter Holdco and its subsidiaries under a management services
agreement.
The
following table sets forth information as of December 31, 2007 with respect to
the shares of common stock of Charter on an actual outstanding, “as converted”
and “fully diluted” basis:
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Charter
Communications, Inc.
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Assuming
Exchange of
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Actual
Shares Outstanding (a)
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Charter
Holdco Membership Units (b)
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Fully
Diluted Shares Outstanding (c)
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Number
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Percentage
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Number
of
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Percentage
of
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of
Fully
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of
Fully
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Number
of
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Percentage
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As
Converted
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As
Converted
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Diluted
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Diluted
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Common
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of
Common
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Common
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Common
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Common
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Common
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Shares
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Shares
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Voting
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Shares
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Shares
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Shares
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Shares
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Outstanding
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Outstanding
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Percentage
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Outstanding
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Outstanding
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Outstanding
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Outstanding
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Class A
Common Stock
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398,226,468
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99.99%
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9.68%
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398,226,468
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54.00%
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398,226,468
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40.44%
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Class B
Common Stock
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50,000
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0.01%
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90.32%
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50,000
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0.01%
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50,000
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*
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Total
Common Shares Outstanding
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398,276,468
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100.00%
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100.00%
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One-for-One
Exchangeable Equity in Subsidiaries:
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Charter
Investment, Inc.
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222,818,858
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30.22%
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222,818,858
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22.63%
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Vulcan
Cable III Inc.
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116,313,173
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15.77%
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116,313,173
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11.81%
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Total
As Converted Shares Outstanding
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737,408,499
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100.00%
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Other
Convertible Securities
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Charter
Communications, Inc.:
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Convertible
Preferred Stock (d)
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148,575
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0.02%
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Convertible
Debt:
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5.875%
Convertible Senior
Notes
(e)
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|
|
|
|
20,104,543
|
|
2.04%
|
6.50%
Convertible Senior Notes (f)
|
|
|
|
|
|
|
|
|
|
|
140,581,566
|
|
14.28%
|
Employee,
Director and
Consultant
Stock Options (g)
|
|
|
|
|
|
|
|
|
|
|
25,970,829
|
|
2.64%
|
Employee
Performance Shares (h)
|
|
|
|
|
|
|
|
|
|
|
28,008,985
|
|
2.84%
|
CCHC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14% Exchangeable
Accreting Note (i)
|
|
|
|
|
|
|
|
|
|
|
32,475,583
|
|
3.30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
Diluted Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
984,698,580
|
|
100.00%
|
__________
* Less
than .01%.
(a)
|
|
Paul
G. Allen owns approximately 7% of Charter’s outstanding Class A common
stock (approximately 50% assuming the exchange by Mr. Allen of all units
in Charter Holdco held by him and his affiliates for shares of Charter
Class B common stock, which are in turn convertible into Class A common
stock) and beneficially controls approximately 91% of the voting power of
Charter’s capital stock. Mr. Allen is entitled to ten
votes for each share of Class B common stock held by him and his
affiliates and for each membership unit in Charter Holdco held by him and
his affiliates.
|
|
|
|
(b)
|
|
Assumes
only the exchange of Charter Holdco membership units held by Mr. Allen and
his affiliates for shares of Charter Class B common stock on a
one-for-one basis pursuant to exchange agreements between the holders of
such units and Charter, which shares are in turn convertible into Class A
common stock on a one-for-one basis. Does not include shares
issuable on conversion or exercise of any other convertible securities,
including stock options, convertible notes and convertible preferred
stock.
|
|
|
|
(c)
|
|
Represents
“fully diluted” common shares outstanding, assuming exercise, exchange or
conversion of all outstanding options and exchangeable or convertible
securities, including the exchangeable membership units described in note
(b) above, all shares of Charter Series A convertible redeemable
preferred stock, the 14% CCHC exchangeable accreting note, all outstanding
5.875% and 6.50% convertible senior notes of Charter, and all employee,
director and consultant stock
options.
|
(d)
|
|
Reflects
common shares issuable upon conversion of the 36,713 shares of
Series A convertible redeemable preferred stock. Such
shares have a current liquidation preference of approximately $4 million
and are convertible at any time into shares of Class A common stock
at an initial conversion price of $24.71 per share (or 4.0469446 shares of
Class A common stock for each share of convertible redeemable preferred
stock), subject to certain adjustments.
|
|
|
|
(e)
|
|
Reflects
shares issuable upon conversion of all outstanding 5.875% convertible
senior notes ($49 million total principal amount), which are convertible
into shares of Class A common stock at an initial conversion rate of
413.2231 shares of Class A common stock per $1,000 principal amount
of notes (or approximately $2.42 per share), subject to certain
adjustments.
|
|
|
|
(f)
|
|
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.
|
|
|
|
(g)
|
|
The
weighted average exercise price of outstanding stock options was $4.02 as
of December 31, 2007.
|
|
|
|
(h)
|
|
Represents
shares issuable under our long-term incentive plan (LTIP), which are
subject to vesting based on continued employment and Charter’s achievement
of certain performance criteria.
|
|
|
|
(i)
|
|
Mr.
Allen, through his wholly owned subsidiary CII, holds an accreting note
(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, 2007 of $65 million
accreting at 14% compounded quarterly, except that from and after February
28, 2009, CCHC may pay any increase in the accreted value of the CCHC note
in cash and the accreted value of the CCHC note will not increase to the
extent such amount is paid in cash. The CCHC note is
exchangeable at CII’s option, at any time, for Charter Holdco Class A
common units, which are exchangeable into shares of Charter Class B common
stock, which shares are in turn convertible into Class A common stock, at
a rate equal to the then accreted value, divided by $2.00. See
Note 10 to our accompanying consolidated financial statements contained in
“Item 8. Financial Statements and Supplementary
Data.”
|
Charter
Communications Holding Company, LLC. Charter Holdco, a Delaware limited
liability company formed on May 25, 1999, is the direct 100% parent of
CCHC. The common membership units of Charter Holdco are owned
approximately 54% by Charter, 16% by Vulcan Cable III Inc. and 30% by
CII. All of the outstanding common membership units in Charter Holdco
held by Vulcan Cable III Inc. and CII are controlled by Mr. Allen and are
exchangeable on a one-for-one basis at any time for shares of Class B
common stock of Charter, which are in turn convertible into Class A common
stock of Charter 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 and 100% of the mirror
preferred membership units of Charter Holdco that automatically convert into
common membership units upon the conversion of the Series A convertible
redeemable preferred stock of Charter.
CCHC,
LLC. CCHC, a Delaware limited liability company formed on
October 25, 2005, is the issuer of an exchangeable accreting note. In
October 2005, Charter, acting through a Special Committee of Charter’s board of
directors, and Mr. Allen, settled a dispute that had arisen between the parties
with regard to the ownership of CC VIII. As part of that settlement,
CCHC issued the CCHC note to CII.
Interim Holding
Company Debt Issuers. As indicated in the organizational chart
above, our interim holding company debt issuers indirectly own the subsidiaries
that own or operate all of our cable systems, subject to a CC VIII minority
interest held by Mr. Allen and CCH I as described below. For a
description of the debt issued by these issuers please see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Description of Our Outstanding Debt.”
Preferred Equity
in CC VIII. 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 services, high-speed Internet services, and telephone services utilizing
our cable network. Our video services include traditional cable video services
(analog and digital) and in some areas advanced broadband services such as
OnDemand, high definition television, and DVR service. 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, 2007 and 2006.
|
|
Approximate
as of
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
(a)
|
|
|
2006
(a)
|
|
|
|
|
|
|
|
|
Video
Cable Services:
|
|
|
|
|
|
|
Video:
|
|
|
|
|
|
|
Residential
(non-bulk) video customers (b)
|
|
|
4,959,800 |
|
|
|
5,172,300 |
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
260,100 |
|
|
|
261,000 |
|
Total
video customers
|
|
|
5,219,900 |
|
|
|
5,433,300 |
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
2,920,400 |
|
|
|
2,808,400 |
|
|
|
|
|
|
|
|
|
|
Non-Video
Cable Services:
|
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,682,500 |
|
|
|
2,402,200 |
|
Telephone
customers (f)
|
|
|
959,300 |
|
|
|
445,800 |
|
|
|
|
|
|
|
|
|
|
Total
Revenue Generating Units
|
|
|
11,782,100 |
|
|
|
11,089,700 |
|
After
giving effect to sales and acquisitions of cable systems in 2007, December 31,
2006 video customers, digital video customers, high-speed Internet customers,
and telephone customers would have been 5,336,200, 2,770,300, 2,393,400, and
446,300, respectively.
(a)
|
“Customers”
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At December 31, 2007 and
2006, “customers” include approximately 48,200 and 32,700 persons whose
accounts were over 60 days past due in payment, approximately 10,700 and
5,400 persons, whose accounts were over 90 days past due in payment, and
approximately 2,900 and 2,700 of which were over 120 days past due in
payment, respectively.
|
(b)
|
Includes
all residential customers who receive video
services.
|
(c)
|
Included
within “video customers” are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit (“EBU”)
basis. EBU is calculated for a system by dividing the bulk
price charged to accounts in an area by the most prevalent price charged
to non-bulk residential customers in that market for the comparable tier
of service. The EBU method of estimating video customers is
consistent with the methodology used in determining costs paid to
programmers and has been used
consistently.
|
(d)
|
Includes
all 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.
|
Video
Services
In 2007,
video services represented approximately 56% 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 service to our customers
in several different service combination packages. All of our
digital packages include a digital set-top box or cable card, an
interactive electronic programming guide, an expanded menu of pay-per-view
channels, including OnDemand, and digital quality music channels and the
option to also receive digital packages which range generally from 3 to 45
additional video channels. We also offer our customers certain
digital packages with one or more premium channels that give customers
access to several alternative genres of certain premium channels (for
example, HBO Family® and HBO Comedy®). Some digital tier
packages focus on the interests of a particular customer demographic and
emphasize, for example, sports, movies, family, or ethnic
programming. In addition to video programming, digital video
service enables customers to receive our advanced broadband services such
as OnDemand, DVRs, and high definition television. Other
digital packages bundle digital television with our high-speed Internet
services and telephone services.
|
|
|
|
|
|
•
|
|
Premium
Channels. These channels
provide original programming, commercial-free movies, sports, and other
special event entertainment programming. Although we offer
subscriptions to premium channels on an individual basis, we offer an
increasing number of digital video channel packages and premium channel
packages, and we offer premium channels bundled with our advanced
broadband services.
|
|
|
|
|
|
•
|
|
Pay-Per-View. These channels
allow customers to pay on a per event basis to view a single showing of a
recently released movie, a one-time special sporting event, music concert,
or similar event on a commercial-free basis.
|
|
|
|
|
|
•
|
|
OnDemand
and Subscription OnDemand. OnDemand service
allows customers to select from hundreds of movies and other programming
at any time with digital picture quality, including some in
high-definition. 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.
|
|
|
|
|
|
•
|
|
High
Definition Television. High definition
television offers our digital customers certain video programming at a
higher resolution to improve picture quality versus standard analog or
digital video images.
|
|
|
|
|
|
•
|
|
Digital
Video Recorder. DVR service enables customers to digitally record
programming and to pause and rewind live
programming.
|
High-Speed
Internet Services
In 2007,
residential high-speed Internet services represented approximately 21% of our
total revenues. We offer several tiers of high-speed Internet
services with speeds ranging up to 16 megahertz 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 2007,
telephone services represented approximately 6% 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 calling,
voicemail, call waiting and caller ID, and call forwarding
features. Charter Telephone also provides international calling
either by the minute or in a package of 250 minutes. At December 31,
2007, telephone service was available to approximately 9.0 million homes passed,
and we were marketing these services to approximately 92% of those
homes. We will continue to prepare additional markets for telephone
launches in 2008 and expect to make telephone service available to
approximately 85% of our estimated total homes passed by year-end
2008.
Commercial
Services
In 2007,
commercial services represented approximately 6% of our total
revenues. Commercial services, offered through Charter Business,
include scalable, tailored and cost-effective broadband communications solutions
for business organizations, such as business-to-business Internet access, data
networking, video and music entertainment services, and business telephone. We will continue to expand
the marketing of our video, high-speed Internet, and telephone services to the
business community.
Sale
of Advertising
In 2007,
sale 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,
2007, 2006 and 2005, we had advertising revenues from vendors of approximately
$13 million, $17 million, and $15 million, respectively. These
revenues resulted from purchases at market rates pursuant to binding
agreements.
Pricing of Our Products and
Services
Our
revenues are derived principally from the monthly fees customers pay for the
services we offer. We typically charge a one-time installation fee
which is sometimes waived or discounted during certain promotional
periods. The prices we charge for our products and services vary
based on the level of service the customer chooses and the geographic
market. Most of our pricing is reviewed throughout the year and
adjusted on an annual basis.
In
accordance with the Federal Communications Commission’s (“FCC”) rules, the
prices we charge for video cable-related equipment, such as set-top boxes and
remote control devices, and for installation services, are based on actual costs
plus a permitted rate of return in regulated markets.
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, they enjoy
prices that are lower per service than if they had only purchased a single
service.
Our Network
Technology
We employ
the hybrid fiber coaxial cable (“HFC”) architecture for our
systems. HFC architecture combines the use of fiber optic cable with
coaxial cable. In most systems, we deliver our signals via fiber
optic cable from the headend to a group of nodes, and use coaxial cable to
deliver the signal from individual nodes to the homes passed served by that
node. On average, our system design enables typically up to 500 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:
|
•
|
|
bandwidth
capacity to enable traditional and two-way video and broadband
services;
|
|
•
|
|
dedicated
bandwidth for two-way services, which avoids return signal interference
problems that can occur with two-way communication capability;
and
|
|
•
|
|
signal
quality and high service
reliability.
|
The
following table sets forth the technological capacity of our systems as of
December 31, 2007 based on a percentage of homes passed:
Less
than 550
|
|
|
|
750
|
|
860/870
|
|
Two-way
|
megahertz
|
|
550
megahertz
|
|
megahertz
|
|
megahertz
|
|
activated
|
|
|
|
|
|
|
|
|
|
5%
|
|
5%
|
|
43%
|
|
47%
|
|
93%
|
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 316 at December 31, 2007. Because headends are the control
centers of a cable system, where incoming signals are amplified, converted,
processed and combined for transmission to the customer, reducing the number of
headends reduces related equipment, service personnel, and maintenance
expenditures. As of December 31, 2007, approximately 90% of our
customers were served by headends serving at least 10,000
customers.
As of
December 31, 2007, our cable systems consisted of approximately 199,100
aerial and underground miles of coaxial cable, and approximately 57,000 aerial
and underground miles of fiber optic cable, passing approximately 11.8 million
households and serving approximately 5.6 million customers.
Management of Our
Systems
The
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 such as
accounting, cash management, taxes, billing, finance, human resources, risk
management, telephone, payroll, information system design and support, internal
audit, legal, purchasing, customer care, marketing, communications, programming
contract administration, Internet service, network and circuits administration,
and oversight and coordination of external auditors and
consultants. The corporate office performs these services on a cost
reimbursement basis pursuant to a management services agreement. Our
field operations are managed within three divisions. Each division
has a divisional president and is supported by operational, financial, legal,
customer care, marketing and engineering functions.
Customer Care
Our
customer care centers are managed centrally, with the deployment and execution
of end-to-end care strategies and initiatives conducted on a company-wide
basis. We have eight customer care locations plus several third-party
call center locations that through technology and procedures function as an
integrated system. We believe that consolidation and integration of
our care centers improves service delivery and customer
satisfaction.
We
provide service to our customers 24 hours a day, seven days a week, and utilize
technologically advanced equipment that we believe enhances interactions with
our customers through more intelligent call routing, data management, and
forecasting and scheduling capabilities. We believe that through
continued optimization of our care network we will improve complaint resolution,
equipment troubleshooting, sales of new and additional services, and customer
retention.
We are
committed to further improving customer care performance to increase customer
retention and satisfaction. Accordingly, we have certain initiatives
underway targeted at gaining new customers and retaining existing
ones. We have increased our efforts to instill a customer service
oriented culture throughout our organization, by giving
the
customer service areas of our operations greater resources for staffing,
training, and the financial incentives for employee performance.
We have
agreements with three third-party call center service providers. We
believe these relationships further our service objectives and support marketing
activities by providing additional capacity to respond to customer
inquiries.
We also
utilize our website to enhance customer care by enabling customers to view and
pay their bills online, obtain useful information, and perform various equipment
troubleshooting procedures. Our customers may also obtain support
through our on-line chat and e-mail functionality.
Sales
and Marketing
Our plan
has been to grow revenues by increasing our targeted marketing programs designed
to offer services to existing and potential customers with particular emphasis
on our bundled services. As a result, marketing expenditures
increased by $58 million, or 32%, over the year ended December 31, 2006 to $238
million for the year ended December 31, 2007. In 2008, we expect to
continue to increase the amount we spend on targeted marketing.
Our
marketing organization provides strategic marketing direction, promotes
interaction, information flow, and sharing of best practices between our
corporate office and our field offices, which make local decisions as to when
and how certain marketing programs will be implemented. We
monitor the effectiveness of our marketing efforts, customer perception,
competition, pricing, and service preferences, among other factors, to increase
our responsiveness to our customers. Our marketing activities involve
door-to-door, telemarketing, media advertising, e-marketing, direct mail, and
retail locations. In 2008, we expect to continue to focus on
migrating existing single service customers into multiple service
bundles.
Programming
General
We
believe that offering a wide variety of programming influences a customer’s
decision to subscribe to and retain our cable services. We rely on
market research, customer demographics and local programming preferences to
determine channel offerings in each of our markets. We obtain basic
and premium programming from a number of suppliers, usually pursuant to written
contracts. Our programming contracts generally continue for a fixed
period of time, usually from three to ten years, and are subject to negotiated
renewal. Some program suppliers offer financial incentives to support
the launch of a channel and/or ongoing marketing support. We also
negotiate volume discount pricing structures. Programming costs are
usually payable each month based on calculations performed by us and are
generally subject to annual cost escalations and audits by the
programmers.
Costs
Programming
is usually made available to us for a license fee, which is generally paid based
on the number of customers to whom we make such programming
available. Such license fees may include “volume” discounts available
for higher numbers of customers, as well as discounts for channel placement or
service penetration. Some channels are available without cost to us
for a limited period of time, after which we pay for the
programming. For home shopping channels, we receive a percentage of
the revenue attributable to our customers’ purchases.
Our cable
programming costs have increased in every year we have operated in excess of
customary inflationary and cost-of-living type increases. We expect
them to continue to increase due to a variety of factors, including annual
increases imposed by programmers and additional programming, including
high-definition and OnDemand programming, being provided to
customers. In particular, sports programming costs have increased
significantly over the past several years. In addition, contracts to
purchase sports programming sometimes provide for optional additional
programming to be available on a surcharge basis during the term of the
contract.
Federal
law allows commercial television broadcast stations to make an election between
“must-carry” rights and an alternative “retransmission-consent”
regime. When a station opts for the retransmission-consent regime, we
are not allowed to carry the station’s signal without the station’s
permission. Future demands by owners of broadcast stations for
carriage of other services or cash payments to those broadcasters in exchange
for retransmission consent could further increase our programming costs or
require us to cease carriage of popular programming, potentially leading to a
loss of customers in affected markets.
Over the
past several years, we have not been able to increase video service rates
sufficiently to fully offset increased programming costs, and with the impact of
increasing competition and other marketplace factors, we do not expect to be
able to do so in the foreseeable future. In addition, our inability
to fully pass these programming cost increases on to our video customers has had
and is expected in the future to have an adverse impact on our cash flow and
operating margins. In order to mitigate
reductions of our operating margins due to rapidly increasing programming costs,
we continue to review our pricing and programming packaging strategies, and we
plan to continue to migrate certain program services from our analog level of
service to our digital tiers. As we migrate our programming to our
digital tier packages, certain programming that was previously available to all
of our customers via an analog signal may only be part of an elective digital
tier package offered to our customers for an additional fee. As a
result, we expect that the customer base upon which we pay programming fees will
proportionately decrease, and the overall expense for providing that service
will 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 2008. 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, 2007, our systems operated pursuant to a total of
approximately 3,300 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 15% of our franchises, covering
approximately 20% of our video customers were expired at December 31,
2007. Approximately 7% of additional franchises, covering
approximately 8% of additional video customers will expire on or before December
31, 2008, if not renewed prior to expiration. We expect to renew 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 cumbersome 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 television signals,
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 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 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 27 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 200 digital channels from a single satellite, thereby surpassing the
traditional analog cable system. In 2007, major DBS competitors
offered a greater variety of channel packages, and were especially competitive
with promotional pricing for more basic services, such as a monthly price of
approximately $35 for 100 channels compared to approximately $50 for the closest
comparable package offered by us in most of our markets. In addition,
while we continue to believe that the initial investment by a DBS customer
exceeds that of a cable customer, the initial equipment cost for DBS has
decreased substantially, as the DBS providers have aggressively marketed offers
to new customers of incentives for discounted or free equipment, installation,
and multiple units. DBS providers are able to offer service
nationwide and are able to establish a national image and branding with
standardized offerings, which together with their ability to avoid franchise
fees of up to 5% of revenues and property tax, leads to greater efficiencies and
lower costs in the lower tiers of service. However, we believe that
cable-delivered OnDemand and Subscription OnDemand services are superior to DBS
service, because cable headends can 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. We also believe that our higher tier services,
particularly bundled premium packages, are price-competitive with DBS packages,
and that many consumers prefer our ability to economically bundle video packages
with high-speed Internet packages. Further, we have the potential in
some areas to provide a more complete “whole house” communications package when
combining video, high-speed Internet, and telephone services. We
believe that this ability to bundle services differentiates us from DBS
competitors and could enable us to win back former customers who migrated to
satellite. However, joint marketing arrangements between DBS
providers and telecommunications carriers allow similar bundling of services in
certain areas. DBS providers have also made attempts at widespread
deployment of high-speed Internet access services via satellite, but those
services have been technically constrained and of limited appeal. DBS
providers are offering more high definition programming, including local high
definition programming.
Telephone
Companies and Utilities
Charter’s
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.
DSL
service allows Internet access to subscribers at data transmission speeds
greater than those available over conventional telephone lines. DSL
service therefore is more competitive with high-speed Internet access over cable
systems than conventional dial-up. Most telephone companies, which
already have plant, an existing customer base, and other operational functions
in place (such as, billing, service personnel, etc.), offer DSL
service. We expect DSL to remain a significant competitor to our
high-speed Internet services, particularly as telephone companies bundle DSL
with telephone service. In addition, the continuing deployment of
fiber into telephone companies’
networks
(primarily by Verizon Communications, Inc. (“Verizon”)) will enable them to
provide even higher bandwidth Internet services.
We
believe that pricing for residential and commercial Internet services on our
system is generally comparable to that for similar DSL services and that some
residential customers prefer our Internet services bundled with our video and/or
telephone services, and prefer our high Internet speeds. However, DSL
providers may currently be in a better position to offer data services to
businesses since their networks tend to be more complete in commercial
areas. They also have the ability to bundle telephone with Internet
services for a higher percentage of their customers.
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. AT&T and Verizon are both upgrading their
networks. Some upgraded portions of these networks carry two-way
video services comparable to ours, in the case of Verizon, high-speed data
services that operate at speeds as high as or higher than ours, and digital
voice services that are 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 5% to 6% of
our estimated homes passed as of December 31, 2007. Additional
upgrades and product launches, primarily by AT&T, 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 weakening 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 weakening 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 either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming.
As of
December 31, 2007, excluding telephone companies, we are aware of
traditional overbuild situations impacting approximately 7% to 8% of our total
homes passed and potential traditional overbuild situations in areas servicing
approximately an additional 2% of our total homes passed. Additional
overbuild situations may occur.
Private
Cable
Additional
competition is posed by satellite master antenna television systems, or SMATV
systems, serving multiple dwelling units, or MDUs, such as condominiums,
apartment complexes, and private residential communities. 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 most local governments. A
failure to comply with these regulations could subject us to substantial
penalties. Our business can be dramatically impacted by changes to
the existing regulatory framework, whether triggered by legislative,
administrative, or judicial rulings. Congress and the FCC have
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 can provide no assurance that the already extensive
regulation of our business will not be expanded in the future.
Video Service
Cable Rate
Regulation. The cable industry has operated under a federal
rate regulation regime for more than a decade. The regulations
currently restrict the prices that cable systems charge for the minimum level of
video programming service, referred to as “basic service,” and associated
equipment. All other cable offerings are now universally exempt from
rate regulation. Although basic 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. With increased competition from DBS and telephone
companies offering video service, our systems are increasingly likely to satisfy
the effective competition standard. We have already secured FCC
recognition of effective competition, and become rate deregulated in many of our
communities.
There
have been frequent calls to impose expanded rate regulation on the cable
industry. Confronted with rapidly increasing cable programming costs,
it is possible that Congress may adopt new constraints on the retail pricing or
packaging
of cable programming. For example, there has been considerable
legislative and regulatory interest in requiring cable operators to offer
historically bundled programming services on an à la carte basis, or to at least
offer a separately available child-friendly “family tier.” Such
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 next election to be made
prior to October 1, 2008. Either option has a potentially adverse
effect on our business. Popular stations invoking “retransmission
consent” have been increasingly demanding 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 commencing on February 17, 2009, the date on which the
broadcast television industry will complete its ongoing transition from an
analog to digital format. The burden could increase further if cable
systems are 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 by February 17, 2009 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 recently adopted a
reduction in the rates that operators can charge commercial leased access users
and imposed additional administrative requirements that will be burdensome on
the cable industry. The FCC’s new rules were adopted to facilitate
commercial leased access usage. Under federal statue, 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 video programmers affiliated with
cable operators from favoring cable operators over competing multichannel video
distributors, such as DBS, and limit the ability of such programmers to offer
exclusive programming arrangements to cable operators. 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. 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 if challenged.
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 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. Although 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 (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 services,
that allocates to the cable operators the additional cost associated with the
“unusable space” of the pole. Such rate change would 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 has expressly ruled
that cable customers must be allowed to purchase set-top boxes from third
parties, and has established a multi-year phase-in during which security
functions (which would remain in the operator's exclusive control) would be
unbundled from the basic converter functions, which could then be provided by
third party vendors. The first phase of implementation has already
passed, whereby cable operators began providing “CableCard” security modules and
support to customer-owned digital televisions and similar devices equipped with
built-in set-top box functionality compatible with CableCards. A
prohibition on cable operators leasing digital set-top boxes that integrate
security and basic navigation functions went into effect on July 1,
2007.
On May 4,
2007, the FCC granted Charter a one-year waiver to exempt our least expensive
digital set-top boxes from the integrated security ban, which can continue to be
deployed until July 1, 2008. However, HD, DVR, and HD/DVR boxes were
not affected by the waiver and the prohibition on leasing of those boxes in
inventory resulted in a $1 million write-off in 2007.
The cable
and consumer electronics industries have been attempting to negotiate an
agreement that would establish additional specifications for two-way digital
televisions. It is unclear how this process will develop and how it
will affect our offering of cable equipment and our relationship with our
customers.
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 existing
cable wiring inside MDUs. The FCC also recently 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. Charter is subject to additional federal, state, and
local laws and regulations that may also impose additional subscriber and
employee privacy restrictions. Further, the FCC, FTC, and many states
now regulate the telemarketing practices of cable operators, including
telemarketing and online marketing efforts.
Other FCC
Regulatory Matters. FCC
regulations cover a variety of additional areas, including, among other things:
(1) equal employment opportunity obligations; (2) customer service standards;
(3) technical service standards; (4) mandatory blackouts of certain network,
syndicated and sports programming; (5) restrictions on political advertising;
(6) restrictions on advertising in children's programming; (7) restrictions on
origination cablecasting; (8) restrictions on carriage of lottery programming;
(9) sponsorship identification obligations; (10) closed captioning of video
programming; (11) licensing of systems and facilities; (12) maintenance of
public files; and (13) emergency alert systems.
It is
possible that Congress or the FCC will expand or modify its regulation of cable
systems in the future, and we cannot predict at this time how that might impact
our business.
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. 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. This
proceeding could lead to proposals or rules 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 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 materially between
jurisdictions. Each franchise generally contains provisions governing
cable operations, franchise fees, system construction, maintenance, technical
performance, and customer service standards. A number of states
subject cable systems to the jurisdiction of centralized state government
agencies, such as public utility commissions. Although local
franchising authorities have considerable discretion in establishing franchise
terms, certain federal protections benefit cable operators. For
example, federal law caps local franchise fees and includes renewal procedures
designed to protect incumbent franchisees from arbitrary denials of
renewal. Even if a franchise is renewed, however, the local
franchising authority may seek to impose new and more onerous requirements as a
condition of renewal. Similarly, if a local franchising authority's
consent is required for the purchase or sale of a cable system, the local
franchising authority may attempt to impose more burdensome requirements as a
condition for providing its consent.
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 some 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 that
would require cable operators offering Internet service to provide
non-discriminatory access to their networks to competing Internet service
providers. In 2005, the U.S. Supreme Court upheld an FCC decision
making it less likely that any non-discriminatory “open access” requirements
(which are generally associated with common carrier regulation of
“telecommunications services”) will be imposed on the cable industry by local,
state or federal authorities. The U.S. Supreme Court held that the
FCC was correct in classifying cable-provided Internet service as an
“information service,” rather than a “telecommunications
service.” This favorable regulatory classification limits the ability
of various governmental authorities to impose open access requirements on
cable-provided Internet service.
The FCC
issued a non-binding policy statement in 2005 establishing four basic principles
that the FCC says will inform its ongoing policymaking activities regarding
broadband-related Internet services. Those principles state that
consumers are entitled to access the lawful Internet content of their choice,
consumers are entitled to run applications and services of their choice, subject
to the needs of law enforcement, consumers are entitled to connect their choice
of legal devices that do not harm the network, and consumers are entitled to
competition among network
providers,
application and service providers and content providers. The FCC
continues to study the network management practices of broadband
providers. It is unclear what, if any, additional regulations the FCC
might impose on our Internet service, and what, if any, impact, such regulations
might have on our business. In addition, legislative proposals have
been introduced in Congress to mandate how providers manage their networks or to
direct the FCC to conduct a study in that regard.
As the
Internet has matured, it has become the subject of increasing regulatory
interest. Congress and federal regulators have adopted a wide range
of measures directly or potentially affecting Internet use, including, for
example, consumer privacy, copyright protections (which afford copyright owners
certain rights against us that could adversely affect our relationship with a
customer accused of violating copyright laws), defamation liability, taxation,
obscenity, and unsolicited commercial e-mail. Additionally, the FCC
and Congress are considering subjecting high-speed Internet access services to
the Universal Service funding requirements. This would impose
significant new costs on our high-speed Internet service. State and
local governmental organizations have also adopted Internet-related
regulations. These various governmental jurisdictions are also
considering additional regulations in these and other areas, such as pricing,
service and product quality, and intellectual property ownership. The
adoption of new Internet regulations or the adaptation of existing laws to the
Internet could adversely affect our business.
Telephone
Service
The 1996
Telecom Act created a more favorable regulatory environment for us to provide
telecommunications services. In particular, it limited the regulatory
role of local franchising authorities and established requirements ensuring that
providers of traditional telecommunications services can interconnect with other
telephone companies to provide 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 and our own entry into the field of
telephone service. The FCC and state regulatory authorities are
considering, for example, whether common carrier regulation traditionally
applied to incumbent local exchange carriers should be modified 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 traditional 911 emergency service
opportunities (“E911”), requirements for accommodating law enforcement wiretaps
(CALEA), universal service fund collection, and telephone relay requirements to
VoIP providers. It is unclear whether and how the FCC will apply
additional types of common carrier regulations, such as inter-carrier
compensations 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 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 and how they will affect
our potential expansion into telephone service.
Employees
As of
December 31, 2007, we had approximately 16,500 full-time equivalent
employees. At December 31, 2007, approximately 100 of our employees
were represented by collective bargaining agreements. We have never
experienced a work stoppage.
Item 1A. Risk
Factors.
Risks Related to Significant
Indebtedness of Us and Our Subsidiaries
We
and our subsidiaries have a significant amount of 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, 2007, our total debt was approximately $19.9
billion, our shareholders' deficit was approximately $7.9 billion and the
deficiency of earnings to cover fixed charges for the year ended December 31,
2007 was $1.4 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. If we need to raise additional capital through the issuance of
equity or find it necessary to engage in a recapitalization or other similar
transaction, our shareholders could suffer significant dilution, including
potential loss of the entire value of their investment, and in the case of a
recapitalization or other similar transaction, our noteholders might not receive
principal and interest payments to which they are contractually
entitled.
Our
significant amount of debt could have other important consequences. For
example, the debt will or could:
·
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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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·
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make
us vulnerable to interest rate increases, because net of hedging
transactions approximately 15% 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, 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 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 their collateral, which includes equity interest in our
subsidiaries, and exercise other rights of secured creditors. Any
default under those credit facilities or the indentures governing our
convertible senior notes or our subsidiaries’ 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 convertible senior notes, Charter
Operating’s credit facilities, and other debt of our subsidiaries, and could
force us to seek the protection of the bankruptcy laws. We and our
subsidiaries may incur significant additional debt in the future. If
current debt 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.
We
may not be able to access funds under the Charter Operating revolving credit
facilities if we fail to satisfy the covenant restrictions, which could
adversely affect our financial condition and our ability to conduct our
business.
Our
subsidiaries have historically relied on access to credit facilities to fund
operations, capital expenditures, and to service parent company debt, and we
expect such reliance to continue in the future. Our total potential
borrowing availability under our revolving credit facility was approximately
$1.0 billion as of December 31, 2007, none of which was limited by covenant
restrictions. There can be no assurance that actual availability under our
credit facility will not be limited by covenant restrictions in the
future.
One of
the conditions to the availability of funding under the Charter
Operating revolving credit facility is the absence of a default under
such facility, including as a result of any failure to comply with the
covenants under the facilities. Among other covenants, the Charter
Operating revolving credit facility requires us to maintain specified
leverage ratios. The Charter Operating revolving credit facility also
provides that Charter Operating obtain an unqualified audit opinion from its
independent accountants for each fiscal year, which, among other things,
requires Charter to demonstrate its ability to fund its projected liquidity
needs for a reasonable period of time following the balance sheet date of the
financial statements being audited. There can be no assurance that Charter
Operating will be able to continue to comply with these or any other of the
covenants under the credit facilities. See “—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” for a
discussion of the consequences of a default under our debt
obligations.
We
depend on generating sufficient cash flow and having access to additional
liquidity sources to fund our debt obligations, capital expenditures, and
ongoing operations.
Our
ability to service our debt and to fund our planned capital expenditures and
ongoing operations will depend on both our ability to generate and grow cash
flow and our access 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 incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers and DSL
providers;
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·
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difficulties
in growing, further introducing, 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 slowdown, including the
recent significant slowdown in the new 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, we believe there is risk that the economic slowdown
could result in reduced spending by customers and advertisers, which could
reduce 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 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. We expect
that cash on hand, cash flows from operating activities, and the amounts
available under Charter Operating’s credit facilities will be adequate to meet
our projected cash needs through the second or third quarter of 2009 and
thereafter will not be sufficient to fund such needs. Our projected
cash needs and projected sources of liquidity depend upon, among other things,
our actual results, the timing and amount of our capital expenditures, and
ongoing compliance with the Charter Operating credit facilities, including
Charter Operating’s obtaining an unqualified audit opinion from our independent
accountants. Charter will therefore need to obtain additional sources
of liquidity by early 2009. Although we and our subsidiaries have
been able to raise funds through issuances of debt in the past, we may not be
able to access additional sources of liquidity on similar terms or pricing as
those that are currently in place, or at all. An inability to access
additional sources of liquidity 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,
which could materially adversely impact our ability to operate our business and
to make payments under our debt instruments, and would reduce or eliminate the
value of our equity shares. See “Part II. Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources.”
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our subsidiaries.
Restrictions in our subsidiaries' debt instruments and under applicable law
limit their ability to provide funds to us or our various debt
issuers.
Charter’s
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:
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the
sum of its debts, including contingent liabilities, was greater than the
fair saleable value of all its
assets;
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·
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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
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it
could not pay its debts as they became
due.
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While we
believe that our relevant subsidiaries currently have surplus and are not
insolvent, there can be no assurance that these 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, 2007, our total debt was approximately $19.9 billion, of which
approximately $19.5 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:
·
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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
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·
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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.
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All
of our and our subsidiaries' outstanding debt is subject to change of control
provisions. We may not have the ability to raise the funds necessary to
fulfill our obligations under our indebtedness following a change of control,
which would place us in default under the applicable debt
instruments.
We may
not have the ability to raise the funds necessary to fulfill our obligations
under our and our subsidiaries' notes and credit facilities following a change
of control. Under the indentures governing our and our subsidiaries'
notes, upon the occurrence of specified change of control events, we are
required to offer to repurchase all of these notes. However, Charter and
our subsidiaries may not have sufficient funds at the time of the change of
control event to make the required repurchase of these notes, and our
subsidiaries are limited in their ability to make distributions or other
payments to fund any required repurchase. In addition, a change of control
under our credit facilities would result in a default under those credit
facilities. Because such credit facilities and our subsidiaries' notes are
obligations of our subsidiaries, the credit facilities and our subsidiaries'
notes would have to be repaid by our subsidiaries before their assets could be
available to us to repurchase our convertible senior notes. Our failure to
make or complete a change of control offer would place us in default under our
convertible senior notes. The failure of our subsidiaries to make a change
of control offer or repay the amounts accelerated under their notes and credit
facilities would place them in default.
Paul
G. Allen and his affiliates are not obligated to purchase equity from,
contribute to, or loan funds to us or any of our subsidiaries.
Paul G.
Allen and his affiliates are not obligated to purchase equity from, contribute
to, or loan funds to us or any of our subsidiaries.
Risks Related to Our
Business
We
operate in a very competitive business environment, which affects our ability to
attract and retain customers and can adversely affect our business and
operations.
The
industry in which we operate is highly competitive and has become more so in
recent years. In some instances, we compete against companies with
fewer regulatory burdens, easier access to financing, greater personnel
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. 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
utilities can offer video and other services in competition with us, and we
expect they will increasingly do so in the future. AT&T and
Verizon are both upgrading their networks. Upgraded portions of these
networks carry two-way video services comparable to ours, in the case of
Verizon, high-speed data services that operate at speeds as high as or higher
than ours, and digital voice services that are similar to 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 5% to 6%
of our estimated homes passed as of December 31, 2007. Additional upgrades
and product launches, primarily by AT&T, 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, 2007, we are aware of traditional overbuild
situations impacting approximately 7% to 8% of our estimated homes passed, and
potential traditional overbuild situations in areas servicing approximately an
additional 2% 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 and the services we can provide with our
cable systems will allow us to compete effectively. Additionally, as
we expand our offerings to include other telecommunications services, and to
introduce new and enhanced services, we will be subject to competition from
other providers of the services we offer. Competition may reduce our
expected growth of future cash flows and increase our projected capital
expenditures. We cannot predict the extent to which competition may
affect our business and results of operations.
We
have a history of net losses and expect to continue to experience net losses.
Consequently, we may not have the ability to finance future
operations.
We have
had a history of net losses and expect to continue to report net losses for the
foreseeable future. Our net losses are principally attributable to
insufficient revenue to cover the combination of operating expenses and interest
expenses we incur because of our high level of debt and the depreciation
expenses that we incur resulting from the capital investments we have made in
our cable properties. These expenses will remain significant.
We reported net losses applicable to common stock of $1.6 billion,
$1.4 billion, and $970 million for the years ended December 31,
2007, 2006, and 2005, respectively. Continued losses would
reduce our cash available from operations to service our indebtedness, as well
as limit our ability to finance our operations.
We
may not have the ability to 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
because of a variety of factors, including 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. We have programming contracts that
have expired and others that will expire at or before the end of
2008. There can be no assurance that these agreements will be renewed
on favorable or comparable terms. To the extent that we are unable to
reach agreement with certain programmers on terms that we believe are reasonable
we may be forced to remove such programming channels from our line-up, which
could result in a further loss of customers.
Increased
demands by owners of some broadcast stations for carriage of other services or
payments to those broadcasters for retransmission consent could further increase
our programming costs. Federal law allows commercial television
broadcast stations to make an election between “must-carry” rights and an
alternative “retransmission-consent” regime. When a station opts for
the latter, cable operators are not allowed to carry the station’s signal
without the station’s permission. In some cases, we carry stations
under short-term arrangements while we attempt to negotiate new long-term
retransmission agreements. If negotiations with these programmers
prove unsuccessful, they could require us to cease carrying their signals,
possibly for an indefinite period. Any loss of stations could make
our video service less attractive to customers, which could result in less
subscription and advertising revenue. In retransmission-consent
negotiations, broadcasters often condition consent with respect to one station
on carriage of one or more other stations or programming services in which they
or their affiliates have an interest. Carriage of these other
services may increase our programming expenses and diminish the amount of
capacity we have available to introduce new services, which could have an
adverse effect on our business and financial results.
If
our required capital expenditures 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, 2007, we spent approximately $1.2 billion on capital
expenditures. During 2008, 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 obtain such capital 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 face risks
inherent in our telephone
business.
We may
encounter unforeseen difficulties as we continue to introduce our telephone
service in new operating areas and as we increase the scale of our telephone
service offerings in areas in which they have already been launched.
First, we face heightened customer expectations for the reliability of telephone
services as compared with our video and high-speed data services. We have
undertaken significant training of customer service representatives and
technicians, and we will continue to need a highly trained workforce. To
ensure reliable service, we may need to increase our expenditures, including
spending on technology, equipment and personnel. If the service is not
sufficiently reliable or we otherwise fail to meet customer expectations, our
telephone business could be adversely affected. Second, the competitive
landscape for telephone services is intense; we face competition from providers
of Internet telephone services, as well as incumbent telephone companies,
cellular telephone service providers, and others, which may limit our ability to
grow the 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.
We depend on
third party suppliers and licensors; thus, if we are unable to procure the
necessary equipment, software or licenses on reasonable terms and on a timely
basis, our ability to offer services could be impaired, and our growth,
operations, business, financial results and financial condition could be
materially adversely affected.
We depend
on third party suppliers and licensors to supply some of the hardware, software
and operational support necessary to provide some of our services. We
obtain these materials from a limited number of vendors, some of which do not
have a long operating history 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 represent our sole source of supply or have, either
through contract or as a result of intellectual property rights, a position of
some exclusivity. If demand exceeds these vendors’ capacity or if these
vendors experience operating or financial difficulties, or are otherwise unable
to provide the equipment we need in a timely manner and at reasonable prices,
our ability to provide some services might be materially adversely affected, or
the need to procure or develop alternative sources of the affected materials or
services might delay our ability to serve our customers. These events
could materially and adversely affect our ability to retain and attract
customers, and have a material negative impact on our operations, business,
financial results and financial condition. A limited number of vendors of
key technologies can lead to less product innovation and higher costs. For
these reasons, we generally endeavor to establish alternative vendors for
materials we consider critical, but may not be able to establish these
relationships or be able to obtain required materials on favorable
terms.
For
example, each of our systems currently purchases set-top boxes from a limited
number of vendors, because each of our cable systems uses one or two
proprietary conditional access security schemes, which allow us to regulate
subscriber access to some services, such as premium channels. We believe
that the proprietary nature of these conditional access schemes makes other
manufacturers reluctant to produce set-top boxes. Future innovation in
set-top boxes may be restricted until these issues are resolved. In
addition, we believe that the general lack of compatibility among set-top box
operating systems has slowed the industry’s development and deployment of
digital set-top box applications.
Malicious
and abusive Internet practices could impair our high-speed Internet
services.
Our
high-speed Internet customers utilize our network to access the Internet and, as
a consequence, we or they may become victim to common malicious and abusive
Internet activities, such as 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, 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, and future transactions
and the timing of such transactions could cause a deemed ownership change for
U.S. federal income tax purposes.
As of
December 31, 2007, we have approximately $7.9 billion of federal tax net
operating losses, resulting in a gross deferred tax asset of approximately $2.8
billion, expiring in the years 2008 through 2027. In addition, we also
have state tax net operating losses, resulting in a gross deferred tax asset of
approximately $358 million, generally
expiring in years 2008 through 2027. Due to uncertainties in
projected future taxable income, valuation allowances have been established
against the gross deferred tax assets for book accounting purposes, except for
deferred benefits available to offset certain deferred tax liabilities.
Currently, such tax net operating losses can accumulate and be used to
offset 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. Although we have
instituted a Rights Plan designed with the goal of attempting to prevent an
ownership change, we cannot provide any assurance that the Rights Plan will
actually prevent an ownership change from occurring. A limitation on
our ability to use our net operating losses, in conjunction with the net
operating loss expiration provisions, could effectively eliminate our ability to
use a substantial portion of our net operating losses to offset any future
taxable income.
Future
transactions and the timing of such transactions could cause an ownership change
for income tax purposes. Such transactions may include additional issuances of
common stock by us (including but not limited to issuances upon future
conversion of our 5.875% and 6.50% convertible senior notes), the return to us
of the borrowed shares loaned by us in connection with the issuance of the
5.875% and 6.50% convertible senior notes, or acquisitions or sales of shares by
certain holders of our shares, including persons who have held, currently hold,
or may accumulate in the future five percent or more of our outstanding stock
(including upon an exchange by Mr. Allen or his affiliates, directly or
indirectly, of membership units of Charter Holdco into Charter’s Class B common
stock). Many of the foregoing transactions, including whether Mr.
Allen exchanges his Charter Holdco units, are beyond our control.
The
failure to maintain a minimum share price of $1.00 per share of
Class A common stock could result in delisting of our shares on the NASDAQ
Global Select Market, which would harm the market price of Charter’s
Class A common stock.
In order
to retain our listing on the NASDAQ Global Select Market we are required to
maintain a minimum bid price of $1.00 per share. Although, as of February 25,
2008, the trading price of Charter’s Class A common stock was
$1.06 per share, our stock has traded near or below this $1.00 minimum in
the recent past. If the bid price falls below the $1.00 minimum for more than 30
consecutive trading days, we will have 180 days to satisfy the $1.00
minimum bid price for a period of at least 10 trading days. If we are unable to
take action to increase the bid price per share (either by reverse stock split
or otherwise), we could be subject to delisting from the NASDAQ Global Select
Market.
The
failure to maintain our listing on the NASDAQ Global Select Market would harm
the liquidity of Charter’s Class A common stock and would have adverse
effect on the market price of our common stock. If the stock were to trade it
would likely trade on the OTC “pink sheets,” which provide significantly less
liquidity than does NASDAQ. As a result, the liquidity of our common stock would
be impaired, not only in the number of shares which could be bought and sold,
but also through delays in the timing of transactions, reduction in security
analysts’ and news media’s coverage, and lower prices for our common stock than
might otherwise be attained. In addition, our common stock would become subject
to the low-priced security or so-called “penny stock” rules that impose
additional sales practice requirements on broker-dealers who sell such
securities.
Risks Related to Mr. Allen's
Controlling Position
The
failure by Mr. Allen to maintain a minimum voting and economic interest in us
could trigger a change of control default under our subsidiary's credit
facilities.
The
Charter Operating credit facilities provide that the failure by (a) Mr. Allen,
(b) his estate, spouse, immediate family members and heirs and (c) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners or other owners of which consist exclusively of Mr. Allen or such other
persons referred to in (b) above or a combination thereof to maintain a 35%
direct or indirect voting interest in the applicable borrower would result in a
change of control default. Such a default could result in the acceleration
of repayment of our and our subsidiaries' indebtedness, including borrowings
under the Charter Operating credit facilities.
Mr. Allen
controls 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.
Mr. Allen
has the ability to control us. Through his control, as of December 31,
2007, of approximately 91% of the voting power of our capital stock, Mr. Allen
is entitled to elect all but one of Charter’s board members and 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 “—
For tax purposes, there is significant risk that we will experience a deemed
ownership change resulting in a material limitation on the use of a substantial
amount of our existing net operating loss carryforwards.” Further,
Mr. Allen could effectively cause us to enter into contracts with another entity
in which he owns an interest, or to decline a transaction into which he (or
another entity in which he owns an interest) ultimately enters.
Current
and future agreements between us and either Mr. Allen or his affiliates may not
be the result of arm's-length negotiations. Consequently, such agreements
may be less favorable to us than agreements that we could otherwise have entered
into with unaffiliated third parties.
We
are not permitted to engage in any business activity other than the cable
transmission of video, audio and data unless Mr. Allen authorizes us to pursue
that particular business activity, which could adversely affect our ability
to offer new products and services outside of the cable transmission business
and to enter into new businesses, and could adversely affect our growth,
financial condition and results of operations.
Our
certificate of incorporation and Charter Holdco's limited liability company
agreement provide that Charter and Charter Holdco and our subsidiaries, cannot
engage in any business activity outside the cable transmission business except
for specified businesses. This will be the case unless Mr. Allen consents
to our engaging in the business activity. The cable transmission business
means the business of transmitting video, audio (including telephone services),
and data over cable television systems owned, operated, or managed by us from
time to time. These provisions may limit our ability to take advantage of
attractive business opportunities.
The
loss of Mr. Allen's services could adversely affect our ability to manage our
business.
Mr. Allen
is Chairman of 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 III Inc. (“Vulcan Cable”)
and CII. The purpose of these special tax allocation provisions was to
allow Mr. Allen to take advantage, for tax purposes, of the losses generated by
Charter Holdco during such period. In some situations, these special tax
allocation provisions could result in our having to pay taxes in an amount that
is more or less than if Charter Holdco had allocated net tax losses to its
members based generally on the percentage of outstanding common membership units
owned by such members. For further discussion on the details of the tax
allocation provisions see “Part II. Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations — Critical
Accounting Policies and Estimates — Income Taxes.”
Risks Related to Regulatory and
Legislative Matters
Our
business is subject to extensive governmental legislation and regulation, which
could adversely affect our business.
Regulation
of the cable industry has increased cable operators' 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
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
and regulations relating to provision of voice
communications;
|
·
|
rules
for franchise renewals and transfers;
and
|
·
|
other
requirements covering a variety of operational areas such as equal
employment opportunity, technical standards, and customer service
requirements.
|
Additionally,
many aspects of these regulations are currently the subject of judicial
proceedings and administrative or legislative proposals. There are also
ongoing efforts to amend or expand the federal, state, and local regulation
of
some of our cable systems,
which may compound the regulatory risks we already face. Certain states
and localities are considering new 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 15% of our franchises, covering approximately 20% of our video
customers, were expired as of December 31, 2007. Approximately 7% of
additional franchises, covering approximately an additional 8% of our video
customers, will expire on or before December 31, 2008, 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 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 considerable legislative and regulatory interest in requiring cable
operators to offer historically bundled programming services on an á la carte
basis, or to at least offer a separately available child-friendly “family tier.”
It is possible that new marketing restrictions could be adopted in the
future. Such restrictions could adversely affect our operations.
Actions
by pole owners might subject us to significantly increased pole attachment
costs.
Pole
attachments are cable wires that are attached to utility poles. Cable
system attachments to public utility poles historically have been regulated at
the federal or state level, generally resulting in favorable pole attachment
rates for attachments used to provide cable service. The FCC
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.
We
may be required to provide access to our network to other Internet service
providers which could significantly increase our competition and adversely
affect our ability to provide new products and services.
A number
of companies, including independent Internet service providers, have requested
local authorities and the FCC to require cable operators to provide
non-discriminatory access to cable's broadband infrastructure, so that these
companies may deliver Internet services directly to customers over cable
facilities. In a 2005 ruling, commonly referred to as Brand X, the Supreme Court
upheld an FCC decision making it less likely that any nondiscriminatory “open
access” requirements (which are generally associated with common carrier
regulation of “telecommunications services”) will be imposed on the cable
industry by local, state or federal authorities. Notwithstanding
Brand X, 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. The proposals might prevent network owners, for
example, from charging bandwidth intensive content providers, such as certain
online gaming, music, and video service providers, an additional fee to ensure
quality delivery of the services to consumers. If we were not allowed to
manage our network as we believe best serves our customers, or were prohibited
from charging heavy bandwidth intensive services a fee for expanding our network
capacity or for use of our networks, we believe that it could impair our ability
to provide high quality service to our customers or use our bandwidth in ways
that would generate maximum revenues. In April 2007, the FCC
issued a notice of inquiry regarding the marketing practices of broadband
providers as a precursor to considering the need for any FCC regulation of
internet service providers. In addition, legislative proposals have
been introduced in Congress to mandate how providers manage their networks or to
direct the FCC to conduct a study in that regard.
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 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). Under two recently released FCC orders, it appears
that our carriage obligations regarding local broadcast programming and
commercial leased access programming will increase substantially if these orders
are not reversed in administrative reconsiderations or judicial
appeals. The FCC recently adopted a new transition plan addressing
the cable industry’s broadcast carriage obligations once the broadcast industry
migration from analog to digital
transmission is completed in February
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 and Universal Service 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 real property and building for our principal
executive offices.
The
physical components of our cable systems require maintenance as well as periodic
upgrades to support the new services and products we introduce. See
“Item 1. Business – Our Network Technology.” We believe that our
properties are generally in good operating condition and are suitable for our
business operations.
Item 3. Legal
Proceedings.
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. Discovery is now
proceeding. Charter is vigorously contesting this
matter.
Rembrandt Technologies, LP v.
Charter Communications et al. (Rembrandt I) On June 6, 2006,
Rembrandt Technologies, LP sued Charter and several other cable companies in the
U.S. District Court for the Eastern District of Texas, alleging patent
infringement. Rembrandt's complaint alleges that each defendant's high
speed data service infringes three patents owned by Rembrandt. Charter has
denied Rembrandt’s allegations.
Rembrandt Technologies, LP v.
Charter Communications, Inc. et al. (Rembrandt II) 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. Charter has denied 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 to conduct pre-trial proceedings before sending the cases
back to the U.S. District Court for the Eastern District of Texas for trial, if
necessary. Charter is vigorously contesting both Rembrandt I and Rembrandt II. On
November 21, 2007, certain vendors of the equipment that is the subject of Rembrandt I and Rembrandt II cases filed a
declaratory judgment against Rembrandt 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. 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.
Verizon
Services Corp. et al. v. Charter Communications, Inc. et al. On February
5, 2008, four Verizon entities sued Charter Communications, Inc. 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. Charter was served with the
complaint on February 6, 2008 and intends to vigorously defend against this
lawsuit.
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.
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, 2007.
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
|
|
2006
|
|
|
|
|
|
|
First
quarter
|
|
$ |
1.25 |
|
|
$ |
0.94 |
|
Second
quarter
|
|
|
1.38 |
|
|
|
1.03 |
|
Third
quarter
|
|
|
1.56 |
|
|
|
1.11 |
|
Fourth
quarter
|
|
|
3.36 |
|
|
|
1.47 |
|
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 |
|
As of
December 31, 2007, there were 3,587 holders of record of Charter’s Class A
common stock, one holder of Charter’s Class B common stock, and 4 holders of
record of our Series A Convertible Redeemable Preferred 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, 2007 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
|
|
25,681,561
|
(1)
|
|
|
$ 4.02
|
|
22,759,689
|
Equity
compensation plans not
approved
by security holders
|
|
289,268
|
(2)
|
|
|
$ 3.91
|
|
--
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
25,970,829
|
|
|
|
$ 4.02
|
|
22,759,689
|
(1)
|
This
total does not include 4,112,375 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 28,008,985 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.”
(E) Performance
Graph
The graph
below shows the cumulative total return on Charter’s Class A common stock
for the period from December 31, 2002 through December 31, 2007, 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, 2002 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
2007, 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)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,002 |
|
|
$ |
5,504 |
|
|
$ |
5,033 |
|
|
$ |
4,760 |
|
|
$ |
4,616 |
|
Operating
income (loss) from continuing operations
|
|
$ |
548 |
|
|
$ |
367 |
|
|
$ |
304 |
|
|
$ |
(1,942 |
) |
|
$ |
484 |
|
Interest
expense, net
|
|
$ |
(1,851 |
) |
|
$ |
(1,877 |
) |
|
$ |
(1,818 |
) |
|
$ |
(1,669 |
) |
|
$ |
(1,557 |
) |
Loss
from continuing operations before income taxes and cumulative effect of
accounting change
|
|
$ |
(1,407 |
) |
|
$ |
(1,399 |
) |
|
$ |
(891 |
) |
|
$ |
(3,575 |
) |
|
$ |
(363 |
) |
Net
loss applicable to common stock
|
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
$ |
(970 |
) |
|
$ |
(4,345 |
) |
|
$ |
(242 |
) |
Basic
and diluted loss from continuing operations before cumulative effect of
accounting change per common share
|
|
$ |
(4.39 |
) |
|
$ |
(4.78 |
) |
|
$ |
(3.24 |
) |
|
$ |
(11.47 |
) |
|
$ |
(0.83 |
) |
Basic
and diluted loss per common share
|
|
$ |
(4.39 |
) |
|
$ |
(4.13 |
) |
|
$ |
(3.13 |
) |
|
$ |
(14.47 |
) |
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding, basic and diluted
|
|
|
368,240,608 |
|
|
|
331,941,788 |
|
|
|
310,209,047 |
|
|
|
300,341,877 |
|
|
|
294,647,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in cable properties
|
|
$ |
14,045 |
|
|
$ |
14,440 |
|
|
$ |
15,666 |
|
|
$ |
16,167 |
|
|
$ |
20,694 |
|
Total
assets
|
|
$ |
14,666 |
|
|
$ |
15,100 |
|
|
$ |
16,431 |
|
|
$ |
17,673 |
|
|
$ |
21,364 |
|
Long-term
debt
|
|
$ |
19,908 |
|
|
$ |
19,062 |
|
|
$ |
19,388 |
|
|
$ |
19,464 |
|
|
$ |
18,647 |
|
Note
payable – related party
|
|
$ |
65 |
|
|
$ |
57 |
|
|
$ |
49 |
|
|
$ |
-- |
|
|
$ |
-- |
|
Minority
interest (b)
|
|
$ |
199 |
|
|
$ |
192 |
|
|
$ |
188 |
|
|
$ |
648 |
|
|
$ |
689 |
|
Preferred
stock — redeemable
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
55 |
|
|
$ |
55 |
|
Shareholders’
deficit
|
|
$ |
(7,892 |
) |
|
$ |
(6,219 |
) |
|
$ |
(4,920 |
) |
|
$ |
(4,406 |
) |
|
$ |
(175 |
) |
(a)
|
In
2006, we sold certain cable television systems in West Virginia and
Virginia to Cebridge Connections, Inc. We determined that the
West Virginia and Virginia cable systems comprise operations and cash
flows that for financial reporting purposes meet the criteria for
discontinued operations. Accordingly, the results of operations
for the West Virginia and Virginia cable systems have been presented as
discontinued operations, net of tax for the year ended December 31, 2006
and all prior periods presented herein have been reclassified to conform
to the current presentation.
|
(b)
|
Minority
interest represents preferred membership interests in our indirect
subsidiary, CC VIII, and since June 6, 2003, the pro rata share of
the profits and losses of CC VIII. This preferred membership interest
arises from approximately $630 million of preferred membership units
issued by CC VIII in connection with an acquisition in February
2000. 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. Under our existing capital structure, Charter will
continue to absorb all future losses for generally accepted accounting
principals (“GAAP”) purposes.
|
Comparability
of the above information from year to year is affected by acquisitions and
dispositions completed by us. See Note 4 to our accompanying
consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
Reference
is made to “Item 1A. Risk Factors” and “Cautionary Statement Regarding
Forward-Looking Statements,” which 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, 2007, 2006, and 2005.
Overview
Charter
is a broadband communications company operating in the United States, with
approximately 5.6 million customers at December 31, 2007. Through our
hybrid fiber and coaxial cable network, we offer our customers traditional cable
video programming (analog and digital, which we refer to as "video" service),
high-speed Internet access, and telephone services, as well as, advanced
broadband services (such as OnDemand, high definition television service and
DVR). See "Item 1. Business — Products and Services" for further
description of these terms, including "customers."
Approximately
89% and 88% of our revenues for each of the years ended December 31, 2007
and 2006, respectively, are attributable to monthly subscription fees charged to
customers for our video, high-speed Internet, telephone, and commercial services
provided by our cable systems. Generally, these customer
subscriptions may be discontinued by the customer at any time. The
remaining 11% and 12% of revenue is derived primarily from advertising revenues,
franchise fee revenues (which are collected by us but then paid to local
franchising authorities), pay-per-view and OnDemand programming (where users are
charged a fee for individual programs viewed), installation or reconnection fees
charged to customers to commence or reinstate service, and commissions related
to the sale of merchandise by home shopping services.
The cable
industry's and our most significant competitive challenges stem from DBS
providers and DSL service providers. In addition, 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 "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 expand our customer base now that approximately 56% 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 DSL 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 video services including wireless
networking, high definition television, OnDemand, and DVR service. In
addition, we expect to increase revenues by expanding the sales of our services
to our commercial customers. However, we cannot assure you that we
will be able to grow revenues at historical rates, if at all.
Our
expenses primarily consist of operating costs, selling, general and
administrative expenses, depreciation and amortization expense and interest
expense. Operating costs primarily include programming costs, the
cost of our workforce, cable service related expenses, advertising sales costs
and franchise fees. Selling, general and administrative expenses
primarily include salaries and benefits, rent expense, billing costs, call
center costs, internal network costs, bad debt expense, and property
taxes. We are attempting to control our costs of operations by
maintaining strict controls on expenses. More specifically, we are
focused on managing our cost structure by improving workforce productivity, and
leveraging our growth, and increasing the effectiveness of our purchasing
activities.
Our
operating income from continuing operations increased to $548 million for the
year ended December 31, 2007 from $367 million for the year ended December 31,
2006 and $304 million for the year ended December 31, 2005. We had
positive operating margins (defined as operating income from continuing
operations divided by revenues) of
9%, 7%,
and 6% for the years ended December 31, 2007, 2006, and 2005,
respectively. The improvement in operating income from continuing
operations and operating margin for the years ended December 31, 2007, 2006, and
2005 is principally due to an increase in revenue over expenses as a result of
increased customers for high-speed Internet, digital video, and telephone
customers, as well as overall rate increases.
We have a
history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally
attributable to insufficient revenue to cover the combination of operating
expenses and interest expenses we incur because of our high amounts of debt, and
depreciation expenses resulting from the capital investments we have made and
continue to make in our cable properties. We expect that these
expenses will remain significant.
Beginning
in 2004 and continuing through 2007, we sold several cable systems to divest
geographically non-strategic assets and allow for more efficient operations,
while also reducing debt or increasing our liquidity. In 2005, 2006,
and 2007, we closed the sale of certain cable systems representing a total of
approximately 33,000, 390,300, and 85,100 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 have 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, and
all prior periods presented herein have been reclassified to conform to the
current presentation. Tax expense of $18 million associated with this
gain on sale was recorded in the fourth quarter of 2006.
Critical Accounting Policies and
Estimates
Certain
of our accounting policies require our management to make difficult, subjective
or complex judgments. Management has discussed these policies with the Audit
Committee of Charter’s board of directors, and the Audit Committee has reviewed
the following disclosure. We consider the following policies to be
the most critical in understanding the estimates, assumptions and judgments that
are involved in preparing our financial statements, and the uncertainties that
could affect our results of operations, financial condition and cash
flows:
·
|
capitalization
of labor and overhead costs;
|
·
|
useful
lives of property, plant and
equipment;
|
·
|
impairment
of property, plant, and equipment, franchises, and
goodwill;
|
In
addition, there are other items within our financial statements that require
estimates or judgment but are not deemed critical, such as the allowance for
doubtful accounts, but changes in 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, 2007 and 2006, the net carrying
amount of our property, plant and equipment (consisting primarily of cable
network assets) was approximately $5.1 billion (representing 35% of total
assets) and $5.2 billion (representing 35% of total assets),
respectively. Total capital expenditures for the years ended
December 31, 2007, 2006, and 2005 were approximately $1.2 billion, $1.1
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 (“overhead”). These indirect costs are
associated with the activities of personnel who assist in connecting and
activating the new service, and
consist
of compensation and overhead costs associated with these support
functions. The costs of disconnecting service at a customer’s
dwelling or reconnecting service to a previously installed dwelling are charged
to operating expense in the period incurred. As our product 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 and betterments, including
replacement of cable drops from the pole to the dwelling, are
capitalized.
We make
judgments regarding the installation and construction activities to be
capitalized. We capitalize direct labor and overhead using standards
developed from actual costs and applicable operational data. We
calculate standards for items such as the labor rates, overhead rates, and the
actual amount of time required to perform a capitalizable
activity. For example, the standard amounts of time required to
perform capitalizable activities are based on studies of the time required to
perform such activities. Overhead rates are established based on an
analysis of the nature of costs incurred in support of capitalizable activities,
and a determination of the portion of costs that is directly attributable to
capitalizable activities. The impact of changes that resulted from
these studies were not significant in the periods presented.
Labor
costs directly associated with capital projects are capitalized. We
capitalize direct labor costs based upon the specific time devoted to network
construction and customer installation activities. Capitalizable
activities performed in connection with customer installations include such
activities as:
·
|
Dispatching
a “truck roll” to the customer’s dwelling for service
connection;
|
·
|
Verification
of serviceability to the customer’s dwelling (i.e., determining whether
the customer’s dwelling is capable of receiving service by our cable
network and/or receiving advanced or Internet
services);
|
·
|
Customer
premise activities performed by in-house field technicians and third-party
contractors in connection with customer installations, installation of
network equipment in connection with the installation of expanded
services, and equipment replacement and betterment;
and
|
·
|
Verifying
the integrity of the customer’s network connection by initiating test
signals downstream from the headend to the customer’s digital set-top
box.
|
Judgment
is required to determine the extent to which overhead costs incurred result from
specific capital activities, and therefore should be capitalized. The
primary costs that are included in the determination of the overhead rate are
(i) employee benefits and payroll taxes associated with capitalized direct
labor, (ii) direct variable costs associated with capitalizable activities,
consisting primarily of installation and construction vehicle costs,
(iii) the cost of support personnel, such as dispatchers, who directly
assist with capitalizable installation activities, and (iv) indirect costs
directly attributable to capitalizable activities.
While we
believe our existing capitalization policies are appropriate, a significant
change in the nature or extent of our system activities could affect
management’s judgment about the extent to which we should capitalize direct
labor or overhead in the future. We monitor the appropriateness of
our capitalization policies, and perform updates to our internal studies on an
ongoing basis to determine whether facts or circumstances warrant a change to
our capitalization policies. We capitalized internal direct labor and
overhead of $194 million, $204 million, and $190 million, respectively, for the
years ended December 31, 2007, 2006, and 2005.
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, we expect depreciation expense to decrease in
2008 by approximately $80 million. The impact of such changes to our
results in 2007 was not material. The effect of a one-year decrease
in the average remaining useful life of our property, plant and equipment would
be an increase in depreciation expense for the year ended December 31, 2007 of
approximately $295 million. The effect of a one-year increase in the
weighted average useful life of our property, plant and equipment would be a
decrease in depreciation expense for the year ended December 31, 2007 of
approximately $152 million.
Depreciation
expense related to property, plant and equipment totaled $1.3 billion, $1.3
billion, and $1.4 billion, representing approximately 24%, 26%, and 30% of costs
and expenses for the years ended December 31, 2007,
2006, and
2005, 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, 2007 and 2006 was
approximately $8.9 billion (representing 61% of total assets) and $9.2 billion
(representing 61% of total assets), respectively. Furthermore, our
noncurrent assets include approximately $67 million of
goodwill.
We
adopted SFAS No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002. SFAS No. 142 requires
that franchise intangible assets that meet specified indefinite-life criteria no
longer be amortized against earnings, but instead must be tested for impairment
annually based on valuations, or more frequently as warranted by events or
changes in circumstances. In determining whether our franchises have
an indefinite-life, we considered the likelihood of franchise renewals, the
expected costs of franchise renewals, and the technological state of the
associated cable systems, with a view to whether or not we are in compliance
with any technology upgrading requirements specified in a franchise
agreement. We have concluded that as of December 31, 2007, 2006, and
2005 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 $3 million, $2 million, and $4 million for the years
ended December 31, 2007, 2006, and 2005, respectively. We expect
that amortization expense on franchise assets will be approximately $2 million
annually for each of the next five years. Actual amortization expense
in future periods could differ from these estimates as a result of new
intangible asset acquisitions or divestitures, changes in useful lives, and
other relevant factors. Our goodwill is also deemed to have an
indefinite life under SFAS No. 142.
SFAS
No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, requires that we evaluate
the recoverability of our property, plant and equipment and 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, 2007,
2006, and 2005. However, approximately $56 million, $159 million, and
$39 million of impairment on assets held for sale were recorded for the years
ended December 31, 2007, 2006, and 2005, respectively. We are also
required to evaluate the recoverability of our indefinite-life franchises, as
well as goodwill, on an annual basis or more frequently as deemed
necessary.
Under
both SFAS No. 144 and SFAS No. 142, if an asset is determined to be impaired, it
is required to be written down to its estimated fair market value. We
determine fair market value based on estimated discounted future cash flows,
using reasonable and appropriate assumptions that are consistent with internal
forecasts. Our assumptions include these and other factors:
Penetration rates for analog and digital video, high-speed Internet, and
telephone; revenue growth rates; and expected operating margins and capital
expenditures. Considerable management judgment is necessary to
estimate future cash flows, and such estimates include inherent uncertainties,
including those relating to the timing and amount of future cash flows, and the
discount rate used in the calculation.
Franchises
were aggregated into essentially inseparable asset groups to conduct the
valuations. The asset groups generally represent geographic
clustering of our cable systems into groups by which such systems are
managed. Management believes such groupings represent the highest and
best use of those assets.
Our
valuations, which are based on the present value of projected after tax cash
flows, result in a value of property, plant and equipment, franchises, customer
relationships, and our total entity value. The value of goodwill is
the
difference
between the total entity value and amounts assigned to the other
assets. The use of different valuation assumptions or definitions of
franchises or customer relationships, such as our inclusion of the value of
selling additional services to our current customers within customer
relationships versus franchises, could significantly impact our valuations and
any resulting impairment.
Franchises,
for valuation purposes, are defined as the future economic benefits of the right
to solicit and service potential customers (customer marketing rights), and the
right to deploy and market new services (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 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
impairment assessment as of October 1, 2007 did not indicate impairment; however
upon completion of our 2008 budgeting process in December 2007, we determined
that a triggering event requiring a reassessment of franchise values had
occurred. Largely driven by increased competition being experienced
by us and our peers, we lowered our projected revenue and expense growth rates
and increased our projected capital expenditures, and accordingly revised our
estimates of future cash flows as compared to those used in prior
valuations. See “Item 1. Business — Competition.” As a
result, we recorded $178 million of impairment for the year ended December 31,
2007.
The
valuations completed at October 1, 2006 and 2005 showed franchise values in
excess of book value, and thus resulted in no impairments.
The
valuations used in our impairment assessments involve numerous assumptions as
noted above. While economic conditions, applicable at the time of the
valuation, indicate the combination of assumptions utilized in the valuations
are reasonable, as market conditions change so will the assumptions, with a
resulting impact on the valuation and consequently the potential impairment
charge. At December 31, 2007, a 10% and 5% decline in the estimated
fair value of our franchise assets in each of our asset groupings would have
increased our impairment charge by approximately $840 million and $390 million,
respectively. A 10% and 5% increase in the estimated fair value of
our franchise assets in each of our asset groupings would have reduced our
impairment charge by approximately $178 million and $90 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, 2007 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, 2007.
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, 2007 and 2006, we have recorded net deferred income tax
liabilities of $665 million and $514 million, respectively. As
part of our net liability, on December 31, 2007 and 2006, we had deferred
tax assets of $5.1 billion and $4.6 billion, respectively, which primarily
relate to financial and tax losses allocated to Charter from Charter
Holdco. We are required to record a valuation allowance when it is
more likely than not that some portion or all of the deferred income tax assets
will not be realized. Given the uncertainty surrounding our ability
to utilize our deferred tax assets, these items have been offset with a
corresponding valuation allowance of $4.8 billion and $4.2 billion at
December 31, 2007 and 2006, respectively.
Charter
and Charter Holdco are currently under examination by the Internal Revenue
Service for the tax years ending December 31, 2004 and
2005. Management does not expect the results of these examinations to
have a material adverse effect on our consolidated financial condition or
results of operations.
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. 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 constitute for the indicated
periods (dollars in millions, except share data):
|
|
Year
Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,002
|
|
100%
|
|
$
|
5,504
|
|
100%
|
|
$
|
5,033
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
2,620
|
|
44%
|
|
|
2,438
|
|
44%
|
|
|
2,203
|
|
44%
|
Selling,
general and administrative
|
|
|
1,289
|
|
21%
|
|
|
1,165
|
|
21%
|
|
|
1,012
|
|
20%
|
Depreciation
and amortization
|
|
|
1,328
|
|
22%
|
|
|
1,354
|
|
25%
|
|
|
1,443
|
|
29%
|
Impairment
of franchises
|
|
|
178
|
|
3%
|
|
|
--
|
|
--
|
|
|
--
|
|
--
|
Asset
impairment charges
|
|
|
56
|
|
1%
|
|
|
159
|
|
3%
|
|
|
39
|
|
1%
|
Other
operating (income) expenses, net
|
|
|
(17)
|
|
--
|
|
|
21
|
|
--
|
|
|
32
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,454
|
|
91%
|
|
|
5,137
|
|
93%
|
|
|
4,729
|
|
94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
548
|
|
9%
|
|
|
367
|
|
7%
|
|
|
304
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,851)
|
|
|
|
|
(1,877)
|
|
|
|
|
(1,818)
|
|
|
Change
in value of derivatives
|
|
|
52
|
|
|
|
|
(4)
|
|
|
|
|
79
|
|
|
Gain
(loss) on extinguishment of debt and
preferred stock
|
|
|
(148)
|
|
|
|
|
101
|
|
|
|
|
521
|
|
|
Other
income (expense), net
|
|
|
(8)
|
|
|
|
|
14
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, before income tax
expense
|
|
|
(1,407)
|
|
|
|
|
(1,399)
|
|
|
|
|
(891)
|
|
|
Income
tax expense
|
|
|
(209)
|
|
|
|
|
(187)
|
|
|
|
|
(112)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,
616)
|
|
|
|
|
(1,586)
|
|
|
|
|
(1,003)
|
|
|
Income
from discontinued operations,
net
of tax
|
|
|
--
|
|
|
|
|
216
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,616)
|
|
|
|
|
(1,370)
|
|
|
|
|
(967)
|
|
|
Dividends
on preferred stock – redeemable
|
|
|
--
|
|
|
|
|
--
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(1,616)
|
|
|
|
$
|
(1,370)
|
|
|
|
$
|
(970)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(4.39)
|
|
|
|
$
|
(4.78)
|
|
|
|
$
|
(3.24)
|
|
|
Net
loss
|
|
$
|
(4.39)
|
|
|
|
$
|
(4.13)
|
|
|
|
$
|
(3.13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
368,240,608
|
|
|
|
|
331,941,788
|
|
|
|
|
310,209,047
|
|
|
Revenues. Average monthly
revenue per video customer, measured on an annual basis, has increased from $74
in 2005 to $82 in 2006 and $93 in 2007. Average monthly revenue per
video customer represents total annual revenue, divided by twelve, divided by
the average number of video customers during the respective
period. Revenue growth in 2007 and 2006 primarily reflects increases
in the number of customers, price increases, and incremental video revenues from
OnDemand, DVR and high-definition television services. Cable system
sales, net of acquisitions, in 2005, 2006, and 2007 reduced the increase in
revenues in 2007 as compared to 2006 by approximately $90 million and in 2006 as
compared to 2005 by approximately $24 million.
Revenues
by service offering were as follows (dollars in millions):
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
over 2006
|
|
|
2006
over 2005
|
|
|
|
Revenues
|
|
|
%
of Revenues
|
|
|
Revenues
|
|
|
%
of Revenues
|
|
|
Revenues
|
|
|
%
of Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
3,392 |
|
|
|
56 |
% |
|
$ |
3,349 |
|
|
|
61 |
% |
|
$ |
3,248 |
|
|
|
65 |
% |
|
$ |
43 |
|
|
|
1 |
% |
|
$ |
101 |
|
|
|
3 |
% |
High-speed
Internet
|
|
|
1,252 |
|
|
|
21 |
% |
|
|
1,051 |
|
|
|
19 |
% |
|
|
875 |
|
|
|
17 |
% |
|
|
201 |
|
|
|
19 |
% |
|
|
176 |
|
|
|
20 |
% |
Telephone
|
|
|
343 |
|
|
|
6 |
% |
|
|
135 |
|
|
|
2 |
% |
|
|
36 |
|
|
|
1 |
% |
|
|
208 |
|
|
|
154 |
% |
|
|
99 |
|
|
|
275 |
% |
Advertising
sales
|
|
|
298 |
|
|
|
5 |
% |
|
|
319 |
|
|
|
6 |
% |
|
|
284 |
|
|
|
6 |
% |
|
|
(21 |
) |
|
|
(7 |
%) |
|
|
35 |
|
|
|
12 |
% |
Commercial
|
|
|
341 |
|
|
|
6 |
% |
|
|
305 |
|
|
|
6 |
% |
|
|
266 |
|
|
|
5 |
% |
|
|
36 |
|
|
|
12 |
% |
|
|
39 |
|
|
|
15 |
% |
Other
|
|
|
376 |
|
|
|
6 |
% |
|
|
345 |
|
|
|
6 |
% |
|
|
324 |
|
|
|
6 |
% |
|
|
31 |
|
|
|
9 |
% |
|
|
21 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,002 |
|
|
|
100 |
% |
|
$ |
5,504 |
|
|
|
100 |
% |
|
$ |
5,033 |
|
|
|
100 |
% |
|
$ |
498 |
|
|
|
9 |
% |
|
$ |
471 |
|
|
|
9 |
% |
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Video customers decreased
by 213,400 and 210,700 customers in 2007 and 2006, respectively, of which 97,100
in 2007 and 137,200 in 2006 was related to system sales, net of
acquisitions. Digital video customers increased by 112,000 and
127,800 customers in 2007 and 2006, respectively. The increase in
2007 and 2006 was reduced by the sale, net of acquisitions, of 38,100 and 42,100
digital customers, respectively. The increases in video revenues are
attributable to the following (dollars in millions):
|
|
2007
compared to 2006
|
|
|
2006
compared to 2005
|
|
|
|
|
|
|
|
|
Rate
adjustments and incremental video services
|
|
$ |
88 |
|
|
$ |
102 |
|
Increase
in digital video customers
|
|
|
59 |
|
|
|
58 |
|
Decrease
in analog video customers
|
|
|
(41 |
) |
|
|
(34 |
) |
System
sales, net of acquisitions
|
|
|
(63 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
43 |
|
|
$ |
101 |
|
High-speed
Internet customers grew by 280,300 and 283,600 customers in 2007 and 2006,
respectively. The increase in 2007 and 2006 was reduced by system
sales, net of acquisitions, of 8,800 and 20,900 high-speed Internet customers,
respectively. The increases in high-speed Internet revenues from our
non-commercial customers are attributable to the following (dollars in
millions):
|
|
2007
compared to 2006
|
|
|
2006
compared to 2005
|
|
|
|
|
|
|
|
|
Increase
in high-speed Internet customers
|
|
$ |
150 |
|
|
$ |
146 |
|
Rate
adjustments and service upgrades
|
|
|
62 |
|
|
|
31 |
|
System
sales, net of acquisitions
|
|
|
(11 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
201 |
|
|
$ |
176 |
|
Revenues
from telephone services increased primarily as a result of an increase of
513,500 and 324,300 telephone customers in 2007 and 2006, respectively, of which
500 and 14,500, in 2007 and 2006, respectively, were related to
acquisitions. Approximately $6 million of the increase in 2006
telephone revenue compared to 2005 is related to an acquisition.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. In 2007, advertising sales
revenues decreased primarily as a result of a decrease in national advertising
sales, including political advertising, as a result of decreases in advertising
sales revenues from programmers, and a decrease of $3 million as a result of
system sales. In 2006, advertising sales revenues increased primarily
as a result of an increase in local and national advertising sales, including
political advertising offset by a decrease of $1 million in 2006 as a result of
system sales. For the years ended December 31, 2007, 2006, and 2005,
we received $13 million, $17 million, and $15 million, respectively, in
advertising sales revenues from vendors.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of an
increase in commercial high-speed Internet revenues. The increases
were reduced by approximately $6 million in 2007 and $1 million in 2006 as a
result of system sales.
Other
revenues consist of franchise fees, equipment rental, customer installations,
home shopping, late payment fees, wire maintenance fees and other miscellaneous
revenues. For the years ended December 31, 2007, 2006, and 2005,
franchise fees represented approximately 47%, 52%, and 54%, respectively, of
total other revenues. The increase in other revenues in 2007 was
primarily the result of increases in universal service fund revenues, wire
maintenance fees, and late payment fees. In 2006, the increase in
other revenues was primarily the result of increases in franchise fees as a
result of increases in revenues upon which the fees apply, and increases in
installation revenues. The increases were reduced by approximately $7
million in 2007 and $2 million in 2006 as a result of system sales.
Operating
expenses. The increases in
our operating expenses are attributable to the following (dollars in
millions):
|
|
2007
compared to 2006
|
|
|
2006
compared to 2005
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
$ |
106 |
|
|
$ |
143 |
|
Labor
costs
|
|
|
49 |
|
|
|
32 |
|
Costs
of providing high-speed Internet and telephone services
|
|
|
33 |
|
|
|
25 |
|
Maintenance
costs
|
|
|
20 |
|
|
|
15 |
|
Other,
net
|
|
|
23 |
|
|
|
27 |
|
System
sales, net of acquisitions
|
|
|
(49 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
182 |
|
|
$ |
235 |
|
Programming
costs were approximately $1.6 billion, $1.5 billion, and $1.4 billion,
representing 60%, 61%, and 62% of total operating expenses for the years ended
December 31, 2007, 2006, and 2005, respectively. Programming
costs consist primarily of costs paid to programmers for analog, premium,
digital, OnDemand, and pay-per-view programming. The increases in
programming costs are primarily a result of contractual rate
increases. Programming costs were also offset by the amortization of
payments received from programmers in support of launches of new channels of $22
million, $32 million, and $41 million in 2007, 2006, and 2005,
respectively. We expect programming expenses to continue to increase
due to a variety of factors, including annual increases imposed by programmers,
amounts paid for retransmission consent, and additional programming, including
high-definition and OnDemand programming, being provided to our
customers.
Labor
costs increased due to an increase in headcount to support improved service
levels and telephone deployment.
Selling, general
and administrative expenses. The increases in
selling, general and administrative expenses are attributable to the following
(dollars in millions):
|
|
2007
compared to 2006
|
|
|
2006
compared to 2005
|
|
|
|
|
|
|
|
|
Customer
care costs
|
|
$ |
62 |
|
|
$ |
56 |
|
Marketing
costs
|
|
|
58 |
|
|
|
38 |
|
Employee
costs
|
|
|
24 |
|
|
|
32 |
|
Property
and casualty costs
|
|
|
(7 |
) |
|
|
17 |
|
Other,
net
|
|
|
2 |
|
|
|
14 |
|
System
sales, net of acquisitions
|
|
|
(15 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
124 |
|
|
$ |
153 |
|
Depreciation and
amortization. Depreciation and
amortization expense decreased by $26 million and $89 million in 2007 and 2006,
respectively. During 2007, the decrease in depreciation was primarily
the result of systems sales, certain assets becoming fully depreciated, and an
$8 million decrease due to the impact of changes in the useful lives of certain
assets. During 2006, the decrease in depreciation was primarily the
result of systems sales and certain assets becoming fully
depreciated.
Impairment of
franchises. Largely driven by increased competition being experienced by
us and our peers, we lowered our projected revenue and expense growth rates and
increased our projected capital expenditures, and accordingly revised our
estimates of future cash flows as compared to those used in prior
valuations. As a result, we recorded $178 million of impairment for
the year ended December 31, 2007. The valuations completed at October
1, 2006 and 2005 showed franchise values in excess of book value, and thus
resulted in no impairments.
Asset impairment
charges. Asset impairment charges for the years ended December 31, 2007,
2006, and 2005 represent the write-down of assets related to cable asset sales
to fair value less costs to sell. See Note 4 to the accompanying
consolidated financial statements contained in “Item 8. Financial Statements and
Supplementary Data.”
Other operating
(income) expenses, net. The decreases in other operating
expenses, net are attributable to the following (dollars in
millions):
|
|
2007
compared to 2006
|
|
|
2006
compared to 2005
|
|
|
|
|
|
|
|
|
Increases
(decreases) in losses on sales of assets
|
|
$ |
(11 |
) |
|
$ |
2 |
|
Hurricane
asset retirement loss
|
|
|
-- |
|
|
|
(19 |
) |
Increases
(decreases) in special charges, net
|
|
|
(27 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(38 |
) |
|
$ |
(11 |
) |
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 decreased by $26 million in 2007 from 2006 and increased by $59
million in 2006 from 2005. 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. The increase in net interest expense from 2005 to 2006 was a
result of an increase in our average borrowing rate from 9.0% in 2005 to 9.5% in
2006, and an increase in average debt outstanding from $19.3 billion in 2005 to
$19.4 billion in 2006.
Change in value
of derivatives. 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. Other derivatives are
held to manage our interest costs and reduce our exposure to increases in
floating interest rates. Change in value of derivatives consists of
the following for the years ended December 31, 2007, 2006 and 2005.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
derivatives from convertible senior notes
|
|
$ |
98 |
|
|
$ |
(10 |
) |
|
$ |
29 |
|
Interest
rate swaps
|
|
|
(46 |
) |
|
|
6 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52 |
|
|
$ |
(4 |
) |
|
$ |
79 |
|
Gain (loss) on
extinguishment of debt and preferred stock. Gain (loss) on
extinguishment of debt and preferred stock consists of the following for the
years ended December 31, 2007, 2006 and 2005.
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Holdings debt exchanges
|
|
$ |
(22 |
) |
|
$ |
108 |
|
|
$ |
500 |
|
Charter
Operating credit facilities refinancing
|
|
|
(13 |
) |
|
|
(27 |
) |
|
|
-- |
|
Charter
convertible note repurchases / exchanges
|
|
|
(113 |
) |
|
|
20 |
|
|
|
3 |
|
Charter
preferred stock repurchase
|
|
|
-- |
|
|
|
-- |
|
|
|
23 |
|
CC
V Holdings notes repurchase
|
|
|
-- |
|
|
|
-- |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(148 |
) |
|
$ |
101 |
|
|
$ |
521 |
|
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 decreases in other income, net are
attributable to the following (dollars in millions):
|
|
2007
compared to 2006
|
|
|
2006
compared to 2005
|
|
|
|
|
|
|
|
|
Decreases
in minority interest
|
|
|
(3 |
) |
|
|
(5 |
) |
Decreases
in investment income
|
|
|
(16 |
) |
|
|
(6 |
) |
Other,
net
|
|
|
(3 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(22 |
) |
|
$ |
(9 |
) |
For more
information, see Note 20 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Income tax
expense. Income tax expense was
recognized through increases in deferred tax liabilities related to our
investment in Charter Holdco, as well as through current federal and state
income tax expense, and increases in the deferred tax liabilities of certain of
our subsidiaries. Income tax expense increases were offset by
decreases in the deferred tax liabilities to reflect the tax impact of certain
divestitures and impairments for a net benefit of $15 million, $23 million, and
$9 million in 2007, 2006, and 2005, respectively.
Income from
discontinued operations, net of tax. Income from discontinued
operations, net of tax, increased in 2006 compared to 2005 due to a gain of $182
million (net of $18 million of tax recorded in the fourth quarter of 2006)
recognized in 2006 on the sale of the West Virginia and Virginia systems.
Net
loss. The
impact to net loss in 2007, 2006, and 2005 of asset impairment charges,
impairment of franchises, extinguishment of debt, and gain on discontinued
operations, net of related tax effects, was to increase net loss by
approximately $347 million, and decrease net loss by approximately $124 million,
and $482 million, respectively.
Preferred stock
dividends.
Preferred stock dividends represents dividends on Charter’s Series A Convertible
Redeemable Preferred Stock at an annual rate of 7.75%. In November
2005, we repurchased 508,546 shares of our Series A Convertible Redeemable
Preferred Stock. Following the repurchase, 36,713 shares of preferred
stock remain outstanding.
Loss per common
share. During 2007 and 2006,
net loss per common share increased by $0.26, or 6%, and increased by $1.00, or
32%, respectively, as a result of the factors described above.
Liquidity and Capital
Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
Overview
of Our Debt and Liquidity
We have
significant amounts of debt. As of December 31, 2007, the
accreted value of our total debt was approximately $19.9 billion, as summarized
below (dollars in millions):
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Semi-Annual
|
|
|
|
|
Principal
|
|
Accreted
|
|
Interest
Payment
|
|
Maturity
|
|
|
Amount
|
|
Value(a)
|
|
Dates
|
|
Date(b)
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due 2009 (c)
|
|
$
|
49
|
|
$
|
49
|
|
|
5/16
& 11/16
|
|
|
11/16/09
|
|
|
6.50%
convertible senior notes due 2027 (c)
|
|
|
479
|
|
|
353
|
|
|
4/1
& 10/1
|
|
|
10/1/27
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior notes due 2009
|
|
|
88
|
|
|
88
|
|
|
4/1
& 10/1
|
|
|
4/1/09
|
|
|
10.750%
senior notes due 2009
|
|
|
63
|
|
|
63
|
|
|
4/1
& 10/1
|
|
|
10/1/09
|
|
|
9.625%
senior notes due 2009
|
|
|
37
|
|
|
37
|
|
|
5/15
& 11/15
|
|
|
11/15/09
|
|
|
10.250%
senior notes due 2010
|
|
|
18
|
|
|
18
|
|
|
1/15
& 7/15
|
|
|
1/15/10
|
|
|
11.750%
senior discount notes due 2010
|
|
|
16
|
|
|
16
|
|
|
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
|
CIH
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due 2014
|
|
|
151
|
|
|
151
|
|
|
1/15
& 7/15
|
|
|
1/15/14
|
|
|
13.500%
senior discount notes due 2014
|
|
|
581
|
|
|
581
|
|
|
1/15
& 7/15
|
|
|
1/15/14
|
|
|
9.920%
senior discount notes due 2014
|
|
|
471
|
|
|
471
|
|
|
4/1
& 10/1
|
|
|
4/1/14
|
|
|
10.000%
senior notes due 2014
|
|
|
299
|
|
|
299
|
|
|
5/15
& 11/15
|
|
|
5/15/14
|
|
|
11.750%
senior discount notes due 2014
|
|
|
815
|
|
|
815
|
|
|
5/15
& 11/15
|
|
|
5/15/14
|
|
|
12.125%
senior discount notes due 2015
|
|
|
217
|
|
|
217
|
|
|
1/15
& 7/15
|
|
|
1/15/15
|
CCH
I (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.00%
senior notes due 2015
|
|
|
3,987
|
|
|
4,083
|
|
|
4/1
& 10/1
|
|
|
10/1/15
|
CCH
II (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250% senior notes due 2010
|
|
|
2,198
|
|
|
2,192
|
|
|
3/15
& 9/15
|
|
|
9/15/10
|
10.250% senior notes due 2013
|
|
|
250
|
|
|
260
|
|
|
4/1
& 10/1
|
|
|
10/1/13
|
CCO
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
8 3/4% senior notes due 2013
|
|
|
800
|
|
|
795
|
|
|
5/15
& 11/15
|
|
|
11/15/13
|
Credit facility
|
|
|
350
|
|
|
350
|
|
|
|
|
|
9/6/14
|
Charter
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Credit
facility
|
|
|
6,844
|
|
|
6,844
|
|
|
|
|
|
varies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,939
|
|
$ |
19,908
|
(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, certain notes
are recorded for financial reporting purposes at values different from the
current accreted value for legal purposes and notes indenture purposes
(the amount that is currently payable if the debt becomes immediately
due). As of
|
|
December
31, 2007, the accreted value of our debt for legal purposes and notes
indentures purposes was $19.9
billion.
|
(b)
|
In
general, the obligors have the right to redeem all of the notes set forth
in the above table (except with respect to the 5.875% convertible senior
notes due 2009, the 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 $65 million CCHC note, which
is included in “note payable-related party” on our accompanying
consolidated balance sheets. See Note 10 to the accompanying
consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary
Data.”
|
In 2008,
$65 million of our debt matures, and in 2009, an additional $302 million
matures. In 2010 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, 2007 under
our long-term debt and certain other contractual obligations and commitments
(dollars in millions).
|
|
Payments
by Period
|
|
|
|
|
|
|
Less
than
|
|
|
|
1-3
|
|
|
|
3-5
|
|
|
More
than
|
|
|
|
Total
|
|
|
1
year
|
|
|
years
|
|
|
years
|
|
|
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt Principal Payments (1)
|
|
$ |
19,939 |
|
|
$ |
65 |
|
|
$ |
2,598 |
|
|
$ |
2,066 |
|
|
$ |
15,210 |
|
Long-Term
Debt Interest Payments (2)
|
|
|
10,111 |
|
|
|
1,666 |
|
|
|
3,297 |
|
|
|
2,805 |
|
|
|
2,343 |
|
Payments
on Interest Rate Instruments (3)
|
|
|
155 |
|
|
|
44 |
|
|
|
91 |
|
|
|
20 |
|
|
|
-- |
|
Capital
and Operating Lease Obligations (4)
|
|
|
99 |
|
|
|
22 |
|
|
|
39 |
|
|
|
19 |
|
|
|
19 |
|
Programming
Minimum Commitments (5)
|
|
|
1,020 |
|
|
|
331 |
|
|
|
418 |
|
|
|
215 |
|
|
|
56 |
|
Other
(6)
|
|
|
475 |
|
|
|
374 |
|
|
|
99 |
|
|
|
2 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
31,799 |
|
|
$ |
2,502 |
|
|
$ |
6,542 |
|
|
$ |
5,127 |
|
|
$ |
17,628 |
|
(1)
|
|
The
table presents maturities of long-term debt outstanding as of
December 31, 2007. 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. Does not include the $65 million CCHC accreting
note which is included in note payable – related party. If not
redeemed prior to maturity in 2020, $380 million would be due under this
note.
|
|
|
|
(2)
|
|
Interest
payments on variable debt are estimated using amounts outstanding at
December 31, 2007 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,
2007. Actual interest payments will differ based on actual
LIBOR rates and actual amounts outstanding for applicable
periods.
|
|
|
|
(3)
|
|
Represents
amounts we will be required to pay under our interest rate hedge
agreements estimated using the average implied forward LIBOR applicable
rates for the quarter during the interest rate reset based on the yield
curve in effect at December 31, 2007.
|
|
|
|
(4)
|
|
We
lease certain facilities and equipment under noncancelable operating
leases. Leases and rental costs charged to expense for the
years ended December 31, 2007, 2006, and 2005, were $23 million, $23
million, and $22 million, respectively.
|
(5)
|
|
We
pay programming fees under multi-year contracts ranging from three to ten
years, typically based on a flat fee per customer, which may be fixed for
the term, or may in some cases escalate over the
term. Programming costs included in the accompanying statement
of operations were approximately $1.6 billion, $1.5 billion, and $1.4
billion, for the years ended December 31, 2007, 2006, and 2005,
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, 2007, 2006, and 2005,
was $47 million, $44 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 $172 million, $175 million, and $165 million for the
years ended December 31, 2007, 2006, and 2005,
respectively.
|
|
·
|
We
also have $136 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, 2007, we generated $327 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
had net cash flows from financing activities of $826 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.
We expect
that cash on hand, cash flows from operating activities, and the amounts
available under Charter Operating’s credit facilities will be adequate to meet
our projected cash needs through the second or third quarter of 2009 and
thereafter will not be sufficient to fund such needs. Our projected
cash needs and projected sources of liquidity depend upon, among other things,
our actual results, the timing and amount of our capital expenditures, and
ongoing compliance with the Charter Operating credit facilities, including
Charter Operating’s obtaining an unqualified audit opinion from our independent
accountants. Charter will therefore need to obtain additional sources
of liquidity by early 2009. Although we and our subsidiaries have
been able to raise funds through issuances of debt in the past, we may not be
able to access additional sources of liquidity on similar terms or pricing as
those that are currently in place, or at all. A continuation of the recent
turmoil in the credit markets and the general economic downturn could adversely
impact the terms and/or pricing when we need to raise additional
liquidity.
Access
to Capital
Our
significant amount of debt could negatively affect our ability to access
additional capital in the future. Additionally, our ability to incur
additional debt may be limited by the restrictive covenants in our indentures
and credit facilities. No assurances can be given that we will not
experience liquidity problems if we do not obtain sufficient additional
financing on a timely basis as our debt becomes due or because of adverse market
conditions, increased competition, or other unfavorable events. If,
at any time, additional capital or borrowing capacity is
required beyond amounts
internally generated or available under our credit facilities, or through
additional debt or equity financings, we would consider:
|
•
|
issuing
equity that would significantly dilute existing
shareholders;
|
|
•
|
issuing
convertible debt or some other securities that may have structural or
other priority over our existing notes and may also, in the case of
convertible debt, significantly dilute Charter’s existing
shareholders;
|
|
•
|
further
reducing our expenses and capital expenditures, which may impair our
ability to increase revenue and grow operating cash
flows;
|
|
•
|
selling
assets; or
|
|
•
|
requesting
waivers or amendments with respect to our credit facilities, which may not
be available on acceptable terms; and cannot be
assured.
|
If the
above strategies were not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. In
addition, if we need to raise additional capital through the issuance of equity
or find it necessary to engage in a recapitalization or other similar
transaction, our shareholders could suffer significant dilution, including
potential loss of the entire value of their investment, and in the case of a
recapitalization or other similar transaction, our noteholders might not receive
principal and interest payments to which they are contractually
entitled.
Credit
Facility Availability
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with our
indentures and the CCO Holdings credit facility, contain certain restrictive
covenants, some of which require us to maintain specified leverage ratios, and
meet financial tests, and provide annual audited financial statements with an
unqualified opinion from our independent accountants. As of December
31, 2007, we were in compliance with the covenants under our indentures and
credit facilities, and we expect to remain in compliance with those covenants
for the next twelve months. As of December 31, 2007, our potential
availability under Charter Operating’s revolving credit facility totaled
approximately $1.0 billion, none of which was limited by covenant
restrictions. Continued access to our revolving credit facility is
subject to our remaining in compliance with these covenants, including covenants
tied to Charter Operating’s leverage ratio and first lien leverage
ratio. If any event of non-compliance were to occur, funding under
the revolving credit facility may not be available and defaults on some or
potentially all of our debt obligations could occur. An event of
default under any of our debt instruments could result in the acceleration of
our payment obligations under that debt and, under certain circumstances, in
cross-defaults under our other debt obligations, which could have a material
adverse effect on our consolidated financial condition and results of
operations.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. In October
2007, Charter Holdco completed an exchange offer in which $364 million of
Charter’s 5.875% convertible senior notes due November 2009 were exchanged for
$479 million of Charter’s 6.50% convertible senior
notes. Approximately $49 million of Charter’s 5.875% convertible
senior notes remain outstanding. 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, 2007, Charter Holdco was owed
$123 million in intercompany loans from Charter Operating and had $62 million in
cash, which amounts were available to pay interest and principal on Charter’s
convertible senior notes.
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 facility,
and unless each applicable subsidiary’s leverage ratio test is met at the time
of such distribution. For the quarter ended December 31, 2007, there was no
default under any of these indentures or credit facilities, and each subsidiary
met its applicable leverage ratio tests based on December 31, 2007 financial
results. Such distributions would be restricted, however, if any such
subsidiary fails to meet these tests at the time of the contemplated
distribution. In the past, certain subsidiaries have
from time to time failed to meet
their leverage ratio test. There can be no assurance that they will
satisfy these tests at the
time of the contemplated distribution. Distributions by Charter
Operating for payment of principal on parent company notes are further
restricted by the covenants in the Charter Operating 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,
2007, 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, 2007 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. See “Risk Factors — Because of our holding company structure,
our outstanding notes are structurally subordinated in right of payment to all
liabilities of our subsidiaries. Restrictions in our subsidiaries’
debt instruments and under applicable law limit their ability to provide funds
to us or our various debt issuers.”
Historical Operating, Financing and
Investing Activities
Cash and Cash
Equivalents. We held $75 million in cash and cash equivalents
as of December 31, 2007 compared to $60 million as of December 31,
2006.
Operating
Activities. 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.
Net cash
provided by operating activities increased $63 million, or 24%, from $260
million for the year ended December 31, 2005 to $323 million for the year ended
December 31, 2006. For the year ended December 31, 2006, net cash
provided by operating activities increased primarily as a result of changes in
operating assets and liabilities that provided $240 million more cash during the
year ended December 31, 2006 than the corresponding period in 2005, offset by an
increase in cash interest expense of $214 million over the corresponding prior
period.
Investing
Activities. Net cash used in
investing activities for the years ended December 31, 2007, 2006, and 2005 was
$1.1 billion, $65 million, and $1.0 billion, respectively. Investing
activities used $1.1 billion more cash during the year ended December 31, 2007
than the corresponding period in 2006 and used $960 million less cash during the
year ended December 31, 2006 than the corresponding period in 2005 primarily due
to $1.0 billion of proceeds received in 2006 from the sale of assets, including
cable systems.
Financing
Activities. Net cash provided by
financing activities was $826 million and $136 million for the years ended
December 31, 2007 and 2005, respectively, and net cash used by financing
activities was $219 million for the year ended December 31, 2006. The
increase in cash provided during the year ended December 31, 2007 compared to
the corresponding in 2006, was primarily the result of an increase in borrowings
of long-term debt. The decrease in cash provided during the year
ended December 31, 2006 compared to the corresponding period in 2005, was
primarily the result of an increase in repayments of long-term
debt.
Capital
Expenditures
We have
significant ongoing capital expenditure requirements. Capital
expenditures were $1.2 billion, $1.1 billion, and $1.1 billion for the years
ended December 31, 2007, 2006, and 2005, respectively. Capital
expenditures increased
as a result of spending on customer premise equipment and support capital to
meet increased digital, high-speed Internet, and telephone customer
growth. See the table below for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt, and borrowings under credit
facilities. In addition, during the years ended December 31, 2007,
2006, and 2005, our liabilities related to capital expenditures decreased by $2
million and increased by $24 million and $8 million, respectively.
During
2008, we expect capital expenditures to be approximately $1.2
billion. We expect that the nature of these expenditures will
continue to be composed primarily of purchases of customer premise equipment
related to telephone and other advanced services, support capital, and scalable
infrastructure. We have funded and expect to continue to fund capital
expenditures for 2008 primarily from cash flows from operating activities and
borrowings under our credit facilities.
We have
adopted capital expenditure disclosure guidance, which was developed by eleven
then publicly traded cable system operators, including Charter, with the support
of the National Cable & Telecommunications Association
(“NCTA”). The disclosure is intended to provide more consistency in
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, 2007,
2006, and 2005 (dollars in millions):
|
|
For
the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Customer
premise equipment (a)
|
|
$ |
578 |
|
|
$ |
507 |
|
|
$ |
434 |
|
Scalable
infrastructure (b)
|
|
|
232 |
|
|
|
214 |
|
|
|
174 |
|
Line
extensions (c)
|
|
|
105 |
|
|
|
107 |
|
|
|
134 |
|
Upgrade/Rebuild
(d)
|
|
|
52 |
|
|
|
45 |
|
|
|
49 |
|
Support
capital (e)
|
|
|
277 |
|
|
|
230 |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$ |
1,244 |
|
|
$ |
1,103 |
|
|
$ |
1,088 |
|
(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, 2007 and 2006, our long-term debt totaled approximately $19.9
billion and $19.1 billion, respectively. This debt was comprised of
approximately $7.2 billion and $5.4 billion of credit facility debt, $12.3
billion and $13.3 billion accreted amount of high-yield notes and $402 million
and $408 million accreted amount of
convertible senior notes at December 31, 2007 and 2006,
respectively. See the organizational chart on page 4 and the first
table under “ — Liquidity and Capital Resources — Overview of Our Debt and
Liquidity” for debt outstanding by issuer.
As of
December 31, 2007 and 2006, the blended weighted average interest rate on our
debt was 9.0% and 9.5%, respectively. The interest rate on
approximately 85% and 78% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate hedge agreements,
as of December 31, 2007 and 2006, respectively. The fair value of our
high-yield notes was $10.3 billion and $13.3 billion at December 31, 2007 and
2006, respectively. The fair value of our convertible senior notes
was $332 million and $576 million at December 31, 2007 and 2006,
respectively. The fair value of our credit facilities was $6.7
billion and $5.4 billion at December 31, 2007 and 2006,
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
The
Charter Operating credit facilities were amended and restated in March 2007,
among other things, to defer maturities and to increase availability. The
Charter Operating credit facilities provide borrowing availability of up to
$8.0 billion as follows:
|
•
|
a
term loan with a 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. However, no
assurance can be given that we could obtain such incremental term loans if
Charter Operating sought to do so.
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.
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. 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. 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 annually deliver audited financial statements
with an unqualified opinion from our independent
accountants,
|
|
•
|
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 CCI 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 2009
Charter
has issued and outstanding 5.875% convertible senior notes due 2009 with a total
principal amount of $49 million. The 5.875% convertible senior notes
are unsecured (except with respect to the collateral as described below) and
rank equally with our existing and future unsubordinated and unsecured
indebtedness (except with respect to the collateral described below), but are
structurally subordinated to all existing and future indebtedness and other
liabilities of our subsidiaries. Interest is payable semi-annually in
arrears.
The
5.875% convertible senior notes are convertible at any time at the option of the
holder into shares of Class A common stock at an initial conversion rate of
413.2231 shares per $1,000 principal amount of notes, which is equivalent to a
conversion price of approximately $2.42 per share, subject to certain
adjustments. Specifically, the adjustments include anti-dilutive
provisions, which cause adjustments to occur automatically based on the
occurrence of specified events to provide protection rights to holders of the
notes. The conversion rate may also be increased (but not to exceed
462 shares per $1,000 principal amount of notes) upon a specified change of
control transaction. Additionally, Charter may elect to increase the
conversion rate under certain circumstances when deemed appropriate, subject to
applicable limitations of the NASDAQ 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 4.9% of the outstanding shares of Charter’s
Class A common stock if such conversion would take place prior to November 16,
2008, or more than 9.9% thereafter.
If a
holder tenders a note for conversion, we may direct that holder (unless we have
called those notes for redemption) to a financial institution designated by us
to conduct a transaction with that institution, on substantially the same terms
that the holder would have received on conversion. But if any such
financial institution does not accept such notes or does not deliver the
required conversion consideration, we remain obligated to convert the
notes.
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.
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 $65 million as of
December 31, 2007 and is recorded in Notes Payable – Related Party in the
accompanying consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data.”
Charter
Communications Holdings, LLC Notes
From
March 1999 through January 2002, Charter Holdings and Charter Communications
Holdings Capital Corporation (“Charter Capital”) jointly issued $10.2 billion
total principal amount of notes, of which $578 million total principal amount
was outstanding as of December 31, 2007. The notes were issued over
15 series of notes with maturities from 2007 through 2012 and have varying
interest rates as set forth in the table above under “Liquidity and Capital
Resources – Overview of Our Debt and Liquidity.” The Charter Holdings
notes are senior debt obligations of Charter Holdings and Charter
Capital. They rank equally with all other current and future
unsecured, unsubordinated obligations of Charter Holdings and Charter
Capital. They are structurally subordinated to the
obligations of Charter Holdings’
subsidiaries, including the CIH notes, the CCH I notes, CCH II notes, the CCO
Holdings notes, the Charter Operating notes, and the Charter Operating credit
facilities.
CCH
I Holdings, LLC Notes
In
September 2005, CIH and CCH I Holdings Capital Corp. jointly issued $2.5 billion
total principal amount of 9.92% to 13.50% senior accreting notes due 2014 and
2015 in exchange for an aggregate amount of $2.4 billion of Charter Holdings
notes due 2011 and 2012, issued over six series of notes and with varying
interest rates as set forth in the
table above under “Liquidity and Capital Resources – Overview of Our Debt and
Liquidity.” The notes are guaranteed on a senior unsecured basis by
Charter Holdings.
The CIH
notes are senior debt obligations of CIH and CCH I Holdings Capital
Corp. They rank equally with all other current and future unsecured,
unsubordinated obligations of CIH and CCH I Holdings Capital
Corp. The CIH notes are structurally subordinated to all obligations
of subsidiaries of CIH, including the CCH I notes, the CCH II notes, the CCO
Holdings notes, the Charter Operating notes and the Charter Operating credit
facilities.
CCH
I, LLC Notes
In
September 2005, CCH I and CCH I Capital Corp. jointly issued $3.5 billion total
principal amount of 11% senior secured notes due October 2015 in exchange for an
aggregate amount of $4.2 billion of certain Charter Holdings notes and, in
September 2006, issued an additional $462 million total principal amount of such
notes in exchange for an aggregate of $527 million of certain Charter Holdings
notes. The notes are guaranteed on a senior unsecured basis by
Charter Holdings and are secured by a pledge of 100% of the equity interest of
CCH I’s wholly owned direct subsidiary, CCH II, and by a pledge of the
CC VIII interests, and the proceeds thereof. Such pledges are
subject to significant limitations as described in the related pledge
agreement.
The CCH I
notes are senior debt obligations of CCH I and CCH I Capital Corp. To
the extent of the value of the collateral, they rank senior to all of CCH I’s
future unsecured senior indebtedness. The CCH I notes are
structurally subordinated to all obligations of subsidiaries of CCH I, including
the CCH II notes, CCO Holdings notes, the Charter Operating notes and the
Charter Operating credit facilities.
CCH
II, LLC Notes
In
September 2003 and January 2006, CCH II and CCH II Capital Corp. jointly issued
approximately $2.2 billion total principal amount of 10.25% senior notes due
2010 (the “CCH II 2010 Notes”) and, in September 2006, issued $250 million total
principal amount of 10.25% senior notes due 2013 (the “CCH II 2013 Notes” and,
together with the CCH II 2010 Notes, the “CCH II notes”) in exchange for an
aggregate of $270 million of certain Charter Holdings notes. The CCH
II Notes are senior debt obligations of CCH II and CCH II Capital
Corp. They rank equally with all other current and future unsecured,
unsubordinated obligations of CCH II and CCH II Capital Corp. The CCH
II 2013 Notes are guaranteed on a senior unsecured basis by Charter
Holdings. The CCH II notes are structurally subordinated to all
obligations of subsidiaries of CCH II, including the CCO Holdings notes, the
Charter Operating notes and the Charter Operating credit
facilities.
CCO
Holdings, LLC Notes
In
November 2003 and August 2005, CCO Holdings and CCO Holdings Capital Corp.
jointly issued $500 million and $300 million, respectively, total principal
amount of 8¾% senior notes due 2013 (the “CCOH 2013 Notes”). 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.
Charter
Communications Operating, LLC Notes
On April
27, 2004, Charter Operating and Charter Communications Operating Capital Corp.
jointly issued $1.1 billion of 8% senior second-lien notes due 2012 and $400
million of 8 3/8% senior second-lien notes due 2014. In March and
June 2005, Charter Operating consummated exchange transactions with a small
number of institutional holders of Charter Holdings 8.25% senior notes due 2007
pursuant to which Charter Operating issued, in private placement transactions,
approximately $333 million principal amount of its 8 3/8% senior second-lien
notes due
2014 in exchange for approximately $346 million of the
Charter Holdings 8.25% senior notes due 2007. 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.
Subject
to specified limitations, CCO Holdings and those subsidiaries of Charter
Operating that are guarantors of, or otherwise obligors with respect to,
indebtedness under the Charter Operating credit facilities and related
obligations are required to guarantee the Charter Operating
notes. The note guarantee of each such guarantor is:
|
·
|
a
senior obligation of such
guarantor;
|
|
·
|
structurally
senior to the outstanding CCO Holdings notes (except in the case of CCO
Holdings’ note guarantee, which is structurally pari passu with such
senior notes), the outstanding CCH II notes, the outstanding CCH I notes,
the outstanding CIH notes, the outstanding Charter Holdings notes and the
outstanding Charter convertible senior
notes;
|
|
·
|
senior
in right of payment to any future subordinated indebtedness of such
guarantor; and
|
|
·
|
effectively
senior to the relevant subsidiary’s unsecured indebtedness, to the extent
of the value of the collateral but subject to the prior lien of the credit
facilities.
|
The
Charter Operating notes and related note guarantees are secured by a
second-priority lien on all of Charter Operating’s and its subsidiaries’ assets
that secure the obligations of Charter Operating or any subsidiary of Charter
Operating with respect to the Charter Operating credit facilities and the
related obligations. The collateral currently consists of the capital
stock of Charter Operating held by CCO Holdings, all of the intercompany
obligations owing to CCO Holdings by Charter Operating or any subsidiary of
Charter Operating, and substantially all of Charter Operating’s and the
guarantors’ assets (other than the assets of CCO Holdings) in which security
interests may be perfected under the Uniform Commercial Code by filing a
financing statement (including capital stock and intercompany obligations),
including, but not limited to:
|
·
|
with
certain exceptions, all capital stock (limited in the case of capital
stock of foreign subsidiaries, if any, to 66% of the capital stock of
first tier foreign Subsidiaries) held by Charter Operating or any
guarantor; and
|
|
·
|
with
certain exceptions, all intercompany obligations owing to Charter
Operating or any guarantor.
|
In the
event that additional liens are granted by Charter Operating or its subsidiaries
to secure obligations under the Charter Operating credit facilities or the
related obligations, second priority liens on the same assets will be granted to
secure the Charter Operating notes, which liens will be subject to the
provisions of an intercreditor agreement (to which none of Charter Operating or
its affiliates are parties). Notwithstanding the foregoing sentence,
no such second priority liens need be provided if the time such lien would
otherwise be granted is not during a guarantee and pledge availability period
(when the Leverage Condition is satisfied), but such second priority liens will
be required to be provided in accordance with the foregoing sentence on or prior
to the fifth business day of the commencement of the next succeeding guarantee
and pledge availability period.
The
Charter Operating notes are senior debt obligations of Charter Operating and
Charter Communications Operating Capital Corp. To the extent of the
value of the collateral (but subject to the prior lien of the credit
facilities), they rank effectively senior to all of Charter Operating’s future
unsecured senior indebtedness.
Redemption
Provisions of Our High Yield Notes
The
various notes issued by our subsidiaries included in the table may be redeemed
in accordance with the following table or are not redeemable until maturity as
indicated:
Note
Series
|
|
Redemption
Dates
|
|
Percentage
of Principal
|
|
|
|
|
|
|
|
|
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
10.000%
senior notes due 2009
|
|
|
Not
callable
|
|
|
|
N/A
|
|
10.750%
senior discount notes due 2009
|
|
|
Not
callable
|
|
|
|
N/A
|
|
9.625%
senor notes due 2009
|
|
|
Not
callable
|
|
|
|
N/A
|
|
10.250%
senior notes due 2010
|
|
|
January
15, 2008 – Thereafter
|
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2010
|
|
|
January
15, 2008 – Thereafter
|
|
|
|
100.000
|
%
|
11.125%
senior notes due 2011
|
|
|
January
15, 2008 – January 14, 2009
|
|
|
|
101.854
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
13.500%
senior discount notes due 2011
|
|
|
January
15, 2008 – January 14, 2009
|
|
|
|
102.250
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
9.920%
senior discount notes due 2011
|
|
|
At
any time
|
|
|
|
100.000
|
%
|
10.000%
senior notes due 2011
|
|
|
May
15, 2007 – May 14, 2008
|
|
|
|
103.333
|
%
|
|
|
|
May
15, 2008 – May 14, 2009
|
|
|
|
101.667
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2011
|
|
|
May
15, 2007 – May 14, 2008
|
|
|
|
103.917
|
%
|
|
|
|
May
15, 2008 – May 14, 2009
|
|
|
|
101.958
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
12.125%
senior discount notes due 2012
|
|
|
January
15, 2008 – January 14, 2009
|
|
|
|
104.042
|
%
|
|
|
|
January
15, 2009 – January 14, 2010
|
|
|
|
102.021
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CIH:
|
|
|
|
|
|
|
|
|
11.125%
senior discount notes due 2014
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
101.854
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
13.500%
senior discount notes due 2014
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
102.250
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
9.920%
senior discount notes due 2014
|
|
|
At
any time
|
|
|
|
100.000
|
%
|
10.000%
senior discount notes due 2014
|
|
|
September
30, 2007 - May 14, 2008
|
|
|
|
103.333
|
%
|
|
|
|
May
15, 2008 - May 14, 2009
|
|
|
|
101.667
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
11.750%
senior discount notes due 2014
|
|
|
September
30, 2007 - May 14, 2008
|
|
|
|
103.917
|
%
|
|
|
|
May
15, 2008 - May 14, 2009
|
|
|
|
101.958
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
12.125%
senior discount notes due 2015
|
|
|
January
15, 2008 - January 14, 2009
|
|
|
|
104.042
|
%
|
|
|
|
January
15, 2009 - January 14, 2010
|
|
|
|
102.021
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CCH
I:
|
|
|
|
|
|
|
|
|
11.000%
senior notes due 2015*
|
|
|
October
1, 2010 – September 30, 2011
|
|
|
|
105.500
|
%
|
|
|
|
October
1, 2011 – September 30, 2012
|
|
|
|
102.750
|
%
|
|
|
|
October
1, 2012 – September 30, 2013
|
|
|
|
101.375
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CCH
II:
|
|
|
|
|
|
|
|
|
10.250%
senior notes due 2010
|
|
|
September
15, 2008 – September 14, 2009
|
|
|
|
105.125
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
10.250%
senior notes due 2013**
|
|
|
October
1, 2010 – September 30, 2011
|
|
|
|
105.125
|
%
|
|
|
|
October
1, 2011 – September 30, 2012
|
|
|
|
102.563
|
%
|
|
|
|
Thereafter
|
|
|
|
100.000
|
%
|
CCO
Holdings:
|
|
|
|
|
|
|
|
|
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
|
%
|
|
*
|
CCH
I may, prior to October 1, 2008 in the event of a qualified equity
offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the CCH I notes at a redemption price of 111% of the
principal amount plus accrued and unpaid
interest.
|
|
**
|
CCH
II may, prior to October 1, 2009 in the event of a qualified equity
offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the CCH II notes at a redemption price of 110.25% of
the principal amount plus accrued and unpaid
interest.
|
|
***
|
Charter
Operating may, at any time and from time to time, at their option, redeem
the outstanding 8% second lien notes due 2012, in whole or in part, at a
redemption price equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the redemption date, plus the
Make-Whole Premium. The Make-Whole Premium is an amount equal
to the excess of (a) the present value of the remaining interest and
principal payments due on a 8% senior second-lien notes due
2012 to its final maturity date, computed using a discount rate equal to
the Treasury Rate on such date plus 0.50%, over (b) the outstanding
principal amount of such Note.
|
In the
event that a specified change of control event occurs, each of the respective
issuers of the notes must offer to repurchase any then outstanding notes at 101%
of their principal amount or accrued value, as applicable, plus accrued and
unpaid interest, if any.
Summary
of Restrictive Covenants of Our High Yield Notes
The
following description is a summary of certain restrictions of our Debt
Agreements. The summary does not restate the terms of the Debt Agreements
in their entirety, nor does it describe all restrictions of the Debt Agreements.
The agreements and instruments governing each of the Debt Agreements are
complicated and you should consult such agreements and instruments for more
detailed information regarding the Debt Agreements.
The notes
issued by Charter Holdings, CIH, CCH I, CCH II, CCO Holdings and Charter
Operating (together, the “note issuers”) were issued pursuant to indentures that
contain covenants that restrict the ability of the note issuers and their
subsidiaries to, among other things:
·
|
pay
dividends or make distributions in respect of capital stock and other
restricted payments;
|
·
|
consolidate,
merge, or sell all or substantially all
assets;
|
·
|
enter
into sale leaseback transactions;
|
·
|
create
restrictions on the ability of restricted subsidiaries to make certain
payments; or
|
·
|
enter
into transactions with affiliates.
|
However,
such covenants are subject to a number of important qualifications and
exceptions. Below we set forth a brief summary of certain of the
restrictive covenants.
Restrictions
on Additional Debt
The
limitations on incurrence of debt and issuance of preferred stock contained in
various indentures permit each of the respective notes issuers and its
restricted subsidiaries to incur additional debt or issue preferred stock, so
long as, after giving pro forma effect to the incurrence, the leverage ratio
would be below a specified level for each of the note issuers as
follows:
Issuer
|
Leverage
Ratio
|
|
|
Charter
Holdings
|
8.75
to 1
|
CIH
|
8.75
to 1
|
CCH
I
|
7.5
to 1
|
CCH
II
|
5.5
to 1
|
CCOH
|
4.5
to 1
|
CCO
|
4.25
to 1
|
In
addition, regardless of whether the leverage ratio could be met, so long as no
default exists or would result from the incurrence or issuance, each issuer and
their restricted subsidiaries are permitted to issue among other permitted
indebtedness:
|
·
|
up
to an amount of debt under credit facilities not otherwise allocated as
indicated below:
|
·
|
Charter
Holdings: $3.5 billion
|
·
|
CIH,
CCH I, CCH II and CCO Holdings: $9.75
billion
|
·
|
Charter
Operating: $6.8 billion
|
|
·
|
up
to $75 million of debt incurred to finance the purchase or capital lease
of new assets;
|
|
·
|
up
to $300 million of additional debt for any
purpose;
|
|
·
|
Charter
Holdings and CIH may incur additional debt in an amount equal to 200% of
proceeds of new cash equity proceeds received since March 1999, the date
of our first indenture, and not allocated for restricted payments or
permitted investments (the “Equity Proceeds Basket”);
and
|
|
·
|
other
items of indebtedness for specific purposes such as intercompany debt,
refinancing of existing debt, and interest rate swaps to provide
protection against fluctuation in interest
rates.
|
Indebtedness
under a single facility or agreement may be incurred in part under one of the
categories listed above and in part under another, and generally may also later
be reclassified into another category including as debt incurred under the
leverage ratio. Accordingly, indebtedness under our credit facilities
is incurred under a combination of the categories of permitted indebtedness
listed above. The restricted subsidiaries of note issuers are
generally not permitted to issue subordinated debt securities.
Restrictions
on Distributions
Generally,
under the various indentures each of the note issuers and their respective
restricted subsidiaries are permitted to pay dividends on or repurchase equity
interests, or make other specified restricted payments, only if the applicable
issuer can incur $1.00 of new debt under the applicable leverage ratio test
after giving effect to the transaction and if no default exists or would exist
as a consequence of such incurrence. If those conditions are met,
restricted payments may be made in a total amount of up to the following amounts
for the applicable issuer as indicated below:
·
|
Charter
Holdings: the sum of 100% of Charter Holdings’ Consolidated
EBITDA, as defined, minus 1.2 times its Consolidated Interest Expense, as
defined, plus 100% of new cash and appraised non-cash equity proceeds
received by Charter Holdings and not allocated to the debt incurrence
covenant or to permitted investments, all cumulatively from March 1999,
the date of the first Charter Holdings indenture, plus $100
million;
|
·
|
CIH: the
sum of the greater of (a) $500 million or (b) 100% of CIH’s Consolidated
EBITDA, as defined, minus 1.2 times its Consolidated Interest Expense, as
defined, plus 100% of new cash and appraised non-cash equity proceeds
received by CIH and not allocated to the debt incurrence covenant or to
permitted investments, all cumulatively from September 28,
2005;
|
·
|
CCH
I: the sum of 100% of CCH I’s Consolidated EBITDA, as defined,
minus 1.3 times its Consolidated Interest Expense, as defined, plus 100%
of new cash and appraised non-cash equity proceeds received by
|
|
CCH
I and not allocated to certain investments, all cumulative from September
28, 2005, plus $100 million; |
·
|
CCH
II: the sum of 100% of CCH II’s Consolidated EBITDA, as
defined, minus 1.3 times its Consolidated Interest Expense, as defined,
plus 100% of new cash and appraised non-cash equity proceeds received by
CCH II and not allocated to certain investments, cumulatively from July 1,
2003, plus $100 million;
|
·
|
CCO
Holdings: the sum of 100% of CCO Holdings’ Consolidated EBITDA,
as defined, minus 1.3 times its Consolidated Interest Expense, as defined,
plus 100% of new cash and appraised non-cash equity proceeds received by
CCO Holdings and not allocated to certain investments, cumulatively from
October 1, 2003, plus $100 million;
and
|
·
|
Charter
Operating: the sum of 100% of Charter Operating’s Consolidated
EBITDA, as defined, minus 1.3 times its Consolidated Interest Expense, as
defined, plus 100% of new cash and appraised non-cash equity proceeds
received by Charter Operating and not allocated to certain investments,
cumulatively from April 1, 2004, plus $100
million.
|
In
addition, each of the note issuers may make distributions or restricted
payments, so long as no default exists or would be caused by transactions among
other distributions or restricted payments:
|
·
|
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year;
|
|
·
|
regardless
of the existence of any default, to pay pass-through tax liabilities in
respect of ownership of equity interests in the applicable issuer or its
restricted subsidiaries; or
|
|
·
|
to
make other specified restricted payments including merger fees up to 1.25%
of the transaction value, repurchases using concurrent new issuances, and
certain dividends on existing subsidiary preferred equity
interests.
|
Each of
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
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. We will adopt SFAS 157 effective January 1,
2008. 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 157 to
fiscal years beginning after November 15, 2008 for nonfinancial assets and
nonfinancial liabilities. We do not expect that the adoption of SFAS
157 will have a material impact on our financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115, which allows measurement at fair value of eligible financial assets
and liabilities that are not otherwise measured at fair value. If the fair
value option for an eligible item is elected, unrealized gains and losses for
that item shall be reported in current earnings at each subsequent reporting
date. SFAS 159 also establishes presentation and disclosure requirements
designed to draw comparison between the different measurement attributes the
company elects for similar types of assets and liabilities. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. We do not expect that the adoption of SFAS 159 will have
a material impact on our financial statements.
In
December 2007, the FASB issued SFAS 141R, Business Combinations: Applying the
Acquisition Method, and SFAS 160, Consolidations, which provide
guidance on the
accounting and reporting for business combinations and minority interests in
consolidated financial statements. SFAS 141R and SFAS 160 are
effective for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. We are currently assessing the impact of SFAS
141R and SFAS 160 on our financial statements.
We do not
believe that any other recently issued, but not yet effective accounting
pronouncements, if adopted, would have a material effect on our accompanying
financial statements.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.
Interest Rate
Risk
We are
exposed to various market risks, including fluctuations in interest
rates. We use interest rate risk management derivative instruments,
including but not limited to interest rate swap agreements and interest rate
collar agreements (collectively referred to herein as interest rate 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.
As of
December 31, 2007 and 2006, our long-term debt totaled approximately $19.9
billion and $19.1 billion, respectively. As of December 31, 2007 and
2006, the weighted average interest rate on the credit facility debt was
approximately 6.8% and 7.9%, respectively, the weighted average interest rate on
the high-yield notes was approximately 10.3% and 10.3%, respectively, and the
weighted average interest rate on the convertible senior notes was approximately
6.4% and 6.9%, respectively, resulting in a blended weighted average interest
rate of 9.0% and 9.5%, respectively. The interest rate on
approximately 85% and 78% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate hedge agreements,
as of December 31, 2007 and 2006, 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, 2007, 2006, and 2005,
change in value of derivatives includes gains of $0, $2 million, and $3 million,
respectively, which represent cash flow hedge ineffectiveness on interest rate
hedge agreements. This ineffectiveness arises from differences
between critical terms of the agreements and the related hedged
obligations.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive income (loss). For the
years ended December 31, 2007, 2006, and 2005,
losses of $123 million and $1 million and a gain of $16 million, respectively,
related to derivative instruments designated as cash flow hedges, were recorded
in accumulated other comprehensive income (loss). The amounts are
subsequently reclassified as an increase or decrease to interest expense in the
same periods in which the related interest on the floating-rate debt obligations
affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as a change in value of derivatives in our statements of
operations. For the years ended December 31, 2007, 2006, and 2005,
change in value of derivatives includes losses of $46 million, and gains of $4
million and $47 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,
2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value at December 31, 2007
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
$ |
-- |
|
|
$ |
237 |
|
|
$ |
2,231 |
|
|
$ |
282 |
|
|
$ |
1,654 |
|
|
$ |
8,340 |
|
|
$ |
12,744 |
|
|
$ |
10,574 |
|
Average
Interest Rate
|
|
|
-- |
|
|
|
9.29 |
% |
|
|
10.26 |
% |
|
|
11.25 |
% |
|
|
7.75 |
% |
|
|
10.70 |
% |
|
|
10.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
|
$ |
65 |
|
|
$ |
65 |
|
|
$ |
65 |
|
|
$ |
65 |
|
|
$ |
65 |
|
|
$ |
6,870 |
|
|
$ |
7,195 |
|
|
$ |
6,723 |
|
Average
Interest Rate
|
|
|
5.94 |
% |
|
|
5.59 |
% |
|
|
6.16 |
% |
|
|
6.51 |
% |
|
|
6.77 |
% |
|
|
6.41 |
% |
|
|
6.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to Fixed Swaps
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
500 |
|
|
$ |
300 |
|
|
$ |
2,500 |
|
|
$ |
1,000 |
|
|
$ |
4,300 |
|
|
$ |
(169 |
) |
Average
Pay Rate
|
|
|
-- |
|
|
|
-- |
|
|
|
6.81 |
% |
|
|
6.98 |
% |
|
|
6.95 |
% |
|
|
6.94 |
% |
|
|
6.93 |
% |
|
|
|
|
Average
Receive Rate
|
|
|
-- |
|
|
|
-- |
|
|
|
6.25 |
% |
|
|
6.35 |
% |
|
|
6.90 |
% |
|
|
6.95 |
% |
|
|
6.80 |
% |
|
|
|
|
The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of our exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts. The estimated
fair value approximates the costs (proceeds) to settle the outstanding
contracts. Interest rates on variable debt are estimated using the
average implied forward LIBOR for the year of maturity based on the yield curve
in effect at December 31, 2007 including applicable bank spread.
At
December 31, 2007 and 2006, we had outstanding $4.3 billion and $1.7 billion,
respectively, in notional amounts of interest rate swaps. The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts.
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, management, including our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures with respect
to the information generated for use in this annual report. The
evaluation was based in part upon reports and 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 Commission’s rules and
forms.
There was
no change in our internal control over financial reporting during the fourth
quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon the above evaluation, we believe that our
controls provide such reasonable assurances.
Management’s
Report on Internal Control Over Financial Reporting
Charter’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control system was designed to provide
reasonable assurance to Charter’s management and board of directors regarding
the preparation and fair presentation of published financial
statements.
Charter’s
management has assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. 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, 2007, 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 2008 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,” and is incorporated
herein by reference.
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,” and is
incorporated herein by reference. Information contained in the Proxy
Statement 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" and is incorporated herein by reference.
The
information required by Item 13 will be included in the Proxy Statement
under the heading “Certain Relationships and Related Transactions” and “Election
of Class B Directors” and is incorporated herein by reference.
The
information required by Item 14 will be included in the Proxy Statement
under the heading “Accounting Matters” and is incorporated herein by
reference.
PART
IV
(a)
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The
following documents are filed as part of this annual
report:
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(1)
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Financial
Statements.
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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.
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(2)
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Financial
Statement Schedules.
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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.
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(3)
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The
index to the exhibits begins on page E-1 of this annual
report.
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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.
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CHARTER
COMMUNICATIONS, INC.,
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Registrant
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By:
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Neil
Smit
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President
and Chief Executive Officer
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Date:
February 27, 2008
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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.
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Chairman
of the Board of Directors
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February
27, 2008
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Paul
G. Allen
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President,
Chief Executive
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Neil
Smit
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Officer,
Director (Principal Executive Officer)
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/s/
Jeffrey T. Fisher |
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Executive
Vice President and Chief Financial Officer |
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February
27, 2008
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Jeffrey
T. Fisher |
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(Principal
Financial Officer) |
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/s/
Kevin D. Howard |
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Vice
President, Controller and Chief Accounting Officer
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Kevin
D. Howard |
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(Principal
Accounting Officer)
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/s/
W. Lance Conn |
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Director |
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W.
Lance Conn |
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Director
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Nathaniel
A. Davis
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Director
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Jonathan
L. Dolgen
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Director
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February
__, 2008
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Rajive
Johri
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Director
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Robert
P. May
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Director
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David
C. Merritt
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Director
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Marc
B. Nathanson
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Director
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Jo
Allen Patton
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Director
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John
H. Tory
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/s/
Larry W. Wangberg
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Director
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Larry
W. Wangberg
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(Exhibits
are listed by numbers corresponding to the Exhibit Table of Item 601
in Regulation S-K).
Exhibit
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Description
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3.1(a)
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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)).
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3.1(b)
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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)).
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3.1(c)
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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)).
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3.2
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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)).
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3.3(a)
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Certificate
of Designation of Series A Convertible Redeemable Preferred Stock of
Charter Communications, Inc. and related Certificate of Correction of
Certificate of Designation (incorporated by reference to Exhibit 3.1
to the quarterly report on Form 10-Q filed by Charter Communications,
Inc. on November 14, 2001 (File
No. 000-27927)).
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3.3(b)
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Certificate
of Amendment of Certificate of Designation of Series A Convertible
Redeemable Preferred Stock of Charter Communications, Inc. (incorporated
by reference to Annex A to the Definitive Information Statement on
Schedule 14C filed by Charter Communications, Inc. on
December 12, 2005 (File No. 000-27927)).
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3.4
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|
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)).
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|
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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.
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4.1
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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)).
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4.2
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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)).
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4.3
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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)).
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4.4
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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)).
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4.5
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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)).
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4.6
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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)).
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10.1
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5.875%
Mirror Convertible Senior Note due 2009, in the principal amount of
$862,500,000 dated as of November 22, 2004 made by Charter
Communications Holding Company, LLC, a Delaware limited liability company,
in favor of Charter Communications, Inc., a Delaware limited liability
company, in favor of Charter Communications, Inc., a Delaware corporation
(incorporated by reference to Exhibit 10.9 to the current report on
Form 8-K of Charter Communications, Inc. filed on November 30,
2004 (File No. 000-27927)).
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10.2
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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)).
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10.3(a)
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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)).
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10.3(b)
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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)).
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10.4(a)
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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)).
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10.4(b)
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|
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)).
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10.5(a)
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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)).
|
10.5(b)
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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)).
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10.6(a)
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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)).
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10.6(b)
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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)).
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10.7(a)
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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)).
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10.7(b)
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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)).
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10.8(a)
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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)).
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10.8(b)
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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)).
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10.9(a)
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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)).
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10.9(b)
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|
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)).
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10.10(a)
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|
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)).
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10.10(b)
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|
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)).
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10.10(c)
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|
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)).
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10.10(d)
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|
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)).
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10.11(a)
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|
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)).
|
10.11(b)
|
|
First
Supplemental Indenture dated as of January 14, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
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)).
|
10.11(c)
|
|
Second
Supplemental Indenture dated as of June 25, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital
Corporation and BNY Midwest Trust Company as Trustee governing
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)).
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10.11(d)
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|
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)).
|
10.12(a)
|
|
Indenture
dated as of May 15, 2001 between Charter Communications Holdings,
LLC, Charter Communications Holdings Capital Corporation and BNY Midwest
Trust Company as Trustee governing 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)).
|
10.12(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)).
|
10.13(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)).
|
10.13(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)).
|
10.13(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)).
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10.14
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|
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)).
|
10.15(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)).
|
10.15(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)).
|
10.16(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)).
|
10.16(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)).
|
10.17
|
|
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)).
|
10.18
|
|
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)).
|
10.19
|
|
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)).
|
10.20
|
|
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)).
|
10.21
|
|
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)).
|
10.22
|
|
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)).
|
10.23
|
|
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)).
|
10.24
|
|
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)).
|
10.25
|
|
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)).
|
10.26(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)).
|
10.26(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)).
|
10.27
|
|
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)).
|
10.28
|
|
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)).
|
10.29
|
|
Exchange
Agreement, dated as of October 31, 2005, by and among Charter
Communications Holding Company, LLC, Charter Investment, Inc. and Paul G.
Allen (incorporated by reference to Exhibit 10.18 to the quarterly
report on Form 10-Q of Charter Communications, Inc. filed on
November 2, 2005 (File No. 000-27927)).
|
10.30
|
|
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)).
|
10.31
|
|
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
9, 2007 (File No. 000-27927)).
|
10.32
|
|
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 9, 2007 (File
No. 000-27927)).
|
10.33
|
|
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
9, 2007 (File No. 000-27927)).
|
10.34
|
|
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 9, 2007 (File No. 000-27927)).
|
10.35
|
|
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)).
|
10.36
|
|
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)).
|
10.37*
|
|
Holdco
Mirror Notes Agreement, dated as of October 2, 2007, by and between
Charter Communications, Inc. and Charter Communications Holding Company,
LLC.
|
10.38(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)).
|
10.38(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)).
|
10.38(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)).
|
10.38(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)).
|
10.38(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)).
|
10.38(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.39(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)).
|
10.40+
|
|
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)).
|
10.41+
|
|
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)).
|
10.42(a)+
|
|
Employment
Agreement, dated as of August 9, 2005, by and between Neil Smit and
Charter Communications, Inc. (incorporated by reference to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on August 15, 2005 (File
No. 000-27927)).
|
10.42(b)+
|
|
Addendum
to the Employment Agreement between Neil Smit and Charter Communications,
Inc., dated as of August 1, 2007 (incorporated by reference to
Exhibit 10.1 to the quarterly report on Form 10-Q of Charter
Communications, Inc. filed on August 2, 2007 (File
No. 000-27927)).
|
10.43+
|
|
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)).
|
10.44+
|
|
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)).
|
10.45+
|
|
Amended
and Restated Employment Agreement between Robert A. Quigley 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)).
|
10.46+
|
|
Amended
and Restated Employment Agreement between Grier C. Raclin and Charter
Communications, Inc., dated as of August 1, 2007 (incorporated by
reference to Exhibit 10.5 to the quarterly report on Form 10-Q
of Charter Communications, Inc. filed on August 2, 2007 (File
No. 000-27927)).
|
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).
|
|
|
|
+
|
|
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, 2007 and 2006
|
|
F-3
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2006,
and 2005
|
|
F-4
|
Consolidated
Statements of Changes in Shareholders’ Equity (Deficit) for the Years
Ended December 31, 2007, 2006, and 2005
|
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006,
and 2005
|
|
F-6
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
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,
2007 and 2006, 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, 2007. We also have audited the Company’s internal
control over financial reporting as of December 31, 2007, 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
St.
Louis, Missouri
February
26, 2008
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in millions, except share data)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
75 |
|
|
$ |
60 |
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$18
and $16, respectively
|
|
|
225 |
|
|
|
195 |
|
Prepaid
expenses and other current assets
|
|
|
36 |
|
|
|
84 |
|
Total
current assets
|
|
|
336 |
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $6,462 and $5,775, respectively
|
|
|
5,103 |
|
|
|
5,217 |
|
Franchises,
net
|
|
|
8,942 |
|
|
|
9,223 |
|
Total
investment in cable properties, net
|
|
|
14,045 |
|
|
|
14,440 |
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
285 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
14,666 |
|
|
$ |
15,100 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,332 |
|
|
$ |
1,298 |
|
Total
current liabilities
|
|
|
1,332 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
19,908 |
|
|
|
19,062 |
|
NOTE
PAYABLE – RELATED PARTY
|
|
|
65 |
|
|
|
57 |
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
|
|
14 |
|
|
|
14 |
|
OTHER
LONG-TERM LIABILITIES
|
|
|
1,035 |
|
|
|
692 |
|
MINORITY
INTEREST
|
|
|
199 |
|
|
|
192 |
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
|
shares
authorized; 36,713 shares issued and outstanding,
respectively
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
|
|
|
|
|
|
|
|
398,226,468
and 407,994,585 shares issued and outstanding,
respectively
|
|
|
-- |
|
|
|
-- |
|
Class
B Common stock; $.001 par value; 4.5 billion
|
|
|
|
|
|
|
|
|
shares
authorized; 50,000 shares issued and outstanding
|
|
|
-- |
|
|
|
-- |
|
Preferred
stock; $.001 par value; 250 million shares
|
|
|
|
|
|
|
|
|
authorized;
no non-redeemable shares issued and outstanding
|
|
|
-- |
|
|
|
-- |
|
Additional
paid-in capital
|
|
|
5,327 |
|
|
|
5,313 |
|
Accumulated
deficit
|
|
|
(13,096 |
) |
|
|
(11,536 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(123 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(7,892 |
) |
|
|
(6,219 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
14,666 |
|
|
$ |
15,100 |
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
6,002 |
|
|
$ |
5,504 |
|
|
$ |
5,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
2,620 |
|
|
|
2,438 |
|
|
|
2,203 |
|
Selling,
general and administrative
|
|
|
1,289 |
|
|
|
1,165 |
|
|
|
1,012 |
|
Depreciation
and amortization
|
|
|
1,328 |
|
|
|
1,354 |
|
|
|
1,443 |
|
Impairment
of franchises
|
|
|
178 |
|
|
|
-- |
|
|
|
-- |
|
Asset
impairment charges
|
|
|
56 |
|
|
|
159 |
|
|
|
39 |
|
Other
operating (income) expenses, net
|
|
|
(17 |
) |
|
|
21 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,454 |
|
|
|
5,137 |
|
|
|
4,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
548 |
|
|
|
367 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,851 |
) |
|
|
(1,877 |
) |
|
|
(1,818 |
) |
Change
in value of derivatives
|
|
|
52 |
|
|
|
(4 |
) |
|
|
79 |
|
Gain
(loss) on extinguishment of debt and preferred stock
|
|
|
(148 |
) |
|
|
101 |
|
|
|
521 |
|
Other
income (expense), net
|
|
|
(8 |
) |
|
|
14 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,955 |
) |
|
|
(1,766 |
) |
|
|
(1,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, before income tax expense
|
|
|
(1,407 |
) |
|
|
(1,399 |
) |
|
|
(891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(209 |
) |
|
|
(187 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,616 |
) |
|
|
(1,586 |
) |
|
|
(1,003 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM DISCONTINUED OPERATIONS,
NET
OF TAX
|
|
|
-- |
|
|
|
216 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,616 |
) |
|
|
(1,370 |
) |
|
|
(967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock – redeemable
|
|
|
-- |
|
|
|
-- |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
$ |
(970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
($4.39 |
) |
|
$ |
(4.78 |
) |
|
$ |
(3.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
($4.39 |
) |
|
$ |
(4.13 |
) |
|
$ |
(3.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
368,240,608 |
|
|
|
331,941,788 |
|
|
|
310,209,047 |
|
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, 2004
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
4,794 |
|
|
$ |
(9,196 |
) |
|
$ |
(4 |
) |
|
$ |
(4,406 |
) |
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
and other
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
9 |
|
|
|
9 |
|
Option
compensation expense, net
|
|
|
-- |
|
|
|
-- |
|
|
|
14 |
|
|
|
-- |
|
|
|
-- |
|
|
|
14 |
|
Issuance
of shares in Securities Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Action
settlement
|
|
|
-- |
|
|
|
-- |
|
|
|
15 |
|
|
|
-- |
|
|
|
-- |
|
|
|
15 |
|
CC
VIII, LLC settlement – exchange of
interests
|
|
|
-- |
|
|
|
-- |
|
|
|
418 |
|
|
|
-- |
|
|
|
-- |
|
|
|
418 |
|
Dividends
on preferred stock – redeemable
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(3 |
) |
|
|
-- |
|
|
|
(3 |
) |
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(967 |
) |
|
|
-- |
|
|
|
(967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2005
|
|
|
-- |
|
|
|
-- |
|
|
|
5,241 |
|
|
|
(10,166 |
) |
|
|
5 |
|
|
|
(4,920 |
) |
Changes
in fair value of interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(1 |
) |
|
|
(1 |
) |
Option
compensation expense, net
|
|
|
-- |
|
|
|
-- |
|
|
|
6 |
|
|
|
-- |
|
|
|
-- |
|
|
|
6 |
|
Issuance
of common stock in exchange for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
notes
|
|
|
-- |
|
|
|
-- |
|
|
|
66 |
|
|
|
-- |
|
|
|
-- |
|
|
|
66 |
|
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,370 |
) |
|
|
-- |
|
|
|
(1,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
|
-- |
|
|
|
-- |
|
|
|
5,313 |
|
|
|
(11,536 |
) |
|
|
4 |
|
|
|
(6,219 |
) |
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 |
) |
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
$ |
(967 |
) |
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,328 |
|
|
|
1,362 |
|
|
|
1,499 |
|
Impairment
of franchises
|
|
|
178 |
|
|
|
-- |
|
|
|
-- |
|
Asset
impairment charges
|
|
|
56 |
|
|
|
159 |
|
|
|
39 |
|
Noncash
interest expense
|
|
|
40 |
|
|
|
128 |
|
|
|
283 |
|
Change
in value of derivatives
|
|
|
(52 |
) |
|
|
4 |
|
|
|
(79 |
) |
Deferred
income taxes
|
|
|
198 |
|
|
|
202 |
|
|
|
109 |
|
Gain
(loss) on sale of assets, net
|
|
|
(3 |
) |
|
|
(192 |
) |
|
|
6 |
|
(Gain)
loss on extinguishment of debt and preferred stock
|
|
|
136 |
|
|
|
(101 |
) |
|
|
(527 |
) |
Other,
net
|
|
|
2 |
|
|
|
4 |
|
|
|
10 |
|
Changes
in operating assets and liabilities, net of effects from acquisitions and
dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(36 |
) |
|
|
24 |
|
|
|
(29 |
) |
Prepaid
expenses and other assets
|
|
|
45 |
|
|
|
55 |
|
|
|
97 |
|
Accounts
payable, accrued expenses and other
|
|
|
51 |
|
|
|
48 |
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
327 |
|
|
|
323 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(1,244 |
) |
|
|
(1,103 |
) |
|
|
(1,088 |
) |
Change
in accrued expenses related to capital expenditures
|
|
|
(2 |
) |
|
|
24 |
|
|
|
8 |
|
Proceeds
from sale of assets, including cable systems
|
|
|
104 |
|
|
|
1,020 |
|
|
|
44 |
|
Other,
net
|
|
|
4 |
|
|
|
(6 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(1,138 |
) |
|
|
(65 |
) |
|
|
(1,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
7,877 |
|
|
|
6,322 |
|
|
|
1,207 |
|
Repayments
of long-term debt
|
|
|
(7,017 |
) |
|
|
(6,938 |
) |
|
|
(1,239 |
) |
Proceeds
from issuance of debt
|
|
|
-- |
|
|
|
440 |
|
|
|
294 |
|
Payments
for debt issuance costs
|
|
|
(42 |
) |
|
|
(44 |
) |
|
|
(70 |
) |
Redemption
of preferred stock
|
|
|
-- |
|
|
|
-- |
|
|
|
(56 |
) |
Other,
net
|
|
|
8 |
|
|
|
1 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
826 |
|
|
|
(219 |
) |
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
15 |
|
|
|
39 |
|
|
|
(629 |
) |
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
60 |
|
|
|
21 |
|
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
75 |
|
|
$ |
60 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$ |
1,792 |
|
|
$ |
1,671 |
|
|
$ |
1,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Holdings, LLC
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
2,423 |
|
Issuance
of debt by CCH I, LLC
|
|
$ |
-- |
|
|
$ |
419 |
|
|
$ |
3,686 |
|
Issuance
of debt by CCH II, LLC
|
|
$ |
-- |
|
|
$ |
410 |
|
|
$ |
-- |
|
Issuance
of debt by Charter Communications Operating, LLC
|
|
$ |
-- |
|
|
$ |
37 |
|
|
$ |
333 |
|
Retirement
of Charter 5.875% convertible notes
|
|
$ |
(364 |
) |
|
$ |
(255 |
) |
|
$ |
-- |
|
Retirement
of Charter Communications Holdings, LLC debt
|
|
$ |
-- |
|
|
$ |
(796 |
) |
|
$ |
(7,000 |
) |
Retirement
of Renaissance Media Group LLC debt
|
|
$ |
-- |
|
|
$ |
(37 |
) |
|
$ |
-- |
|
Issuance
of Charter Class A common stock in Securities Class Action
Settlement
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
15 |
|
CC
VIII, LLC Settlement – exchange of interests
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
418 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(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, 2007 are the 54% controlling common equity interest (52% for
accounting purposes) in Charter Communications Holding Company, LLC (“Charter
Holdco”) and “mirror” notes which are payable by Charter Holdco to Charter and
have the same principal amount and terms as those of Charter’s convertible
senior notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"),
which is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The consolidated financial statements include the
accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." Charter has 100% voting control
over Charter Holdco and consolidates Charter Holdco as a variable interest
entity under Financial Accounting Standards Board ("FASB") Interpretation
("FIN") 46(R) Consolidation of
Variable Interest Entities. Charter Holdco’s limited liability
company agreement provides that so long as Charter’s Class B common stock
retains its special voting rights, Charter will maintain a 100% voting interest
in Charter Holdco. Voting control gives Charter full authority and
control over the operations of Charter Holdco. All significant
intercompany accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (analog and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™, and digital
video recorder service. The Company sells its cable video
programming, high-speed Internet, telephone, and advanced broadband services on
a subscription basis. The Company also sells local advertising on
cable networks.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“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 2007
presentation.
2.
|
Liquidity
and Capital Resources
|
The
Company incurred net loss applicable to common stock of $1.6 billion, $1.4
billion, and $970 million in 2007, 2006, and 2005, respectively. The
Company’s net cash flows from operating activities were $327 million, $323
million, and $260 million for the years ending December 31, 2007, 2006, and
2005, respectively.
The
Company has a significant amount of debt. The Company's long-term
financing as of December 31, 2007 totaled $19.9 billion, consisting of $7.2
billion of credit facility debt, $12.3 billion accreted value of high-yield
notes, and $402 million accreted value of convertible senior
notes. In 2008, $65 million of the Company’s debt matures and in
2009, an additional $302 million matures. In 2010 and beyond,
significant additional amounts will become due under the Company’s remaining
long-term debt obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically
funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, sales of assets, issuances of debt and
equity securities, and cash on hand. However, the mix of funding
sources changes from period to period. For the year ended
December 31, 2007, the Company generated $327 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 $826 million.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
The
Company expects that cash on hand, cash flows from operating activities, and the
amounts available under the Charter Communications Operating, LLC (“Charter
Operating”) credit facilities will be adequate to meet its projected cash needs
through the second or third quarter of 2009 and thereafter will not be
sufficient to fund such 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 capital expenditures, and ongoing
compliance with the Charter Operating credit facilities, including Charter
Operating’s obtaining an unqualified audit opinion from its independent
accountants. The Company will therefore need to obtain additional
sources of liquidity by early 2009. Although the Company and its
subsidiaries have been able to raise funds through issuances of debt in the
past, it may not be able to access additional sources of liquidity on similar
terms or pricing as those that are currently in place, or at all. A
continuation of the recent turmoil in the credit markets and the general
economic downturn could adversely impact the terms and/or pricing when
the Company needs to raise additional liquidity. No assurances can be
given that the Company will not experience liquidity problems if it does not
obtain sufficient additional financing on a timely basis as the Company’s debt
becomes due or because of adverse market conditions, increased competition, or
other unfavorable events.
If, at
any time, additional capital or borrowing capacity is required beyond amounts
internally generated or available under the Company’s credit facilities, or
through additional debt or equity financings, the Company would consider issuing
equity, issuing convertible debt or some other securities, further reducing the
Company’s expenses and capital expenditures, selling assets, or requesting
waivers or amendments with respect to the Company’s credit
facilities.
If the
above strategies were not successful, the Company could be forced to restructure
its obligations or seek protection under the bankruptcy laws. In
addition, if the Company needs to raise additional capital through the issuance
of equity or finds it necessary to engage in a recapitalization or other similar
transaction, the Company’s shareholders could suffer significant dilution,
including potential loss of the entire value of their investment, and in the
case of a recapitalization or other similar transaction, the Company’s
noteholders might not receive principal and interest payments to which they are
contractually entitled.
Credit
Facility Availability
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with the
Company’s indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility,
contain certain restrictive covenants, some of which require the Company to
maintain specified leverage ratios, meet financial tests, and provide annual
audited financial statements with an unqualified opinion from the Company’s
independent accountants. As of December 31, 2007, the Company was in
compliance with the covenants under its indentures and credit facilities, and
the Company expects to remain in compliance with those covenants for the next
twelve months. As of December 31, 2007, the Company’s potential
availability under Charter Operating’s revolving credit facility totaled
approximately $1.0 billion, none of which was limited by covenant
restrictions. Continued access to the Company’s revolving credit
facility is subject to the Company remaining in compliance with these covenants,
including covenants tied to Charter Operating’s leverage ratio and first lien
leverage ratio. If any event of non-compliance were to occur, funding
under the revolving credit facility may not be available and defaults on some or
potentially all of the Company’s debt obligations could occur. An
event of default under any of the Company’s debt instruments could result in the
acceleration of its payment obligations under that debt and, under certain
circumstances, in cross-defaults under its other debt obligations, which could
have a material adverse effect on the Company’s consolidated financial condition
and results of operations.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. In October
2007, Charter Holdco completed an exchange offer, in which $364 million of
Charter’s 5.875% convertible senior notes due November 2009 were exchanged for
$479 million of Charter’s 6.50% convertible senior
notes. Approximately $49 million of Charter’s 5.875% convertible
senior notes remain outstanding. Charter’s ability to make interest
payments on its convertible
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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, 2007, Charter Holdco was owed $123 million in intercompany loans
from Charter Operating and had $62 million in cash, which amounts were available
to pay interest and principal on Charter's convertible senior
notes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, Charter Operating
notes, and under the CCO Holdings credit 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, 2007, there was no
default under any of these indentures or credit facilities, and each subsidiary
met its applicable leverage ratio tests based on December 31, 2007 financial
results. Such distributions would be restricted, however, if any such
subsidiary fails to meet these tests at the time of the contemplated
distribution. In the past, certain subsidiaries have from time to
time failed to meet their leverage ratio test. There can be no
assurance that they will satisfy these tests at the time of the contemplated
distribution. Distributions by Charter Operating for payment of
principal on parent company notes are further restricted by the covenants in the
Charter Operating 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, 2007, 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, 2007 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.
3.
|
Summary
of Significant Accounting
Policies
|
Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are
carried at cost, which approximates market value.
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost, including all material, labor and
certain indirect costs associated with the construction of cable transmission
and distribution facilities. While the Company’s capitalization is
based on specific activities, once capitalized, costs are tracked by fixed asset
category at the cable system level and not on a specific asset
basis. 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
disconnecting
service at a customer’s dwelling or reconnecting service to a previously
installed dwelling are charged to operating expense in the period
incurred. Costs for repairs and maintenance are charged to operating
expense as incurred, while plant and equipment replacement and betterments,
including replacement of cable drops from the pole to the dwelling, are
capitalized.
Depreciation
is recorded using the straight-line composite method over management’s estimate
of the useful lives of the related assets as follows:
Cable
distribution systems
|
|
7-20 years
|
Customer
equipment and installations
|
|
3-5 years
|
Vehicles
and equipment
|
|
1-5 years
|
Buildings
and leasehold improvements
|
|
5-15 years
|
Furniture,
fixtures and equipment
|
|
5 years
|
Asset
Retirement Obligations
Certain
of the Company’s franchise agreements and leases contain provisions requiring
the Company to restore facilities or remove equipment in the event that the
franchise or lease agreement is not renewed. The Company expects to
continually renew its franchise agreements and have concluded that substantially
all of the related franchise rights are indefinite lived intangible
assets. Accordingly, the possibility is remote that the Company would
be required to incur significant restoration or removal costs related to these
franchise agreements in the foreseeable future. Statement of
Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement
Obligations, as interpreted by FIN No. 47, Accounting for Conditional Asset
Retirement Obligations – an Interpretation of FASB Statement No. 143,
requires that a liability be recognized for an asset retirement obligation in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The Company has not recorded an estimate for potential
franchise related obligations but would record an estimated liability in the
unlikely event a franchise agreement containing such a provision were no longer
expected to be renewed. The Company also expects to renew many of its
lease agreements related to the continued operation of its cable business in the
franchise areas. For the Company’s lease agreements, the estimated
liabilities related to the removal provisions, where applicable, have been
recorded and are not significant to the financial statements.
Franchises
Franchise
rights represent the value attributed to agreements with local authorities that
allow access to homes in cable service areas acquired through the purchase of
cable systems. Management estimates the fair value of franchise
rights at the date of acquisition and determines if the franchise has a finite
life or an indefinite-life as defined by SFAS No. 142, Goodwill and Other Intangible
Assets. All franchises that qualify for indefinite-life treatment under
SFAS No. 142 are no longer amortized against earnings but instead are
tested for impairment annually as of October 1, or more frequently as
warranted by events or changes in circumstances (see Note 7). The
Company concluded that 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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
The
following summarizes investment information as of December 31, 2007 and 2006 and
for the years ended December 31, 2007, 2006, and 2005:
|
|
|
|
|
Gain
for
|
|
|
|
Carrying
Value at
|
|
|
the
Years Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
investments, under the cost method
|
|
$ |
-- |
|
|
$ |
34 |
|
|
$ |
-- |
|
|
$ |
12 |
|
|
$ |
-- |
|
Equity
investments, under the equity method
|
|
|
9 |
|
|
|
11 |
|
|
|
-- |
|
|
|
4 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9 |
|
|
$ |
45 |
|
|
$ |
-- |
|
|
$ |
16 |
|
|
$ |
22 |
|
The gain
on equity investments, under the cost method for the year ended December 31,
2006 primarily represents gains realized on the sale of two
investments. The gain on equity investments, under the equity method
for the year ended December 31, 2005 primarily represents a gain realized on an
exchange of the Company’s interest in an equity investee for an investment in a
larger enterprise. Such amounts are included in other income
(expense), net in the statements of operations.
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 2007, 2006, and 2005; however, approximately $56 million,
$159 million, and $39 million of impairment on assets held for sale was recorded
for the years ended December 31, 2007, 2006, and 2005, respectively (see Note
4).
Derivative Financial
Instruments
The
Company accounts for derivative financial instruments in accordance with SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. For
those instruments which qualify as hedging activities, related gains or losses
are recorded in accumulated other comprehensive income (loss). For
all other derivative instruments, the related gains or losses are recorded in
the income statement. The Company uses interest rate derivative
instruments, such as interest rate swap agreements and interest rate collar
agreements (collectively referred to herein as interest rate agreements) to
manage its interest costs 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. Interest rate
collar agreements are used to limit exposure to and benefits from interest rate
fluctuations on variable rate debt to within a certain range of
rates. The Company does not hold or issue any derivative financial
instruments for trading purposes.
Certain
provisions of the Company’s 5.875% 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 separately accounted
for from the convertible senior notes. In accordance with SFAS No.
133, these derivatives are marked to market with gains or losses recorded as the
change in value of derivatives on the Company’s consolidated statement of
operations. For the years ended December 31, 2007, 2006, and 2005,
the Company recognized $98
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
million
in gains, $10 million in losses, and $29 million in gains, respectively, related
to these derivatives. At December 31, 2007 and 2006, $6 million and
$12 million, respectively, is recorded in accounts payable and accrued expenses
relating to the short-term portion of these derivatives and $27 million and $0,
respectively, is recorded in other long-term liabilities related to the
long-term portion.
Revenue
Recognition
Revenues
from residential and commercial video, high-speed Internet and telephone
services are recognized when the related services are
provided. Advertising sales are recognized at estimated realizable
values in the period that the advertisements are broadcast. Franchise
fees imposed by local governmental authorities are collected on a monthly basis
from the Company’s customers and are periodically remitted to local franchise
authorities. Franchise fees of $177 million, $179 million, and $174
million for the years ended December 31, 2007, 2006, and 2005, respectively, are
reported as revenues on a gross basis with a corresponding operating
expense. Sales taxes
collected and remitted to state and local authorities are recorded on a net
basis.
The
Company’s revenues by product line are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
3,392 |
|
|
$ |
3,349 |
|
|
$ |
3,248 |
|
High-speed
Internet
|
|
|
1,252 |
|
|
|
1,051 |
|
|
|
875 |
|
Telephone
|
|
|
343 |
|
|
|
135 |
|
|
|
36 |
|
Advertising
sales
|
|
|
298 |
|
|
|
319 |
|
|
|
284 |
|
Commercial
|
|
|
341 |
|
|
|
305 |
|
|
|
266 |
|
Other
|
|
|
376 |
|
|
|
345 |
|
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,002 |
|
|
$ |
5,504 |
|
|
$ |
5,033 |
|
Programming
Costs
The
Company has various contracts to obtain analog, digital and premium video
programming from program suppliers whose compensation is typically based on a
flat fee per customer. The cost of the right to exhibit network
programming under such arrangements is recorded in operating expenses in the
month the programming is available for exhibition. Programming costs
are paid each month based on calculations performed by the Company and are
subject to periodic audits performed by the programmers. Certain
programming contracts contain launch incentives to be paid by the
programmers. The Company receives these payments related to the
activation of the programmer’s cable television channel and recognizes the
launch incentives on a straight-line basis over the life of the programming
agreement as a reduction of programming expense. This offset to
programming expense was $22 million, $32 million, and $41 million for the years
ended December 31, 2007, 2006, and 2005, respectively. Programming
costs included in the accompanying statement of operations were $1.6 billion,
$1.5 billion, and $1.4 billion for the years ended December 31, 2007, 2006,
and 2005, respectively. As of December 31, 2007 and 2006, the
deferred amounts of launch incentives, included in other long-term liabilities,
were $65 million and $67 million, respectively.
Advertising
Costs
Advertising
costs associated with marketing the Company’s products and services are
generally expensed as costs are incurred. Such advertising expense
was $187 million, $131 million, and $94 million for the years ended
December 31, 2007, 2006, and 2005, respectively.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(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
On
January 1, 2006, the Company adopted 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. Because the Company adopted the fair value recognition
provisions of SFAS No. 123 on January 1, 2003, the revised standard did not have
a material impact on its financial statements. The Company recorded
$18 million, $13 million, and $14 million of option compensation expense which
is included in general and administrative expenses for the years ended December
31, 2007, 2006, and 2005, 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, 2007, 2006,
and 2005, respectively; risk-free interest rates of 4.6%, 4.6%, and 4.0%;
expected volatility of 70.3%, 87.3%, and 70.9% based on historical volatility;
and expected lives of 6.3 years, 6.3 years, and 4.5 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 $199 million and $192
million as of December 31, 2007 and 2006, respectively, on the accompanying
consolidated balance sheets.
Reported
losses allocated to minority interest on the statement of operations reflect the
minority interests in CC VIII. Because minority interest in Charter
Holdco was eliminated, Charter absorbs all losses before income taxes that
otherwise would have been allocated to minority interest (see Note
11).
Loss per Common
Share
Basic
loss per common share is computed by dividing the net loss applicable to common
stock by 368,240,608 shares, 331,941,788 shares, and 310,209,047 shares for the
years ended December 31, 2007, 2006, and 2005, 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
December
31, 2007, Charter Holdco had 737,408,499 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 24.8
million and 39.8 million shares outstanding as of December 31, 2007 and 2006,
respectively, pursuant to the share lending agreement described in Note 13 are
required to be returned, in accordance with the contractual arrangement, and are
treated in basic and diluted earnings per share as if they were already returned
and retired. Consequently, there is no impact of the shares of common
stock lent under the share lending agreement in the earnings per share
calculation.
Segments
SFAS
No. 131, Disclosure about
Segments of an Enterprise and Related Information, established standards
for reporting information about operating segments in annual financial
statements and in interim financial reports issued to
shareholders. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated on a regular basis by the chief operating decision maker, or decision
making group, in deciding how to allocate resources to an individual segment and
in assessing performance of the segment.
The
Company’s operations are managed on the basis of geographic divisional operating
segments. The Company has evaluated the criteria for aggregation of
the geographic operating segments under paragraph 17 of SFAS No. 131 and
believes it meets each of the respective criteria set forth. The
Company delivers similar products and services within each of its geographic
divisional operations. Each geographic and divisional service area
utilizes similar means for delivering the programming of the Company’s services;
have similarity in the type or class of customer receiving the products and
services; distributes the Company’s services over a unified network; and
operates within a consistent regulatory environment. In addition,
each of the geographic divisional operating segments has similar economic
characteristics. In light of the Company’s similar services, means
for delivery, similarity in type of customers, the use of a unified network and
other considerations across its geographic divisional operating structure,
management has determined that the Company has one reportable segment, broadband
services.
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, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
Summarized
consolidated financial information for the years ended December 31, 2006 and
2005 for the West Virginia and Virginia cable systems is as
follows:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
109 |
|
|
$ |
221 |
|
Income
before income taxes
|
|
$ |
238 |
|
|
$ |
39 |
|
Income
tax expense
|
|
$ |
(22 |
) |
|
$ |
(3 |
) |
Net
income
|
|
$ |
216 |
|
|
$ |
36 |
|
Earnings
per common share, basic and diluted
|
|
$ |
0.65 |
|
|
$ |
0.12 |
|
In 2007,
2006, and 2005, the Company recorded asset impairment charges of $56 million,
$60 million, and $39 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
16 |
|
|
$ |
17 |
|
|
$ |
15 |
|
Charged
to expense
|
|
|
107 |
|
|
|
89 |
|
|
|
76 |
|
Uncollected
balances written off, net of recoveries
|
|
|
(105 |
) |
|
|
(90 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$ |
18 |
|
|
$ |
16 |
|
|
$ |
17 |
|
6.
|
Property,
Plant and Equipment
|
Property,
plant and equipment consists of the following as of December 31, 2007 and
2006:
|
|
2007 |
|
|
2006
|
|
|
|
|
|
|
|
|
Cable
distribution systems
|
|
$ |
6,697 |
|
|
$ |
6,415 |
|
Customer
equipment and installations
|
|
|
3,740 |
|
|
|
3,428 |
|
Vehicles
and equipment
|
|
|
257 |
|
|
|
254 |
|
Buildings
and leasehold improvements
|
|
|
483 |
|
|
|
498 |
|
Furniture,
fixtures and equipment
|
|
|
388 |
|
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11,565 |
|
|
|
10,992 |
|
Less:
accumulated depreciation
|
|
|
(6,462 |
) |
|
|
(5,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
5,103 |
|
|
$ |
5,217 |
|
The
Company has adjusted the historical cost basis and related accumulated
depreciation as of December 31, 2007 and 2006 to reflect estimated asset
retirements through December 31, 2007 and 2006, respectively. No gain
or loss was recorded on these retirements.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
certain
property, plant, and equipment based on technological changes. The
change in useful lives reduced depreciation expense by approximately $8 million
during 2007.
Depreciation
expense for the years ended December 31, 2007, 2006, and 2005 was $1.3 billion,
$1.3 billion, and $1.4 billion, respectively.
Franchise
rights represent the value attributed to agreements with local authorities that
allow access to homes in cable service areas acquired through the purchase of
cable systems. Management estimates the fair value of franchise
rights at the date of acquisition and determines if the franchise has a finite
life or an indefinite-life as defined by SFAS No. 142, Goodwill and Other Intangible
Assets. Franchises that qualify for indefinite-life treatment
under SFAS No. 142 are tested for impairment annually each October 1 based on
valuations, or more frequently as warranted by events or changes in
circumstances. The Company’s impairment assessment as of October 1,
2007 did not indicate impairment; however upon completion of its 2008 budgeting
process in December 2007, the Company determined that a triggering event
requiring a reassessment of franchise values had occurred. Largely
driven by increased competition being experienced by the Company and its peers,
the Company lowered its projected revenue and expense growth rates and increased
its projected capital expenditures, and accordingly revised its estimates of
future cash flows as compared to those used in prior valuations. As a
result, the Company recorded $178 million of impairment for the year ended
December 31, 2007. The valuations completed at October 1, 2006 and 2005 showed
franchise values in excess of book value, and thus resulted in no
impairments. Franchises are aggregated into essentially inseparable
asset groups to conduct the valuations. The asset groups generally
represent geographical clustering of the Company’s cable systems into groups by
which such systems are managed. Management believes such grouping
represents the highest and best use of those assets.
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, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
As of
December 31, 2007 and 2006, indefinite-lived and finite-lived intangible
assets are presented in the following table:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Indefinite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$ |
8,929
|
|
|
$ |
--
|
|
|
$ |
8,929
|
|
|
$ |
9,207
|
|
|
$ |
--
|
|
|
$ |
9,207
|
|
Goodwill
|
|
|
67
|
|
|
|
--
|
|
|
|
67
|
|
|
|
61
|
|
|
|
--
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,996
|
|
|
$ |
--
|
|
|
$ |
8,996
|
|
|
$ |
9,268
|
|
|
$ |
--
|
|
|
$ |
9,268
|
|
Finite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$ |
23
|
|
|
$ |
10
|
|
|
$ |
13
|
|
|
$ |
23
|
|
|
$ |
7
|
|
|
$ |
16
|
|
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. For the year ended December 31, 2006, the net carrying amount
of indefinite-lived and finite-lived franchises was reduced by $452 million and
$2 million, respectively, related to cable asset sales completed in 2006 and
indefinite-lived franchises were further reduced by $147 million as a result of
the asset impairment charges recorded related to these cable asset
sales.
Franchise
amortization expense represents the amortization relating to franchises that did
not qualify for indefinite-life treatment under SFAS No. 142, including costs
associated with franchise renewals. Franchise amortization expense
for the years ended December 31, 2007, 2006, and 2005 was $3 million, $2
million, and $4 million, respectively. The Company expects that
amortization expense on franchise assets will be approximately $2 million
annually for each of the next five years. Actual amortization expense
in future periods could differ from these estimates as a result of new
intangible asset acquisitions or divestitures, changes in useful lives and other
relevant factors.
For the
year ended December 31, 2007 and 2006, the net carrying amount of goodwill
increased $6 million and $9 million, respectively, as a result of the Company’s
purchase of certain cable systems in 2007 and 2006.
8.
|
Accounts
Payable and Accrued
Expenses
|
Accounts
payable and accrued expenses consist of the following as of December 31, 2007
and 2006:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Accounts
payable – trade
|
|
$ |
127 |
|
|
$ |
92 |
|
Accrued
capital expenditures
|
|
|
95 |
|
|
|
97 |
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
418 |
|
|
|
410 |
|
Programming
costs
|
|
|
273 |
|
|
|
268 |
|
Franchise
related fees
|
|
|
66 |
|
|
|
68 |
|
Compensation
|
|
|
116 |
|
|
|
110 |
|
Other
|
|
|
237 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,332 |
|
|
$ |
1,298 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
Long-term
debt consists of the following as of December 31, 2007 and
2006:
|
|
2007
|
|
|
2006
|
|
|
|
Principal
|
|
|
Accreted
|
|
|
Principal
|
|
|
Accreted
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due November 16, 2009
|
|
$ |
49 |
|
|
$ |
49 |
|
|
$ |
413 |
|
|
$ |
408 |
|
6.50%
convertible senior notes due October 1, 2027
|
|
|
479 |
|
|
|
353 |
|
|
|
-- |
|
|
|
-- |
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.250%
senior notes due April 1, 2007
|
|
|
-- |
|
|
|
-- |
|
|
|
105 |
|
|
|
105 |
|
8.625%
senior notes due April 1, 2009
|
|
|
-- |
|
|
|
-- |
|
|
|
187 |
|
|
|
187 |
|
10.000%
senior notes due April 1, 2009
|
|
|
88 |
|
|
|
88 |
|
|
|
105 |
|
|
|
105 |
|
10.750%
senior notes due October 1, 2009
|
|
|
63 |
|
|
|
63 |
|
|
|
71 |
|
|
|
71 |
|
9.625%
senior notes due November 15, 2009
|
|
|
37 |
|
|
|
37 |
|
|
|
52 |
|
|
|
52 |
|
10.250%
senior notes due January 15, 2010
|
|
|
18 |
|
|
|
18 |
|
|
|
32 |
|
|
|
32 |
|
11.750%
senior discount notes due January 15, 2010
|
|
|
16 |
|
|
|
16 |
|
|
|
21 |
|
|
|
21 |
|
11.125%
senior notes due January 15, 2011
|
|
|
47 |
|
|
|
47 |
|
|
|
52 |
|
|
|
52 |
|
13.500%
senior discount notes due January 15, 2011
|
|
|
60 |
|
|
|
60 |
|
|
|
62 |
|
|
|
62 |
|
9.920%
senior discount notes due April 1, 2011
|
|
|
51 |
|
|
|
51 |
|
|
|
63 |
|
|
|
63 |
|
10.000%
senior notes due May 15, 2011
|
|
|
69 |
|
|
|
69 |
|
|
|
71 |
|
|
|
71 |
|
11.750%
senior discount notes due May 15, 2011
|
|
|
54 |
|
|
|
54 |
|
|
|
55 |
|
|
|
55 |
|
12.125%
senior discount notes due January 15, 2012
|
|
|
75 |
|
|
|
75 |
|
|
|
91 |
|
|
|
91 |
|
CIH:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due January 15, 2014
|
|
|
151 |
|
|
|
151 |
|
|
|
151 |
|
|
|
151 |
|
13.500%
senior discount notes due January 15, 2014
|
|
|
581 |
|
|
|
581 |
|
|
|
581 |
|
|
|
581 |
|
9.920%
senior discount notes due April 1, 2014
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
10.000%
senior notes due May 15, 2014
|
|
|
299 |
|
|
|
299 |
|
|
|
299 |
|
|
|
299 |
|
11.750%
senior discount notes due May 15, 2014
|
|
|
815 |
|
|
|
815 |
|
|
|
815 |
|
|
|
815 |
|
12.125%
senior discount notes due January 15, 2015
|
|
|
217 |
|
|
|
217 |
|
|
|
217 |
|
|
|
216 |
|
CCH
I:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.000%
senior notes due October 1, 2015
|
|
|
3,987 |
|
|
|
4,083 |
|
|
|
3,987 |
|
|
|
4,092 |
|
CCH
II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due September 15, 2010
|
|
|
2,198 |
|
|
|
2,192 |
|
|
|
2,198 |
|
|
|
2,190 |
|
10.250%
senior notes due October 1, 2013
|
|
|
250 |
|
|
|
260 |
|
|
|
250 |
|
|
|
262 |
|
CCO
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
floating notes due December 15, 2010
|
|
|
-- |
|
|
|
-- |
|
|
|
550 |
|
|
|
550 |
|
8
3/4% senior notes due November 15, 2013
|
|
|
800 |
|
|
|
795 |
|
|
|
800 |
|
|
|
795 |
|
Credit
facility
|
|
|
350 |
|
|
|
350 |
|
|
|
-- |
|
|
|
-- |
|
Charter
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.000%
senior second-lien notes due April 30, 2012
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
8
3/8% senior second-lien notes due April 30, 2014
|
|
|
770 |
|
|
|
770 |
|
|
|
770 |
|
|
|
770 |
|
Credit
facilities
|
|
|
6,844 |
|
|
|
6,844 |
|
|
|
5,395 |
|
|
|
5,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,939 |
|
|
$ |
19,908 |
|
|
$ |
18,964 |
|
|
$ |
19,062 |
|
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, certain of the notes are recorded
for financial reporting purposes at values different from the current accreted
value for legal purposes and notes indenture purposes (the amount that is
currently payable if the debt becomes immediately due). As of
December 31, 2007, the accreted value of the Company’s debt for legal purposes
and notes indenture purposes is $19.9 billion.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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. As of December 31, 2007, there was $528 million in
accreted value for legal purposes and notes indentures purposes.
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.
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 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 interest.
In
September 2006, CCHC and CCH II completed the exchange of $450 million principal
amount of Charter’s outstanding 5.875% senior convertible notes due 2009 for
$188 million in cash, 45 million shares of Charter’s Class A common stock valued
at $68 million and $146 million principal amount of 10.25% CCH II notes due
2010. The convertible notes received in the exchange 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, included
in gain (loss) on extinguishment of debt and preferred stock on the Company’s
consolidated statements of operations.
In
October 2007, Charter Holdco completed a tender offer, in which $364 million of
Charter’s 5.875% convertible senior notes due 2009 were accepted for $479
million of Charter’s 6.50% convertible senior notes due 2027. The
6.50% convertible senior notes provide the holders with the right to require
Charter to repurchase some or all of the 6.50% convertible senior notes for cash
on October 1, 2012, 2017, and 2022 at a repurchase price equal to the principal
amount plus accrued interest. 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 and preferred stock
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.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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
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, included in gain (loss) on
extinguishment of debt and preferred stock 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 of approximately $22 million for the year ended December 31, 2007,
included in gain (loss) on extinguishment of debt and preferred stock on the
Company’s consolidated statements of operations.
On April
1, 2007, $105 million of Charter Holdings 8.25% notes matured and were paid off
with proceeds from the CCO Holdings credit facility.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(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. As of December 31, 2007, there was $2.5 billion
in accreted value for legal purposes and notes indentures purposes.
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. As of December 31, 2007, there
was $4.0 billion in accreted value for legal purposes and notes indentures
purposes.
CCH I and
CCH I Capital Corp. may, prior to October 1, 2008 in the event of a qualified
equity offering providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the CCH I notes at a redemption price of 111% of the
principal amount plus accrued and unpaid interest. Aside from this
provision, CCH I and CCH I Capital Corp. may not redeem at their option any of
the notes prior to October 1, 2010. On or after October 1, 2010, CCH
I and CCH I Capital Corp. may redeem, in whole or in part, CCH I notes at
anytime, in each case at a premium. The optional redemption price
declines to 100% of the principal amount, plus accrued and unpaid interest, on
or after October 1, 2013.
If a
change of control occurs, each holder of the CCH I notes will have the right to
require the repurchase of all or any part of that holder’s CCH I notes at 101%
of the principal amount plus accrued and unpaid interest.
CCH
II, LLC Notes
The CCH
II Notes are senior debt obligations of CCH II and CCH II Capital
Corp. The CCH II Notes rank equally with all other current and
future unsecured, unsubordinated obligations of CCH II and CCH II Capital
Corp. The CCH II 2013 Notes are guaranteed on a senior unsecured
basis by Charter Holdings. The CCH II notes are structurally
subordinated to all obligations of subsidiaries of CCH II, including the CCO
Holdings notes, the Charter Operating notes and the Charter Operating credit
facilities.
On or
after September 15, 2008, the issuers of the CCH II 2010 Notes may redeem all or
a part of the notes at a redemption price that declines ratably from the initial
redemption price of 105.125% to a redemption price on or after September 15,
2009 of 100.0% of the principal amount of the CCH II 2010 Notes redeemed, plus,
in each case, any accrued and unpaid interest. On or after October 1,
2010, the issuers of the CCH II 2013 Notes may redeem all or a part of the notes
at a redemption price that declines ratably from the initial redemption price of
105.125% to a
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
redemption
price on or after October 1, 2012 of 100.0% of the principal amount of the CCH
II 2013 Notes redeemed, plus, in each case, any accrued and unpaid
interest.
In the
event of specified change of control events, CCH II must offer to purchase the
outstanding CCH II notes from the holders at a purchase price equal to 101% of
the total principal amount of the notes, plus any accrued and unpaid
interest.
CCO
Holdings Notes
The CCO
Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings
Capital Corp. They rank equally with all other current and future unsecured,
unsubordinated obligations of CCO Holdings and CCO Holdings Capital
Corp. The CCO Holdings notes are structurally subordinated to all
obligations of subsidiaries of CCO Holdings, including the Charter Operating
notes and the Charter Operating credit facilities.
On or
after November 15, 2008, the issuers of the CCO Holdings 8 ¾% senior notes may
redeem all or a part of the notes at a redemption price that declines ratably
from the initial redemption price of 104.375% to a redemption price on or after
November 15, 2011 of 100.0% of the principal amount of the CCO Holdings 8 ¾%
senior notes redeemed, plus, in each case, any accrued and unpaid
interest.
Prior to
their redemption in April 2007, interest on the CCO Holdings senior floating
rate notes accrued at the LIBOR rate (5.36% as of December 31, 2006) plus 4.125%
annually, from the date interest was most recently paid.
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 the
event of specified change of control events, Charter Operating must offer to
purchase the Charter Operating notes at a purchase price equal to 101% of the
total principal amount of the Charter Operating notes repurchased plus any
accrued and unpaid interest thereon.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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
In March
2007, CCO Holdings entered into a credit agreement among CCO Holdings, the
several lenders from time to time that are parties thereto, Bank of America,
N.A., as administrative agent, and certain other agents (the “CCO Holdings
credit facility”). The CCO Holdings credit facility consists of a
$350 million term loan, which is fully drawn. 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
In March
2007, Charter Operating entered into the Charter Operating credit facilities
which provide for a $1.5 billion senior secured revolving line of credit, a
continuation of the existing $5.0 billion term loan facility (the “Existing Term
Loan”), and a $1.5 billion new term loan facility (the “New Term Loan”), which
was funded in March and April 2007. The refinancing resulted 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 and
preferred stock on the Company’s consolidated statements of
operations. Borrowings under the Charter Operating credit facilities
bear interest at a variable interest rate based on either LIBOR or a base rate,
plus in either case, an applicable margin. The applicable margin for
LIBOR loans under the New Term Loan and revolving loans is 2.00% above
LIBOR. The revolving line of credit commitments terminate in March
2013. The Existing Term Loan and the New Term Loan are subject to
amortization at 1% of their initial principal amount per annum commencing on
March 31, 2008 with the remaining principal amount of the New Term Loan due in
March 2014. The Charter Operating credit facilities also modified the
quarterly consolidated leverage ratio to be less restrictive.
The
Charter Operating credit facilities provide borrowing availability of up to $8.0
billion as follows:
·
|
a
term loan with a 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.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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. However, no assurance can be given that such
incremental term loans could be obtained if Charter Operating sought to do
so.
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate (4.87% to
5.24% as of December 31, 2007 and 5.36% to 5.38% as of December 31, 2006), 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, 2007, outstanding borrowings under the Charter Operating credit
facilities were approximately $6.8 billion and the unused total potential
availability was approximately $1.0 billion, none of which was limited by
covenant restrictions.
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 with an unqualified
opinion from the Company’s independent
accountants,
|
|
·
|
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,
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
|
· |
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 CCI 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, 2007, 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, 2007, are as follows:
Year
|
|
Amount
|
|
|
|
|
|
2008
|
|
$ |
65 |
|
2009
|
|
|
302 |
|
2010
|
|
|
2,296 |
|
2011
|
|
|
347 |
|
2012
|
|
|
1,719 |
|
Thereafter
|
|
|
15,210 |
|
|
|
|
|
|
|
|
$ |
19,939 |
|
For the
amounts of debt scheduled to mature during 2008, it is management’s intent to
fund the repayments from borrowings on the Company’s revolving credit
facility. The accompanying consolidated balance sheets reflect this
intent by presenting all debt balances as long-term while the table above
reflects actual debt maturities as of the stated date.
10.
|
Note
Payable – Related
Party
|
In
October 2005, CCHC issued a subordinated exchangeable note (the “CCHC Note”) to
Charter Investment, Inc. (“CII”). The CCHC Note has a 15-year
maturity. The CCHC Note has an initial accreted value of $48 million
accreting at 14% compounded quarterly, except that from and after February 28,
2009, CCHC may pay any increase in the accreted value of the CCHC Note in cash
and the accreted value of the CCHC Note will not increase to the extent such
amount is paid in cash. The CCHC Note is exchangeable at CII’s
option, at any time, for Charter Holdco Class A Common units at a rate equal to
the then accreted value, divided by $2.00 (the “Exchange
Rate”). Customary anti-dilution protections have been provided that
could cause future changes to the Exchange Rate. Additionally, the
Charter Holdco Class A Common units received will be exchangeable by the holder
into Charter
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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 as of December 31, 2007
and 2006 is $65 million and $57 million, respectively. If not
redeemed prior to maturity in 2020, $380 million would be due under this
note.
11.
|
Minority
Interest and Equity Interest of Charter
Holdco
|
Charter
is a holding company whose primary assets are a controlling equity interest in
Charter Holdco, the indirect owner of the Company’s cable systems, and $528
million and $413 million at December 31, 2007 and 2006, respectively, of mirror
notes payable by Charter Holdco to Charter and 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, 2007 and 2006 represents Mr. Allen’s, Charter’s chairman and
controlling shareholder, 5.6% preferred membership interests in CC VIII, an
indirect subsidiary of Charter Holdco, of $199 million and $192 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
$7.3 billion, $5.9 billion, and $4.8 billion as of December 31, 2007, 2006, and
2005, respectively, thus minority interest in Charter Holdco has been
eliminated. Minority ownership, for accounting purposes, was 48%,
48%, and 52% as of December 31, 2007, 2006, and 2005,
respectively. Because minority interest in Charter Holdco is
substantially eliminated, Charter absorbs all losses of Charter
Holdco. Subject to any changes in Charter Holdco’s capital structure,
future losses will continue to be absorbed by Charter for GAAP
purposes. Changes to minority interest consist of the following for
the periods presented:
|
|
Minority
|
|
|
|
Interest
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$ |
648 |
|
Minority
interest in loss of subsidiary
|
|
|
(1 |
) |
CC
VIII settlement – exchange of interests
|
|
|
(467 |
) |
Changes
in fair value of interest rate agreements and other
|
|
|
8 |
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
188 |
|
Minority
interest in income of subsidiary
|
|
|
4 |
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
192 |
|
Minority
interest in income of subsidiary
|
|
|
7 |
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
$ |
199 |
|
In
connection with the issuance of the 6.50% convertible senior notes described in
Note 6, Charter entered into certain agreements with Charter Holdco to provide
for the issuance of $479 million original principal amount of a 6.50% mirror
convertible senior note due 2027 of Charter Holdco (the “Mirror Note”) to
Charter. These agreements facilitated compliance with the certificate
of incorporation of Charter and the governing documents of Charter Holdco
regarding the required issuance of mirror securities by Charter
Holdco. The terms of the Mirror Note mirror the terms of the 6.50%
convertible senior notes.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
12.
|
Preferred
Stock –
Redeemable
|
In
November 2005, Charter repurchased 508,546 shares of its Series A Convertible
Redeemable Preferred Stock (the “Preferred Stock”) for an aggregate purchase
price of approximately $31 million (or $60 per share). The shares had
liquidation preference of approximately $51 million and had accrued but unpaid
dividends of approximately $3 million resulting in a gain of approximately $23
million for the year ended December 31, 2005 recorded in gain (loss) on
extinguishment of debt and preferred stock in the Company’s consolidated
statements of operations. Following the repurchase, 36,713 shares of
preferred stock remained outstanding. The remaining Preferred Stock
is redeemable by Charter at its option and must be redeemed by Charter at any
time upon a change of control, or if not previously redeemed or converted, on
August 31, 2008. The Preferred Stock is convertible, in whole or in
part, at the option of the holders through August 31, 2008, into shares of
common stock, at an initial conversion price of $24.71 per share of common
stock, subject to certain customary adjustments.
In
connection with the repurchase, the holders of the Preferred Stock consented to
an amendment to the Certificate of Designation governing the Preferred Stock
that eliminated the quarterly dividends on all of the outstanding Preferred
Stock and provided that the liquidation preference for the remaining shares
outstanding will be $105.4063 per share, which amount shall accrete from
September 30, 2005 at an annual rate of 7.75%, compounded
quarterly. Certain holders of Preferred Stock also released Charter
from various threatened claims relating to their acquisition and ownership of
the Preferred Stock, including threatened claims for breach of
contract.
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, 2007:
|
|
Class
A
|
|
|
Class
B
|
|
|
|
Common
|
|
|
Common
|
|
|
|
Stock
|
|
|
Stock
|
|
|
|
|
|
|
|
|
BALANCE,
January 1, 2005
|
|
|
305,203,770 |
|
|
|
50,000 |
|
Option
exercises
|
|
|
19,717 |
|
|
|
-- |
|
Restricted
stock issuances, net of cancellations
|
|
|
2,669,884 |
|
|
|
-- |
|
Issuances
pursuant to share lending agreement
|
|
|
94,911,300 |
|
|
|
-- |
|
Issuance
of shares in Securities Class Action settlement
|
|
|
13,400,000 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2005
|
|
|
416,204,671 |
|
|
|
50,000 |
|
Option
exercises
|
|
|
1,046,540 |
|
|
|
-- |
|
Restricted
stock issuances, net of cancellations
|
|
|
809,474 |
|
|
|
-- |
|
Issuances
pursuant to share lending agreement
|
|
|
22,038,000 |
|
|
|
-- |
|
Returns
pursuant to share lending agreement
|
|
|
(77,104,100 |
) |
|
|
-- |
|
Issuances
in exchange for convertible notes
|
|
|
45,000,000 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
|
407,994,585 |
|
|
|
50,000 |
|
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 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
Charter
issued 45 million shares of Class A Common Stock in September 2006 in connection
with the Charter, CCHC and CCH II exchange. See Note 9.
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, 2007, 92.1 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 October 2007 tender offer, 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
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 24.8
million loaned shares outstanding is approximately $29.1 million as of December
31, 2007. However, the net effect on shareholders’ deficit of the
shares lent pursuant to the share lending agreement, which includes Charter’s
requirement to lend the shares and the counterparties’ requirement to return the
shares, is de minimis and represents the cash received upon lending of the
shares and is equal to the par value of the common stock to be
issued.
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, 2008, if not terminated
earlier.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
The
Company reports changes in the fair value of interest rate agreements designated
as hedging the variability of cash flows associated with floating-rate debt
obligations, that meet the effectiveness criteria of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, in accumulated other comprehensive
income (loss). Comprehensive loss for the years ended
December 31, 2007, 2006, and 2005 was $1.7 billion, $1.4 billion, and $961
million, respectively.
16.
|
Accounting
for Derivative Instruments and Hedging
Activities
|
The
Company uses interest rate derivative instruments, including but not limited to
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, the Company
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.
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 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, 2007,
2006, and 2005, change in value of derivatives includes gains of $0, $2 million,
and $3 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 income (loss). For
the years ended December 31, 2007, 2006, and 2005, losses of $123 million and $1
million, and a gain of $16 million, respectively, related to derivative
instruments designated as cash flow hedges, were recorded in accumulated other
comprehensive income (loss). The amounts are subsequently
reclassified as an increase or decrease to interest expense in the same periods
in which the related interest on the floating-rate debt obligations affects
earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS
No. 133. However, management believes such instruments are
closely correlated with the respective debt, thus managing associated
risk. Interest rate derivative instruments not designated as hedges
are marked to fair value, with the impact recorded as a change in value of
derivatives in the Company’s consolidated statement of
operations. For the years ended December 31, 2007, 2006, and
2005, change in value of derivatives includes losses of $46 million, and gains
of $4 million, and $47 million, respectively, resulting from interest rate
derivative instruments not designated as hedges.
As of
December 31, 2007, 2006, and 2005, the Company had outstanding $4.3
billion, $1.7 billion, and $1.8 billion, and $0, $0, and $20 million,
respectively, in notional amounts of interest rate swaps and collars,
respectively. The notional amounts of interest rate instruments do
not represent amounts exchanged by the parties and, thus, are not a measure of
exposure to credit loss. The amounts exchanged are determined by
reference to the notional amount and the other terms of the
contracts.
17.
|
Fair
Value of Financial
Instruments
|
The
Company has estimated the fair value of its financial instruments as of
December 31, 2007 and 2006 using available market information or other
appropriate valuation methodologies. Considerable judgment, however,
is
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented in the accompanying consolidated financial statements are
not necessarily indicative of the amounts the Company would realize in a current
market exchange.
The
carrying amounts of cash, receivables, payables and other current assets and
liabilities approximate fair value because of the short maturity of those
instruments. The Company is exposed to market price risk volatility
with respect to investments in publicly traded and privately held
entities.
The fair
value of interest rate agreements represents the estimated amount the Company
would receive or pay upon termination of the agreements. Management
believes that the sellers of the interest rate agreements will be able to meet
their obligations under the agreements. In addition, some of the
interest rate agreements are with certain of the participating banks under the
Company’s credit facilities, thereby reducing the exposure to credit
loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the
counterparties is not anticipated nor would it have a material adverse effect on
the Company’s consolidated financial condition or results of
operations.
The
estimated fair value of the Company’s notes and interest rate agreements at
December 31, 2007 and 2006 are based on quoted market prices, and the fair
value of the credit facilities is based on dealer quotations.
A summary
of the carrying value and fair value of the Company’s debt and related interest
rate agreements at December 31, 2007 and 2006 is as follows:
|
|
2007
|
|
2006
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
convertible notes
|
|
$
|
402
|
|
|
$
|
332
|
|
|
$
|
408
|
|
|
$
|
576
|
Charter
Holdings debt
|
|
|
578
|
|
|
|
471
|
|
|
|
967
|
|
|
|
932
|
CIH
debt
|
|
|
2,534
|
|
|
|
1,627
|
|
|
|
2,533
|
|
|
|
2,294
|
CCH
I debt
|
|
|
4,083
|
|
|
|
3,225
|
|
|
|
4,092
|
|
|
|
4,104
|
CCH
II debt
|
|
|
2,452
|
|
|
|
2,390
|
|
|
|
2,452
|
|
|
|
2,575
|
CCO
Holdings debt
|
|
|
795
|
|
|
|
761
|
|
|
|
1,345
|
|
|
|
1,391
|
Charter
Operating debt
|
|
|
1,870
|
|
|
|
1,807
|
|
|
|
1,870
|
|
|
|
1,943
|
Credit
facilities
|
|
|
7,194
|
|
|
|
6,723
|
|
|
|
5,395
|
|
|
|
5,418
|
Interest
Rate Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
(169)
|
|
|
|
(169)
|
|
|
|
--
|
|
|
|
--
|
The
weighted average interest pay rate for the Company’s interest rate swap
agreements was 4.93% and 4.87% at December 31, 2007 and 2006,
respectively.
18.
|
Other
Operating (Income) Expenses,
Net
|
Other
operating (income) expenses, net consist of the following for the years
presented:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)
loss on sale of assets, net
|
|
$ |
(3 |
) |
|
$ |
8 |
|
|
$ |
6 |
|
Hurricane
asset retirement loss
|
|
|
-- |
|
|
|
-- |
|
|
|
19 |
|
Special
charges, net
|
|
|
(14 |
) |
|
|
13 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(17 |
) |
|
$ |
21 |
|
|
$ |
32 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
(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.
Hurricane
asset retirement loss
For the
year ended December 31, 2005, hurricane asset retirement loss represents the
write off of $19 million of the Company’s plants’ net book value as a result of
significant plant damage suffered by certain of the Company’s cable systems in
Louisiana as a result of hurricanes Katrina and Rita.
Special
charges, net
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. Special charges, net for the year ended
December 31, 2005 primarily represent severance costs as a result of reducing
workforce, consolidating administrative offices and executive
severance. For the year ended December 31, 2005, special charges, net
were offset by approximately $2 million related to an agreed upon discount in
respect of the portion of settlement consideration payable under the settlement
terms of class action lawsuits.
19.
|
Gain
(loss) on extinguishment of debt and preferred
stock
|
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Holdings and CCO Holdings debt exchanges
|
|
$ |
(22 |
) |
|
$ |
108 |
|
|
$ |
500 |
|
Charter
Operating credit facilities refinancing
|
|
|
(13 |
) |
|
|
(27 |
) |
|
|
-- |
|
Charter
convertible note repurchases / exchanges
|
|
|
(113 |
) |
|
|
20 |
|
|
|
3 |
|
Charter
preferred stock repurchase
|
|
|
-- |
|
|
|
-- |
|
|
|
23 |
|
CC
V Holdings notes repurchase
|
|
|
-- |
|
|
|
-- |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(148 |
) |
|
$ |
101 |
|
|
$ |
521 |
|
See Note
9 for discussion of 2007 and 2006 debt transactions.
In March
and June 2005, Charter Operating consummated exchange transactions with a small
number of institutional holders of Charter Holdings 8.25% senior notes due 2007
pursuant to which Charter Operating issued approximately $333 million principal
amount of new notes with terms identical to Charter Operating's 8.375% senior
second lien notes due 2014 in exchange for approximately $346 million of the
Charter Holdings 8.25% senior notes due 2007. The Charter Holdings
notes received in the exchange were thereafter distributed to Charter Holdings
and cancelled. The exchanges resulted in a gain on extinguishment of
debt of approximately $10 million.
In March
2005, all of CC V Holdings, LLC’s outstanding 11.875% senior discount notes due
2008 were redeemed at a total cost of $122 million, resulting in a loss of
extinguishment of debt of approximately $5 million.
In
September 2005, Charter Holdings and its wholly owned subsidiaries, CCH I and
CIH, completed the exchange of approximately $6.8 billion total principal amount
of outstanding debt securities of Charter Holdings in a private placement for
CCH I and CIH new debt securities. The Charter Holdings notes
received in the exchange were thereafter distributed to Charter Holdings and
cancelled. The exchanges resulted in a gain on extinguishment of debt
of approximately $490 million.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
During
the year ended December 31, 2005, the Company repurchased, in private
transactions, from a small number of institutional holders, a total of $136
million principal amount of its 4.75% convertible senior notes due 2006,
resulting in a gain on debt extinguishment of approximately $3
million.
20.
|
Other
Income (Expense),
Net
|
Other
income (expense), net consists of the following for years
presented:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest (Note 11)
|
|
$
|
(7 |
) |
|
$ |
(4 |
) |
|
$ |
1 |
|
Gain
(loss) on investment (Note 3)
|
|
|
-- |
|
|
|
16 |
|
|
|
22 |
|
Other,
net
|
|
|
(1 |
) |
|
|
2 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(8 |
) |
|
$ |
14 |
|
|
$ |
23 |
|
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 (not to exceed 20.0 million shares of Charter
Class A common stock), as each term is defined in the
Plans. Employees, officers, consultants and directors of the Company
and its subsidiaries and affiliates are eligible to receive grants under the
Plans. Options granted generally vest over four years from the grant
date, with 25% generally vesting on the anniversary of the grant date and
ratably thereafter. Generally, options expire 10 years from the
grant date. The 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).
In the
years ended December 31, 2007, 2006, and 2005, certain directors were awarded a
total of 0.2 million, 0.6 million, and 0.5 million shares, respectively, of
restricted Class A common stock of which no shares had been cancelled as of
December 31, 2007. The shares vest one year from the date of
grant. In 2007, 2006, and 2005, in connection with new employment
agreements, certain officers were awarded 2.3 million, 0.1 million, and 3.0
million shares, respectively, of restricted Class A common stock of which no
shares had been cancelled as of December 31, 2007. The shares vest
annually over a one to three-year period beginning from the date of
grant. As of December 31, 2007, deferred compensation remaining to be
recognized in future periods totaled $8 million.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
A summary
of the activity for the Company’s stock options, excluding granted shares of
restricted Class A common stock, for the years ended December 31,
2007, 2006, and 2005, is as follows (amounts in thousands, except per share
data):
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, beginning of period
|
|
|
26,403
|
|
$
|
3.88
|
|
|
29,127
|
|
$
|
4.47
|
|
|
24,835
|
|
$
|
6.57
|
Granted
|
|
|
4,549
|
|
|
2.77
|
|
|
6,065
|
|
|
1.28
|
|
|
10,810
|
|
|
1.36
|
Exercised
|
|
|
(2,759)
|
|
|
1.57
|
|
|
(1,049)
|
|
|
1.41
|
|
|
(17)
|
|
|
1.11
|
Cancelled
|
|
|
(2,511)
|
|
|
2.98
|
|
|
(7,740)
|
|
|
4.39
|
|
|
(6,501)
|
|
|
7.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding, end of period
|
|
|
25,682
|
|
$
|
4.02
|
|
|
26,403
|
|
$
|
3.88
|
|
|
29,127
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining contractual life
|
|
|
7
years
|
|
|
|
|
|
8
years
|
|
|
|
|
|
8
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, end of period
|
|
|
13,119
|
|
$
|
5.88
|
|
|
10,984
|
|
$
|
6.62
|
|
|
9,999
|
|
$
|
7.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$
|
1.86
|
|
|
|
|
$
|
0.96
|
|
|
|
|
$
|
0.65
|
|
|
|
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2007 (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
|
|
8,915
|
|
8
years
|
|
$
|
1.17
|
|
3,097
|
|
8
years
|
|
$
|
1.17
|
$
|
1.53
|
|
—
|
|
$
|
1.96
|
|
3,270
|
|
7
years
|
|
|
1.55
|
|
1,752
|
|
7
years
|
|
|
1.55
|
$
|
2.66
|
|
—
|
|
$
|
3.35
|
|
5,712
|
|
8
years
|
|
|
2.89
|
|
1,372
|
|
6
years
|
|
|
2.93
|
$
|
4.30
|
|
—
|
|
$
|
5.17
|
|
4,684
|
|
6
years
|
|
|
5.00
|
|
3,798
|
|
6
years
|
|
|
4.99
|
$
|
9.13
|
|
—
|
|
$
|
12.27
|
|
1,406
|
|
4
years
|
|
|
10.95
|
|
1,406
|
|
4
years
|
|
|
10.95
|
$
|
13.96
|
|
—
|
|
$
|
20.73
|
|
1,433
|
|
2
years
|
|
|
18.49
|
|
1,433
|
|
2
years
|
|
|
18.49
|
$
|
21.20
|
|
—
|
|
$
|
23.09
|
|
262
|
|
3
years
|
|
|
22.84
|
|
262
|
|
3
years
|
|
|
22.84
|
In
January 2004, the Compensation and Benefits Committee of the board of directors
of Charter approved Charter's Long-Term Incentive Program (“LTIP”), which is a
program administered under the 2001 Stock Incentive Plan. Under the
LTIP, employees of Charter and its subsidiaries whose pay classifications
exceed a
certain level are eligible to receive stock options, and more senior level
employees are eligible to receive stock options and performance
units. The stock options vest 25% on each of the first four
anniversaries of the date of grant. The performance units become
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. Charter granted 15.8 million and 12.2 million performance
units in the years ended December 31, 2007 and 2006, respectively, under this
program, and recognized expense of $10 million and $4 million,
respectively. In 2005, Charter granted 3.2 million performance units
under this program but did not recognize any expense, based on the Company’s
assessment of the probability
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
of
achieving the financial performance measures established by Charter and required
to be met for the performance units to vest. In February 2006, the
Compensation and Benefits Committee of Charter’s board of directors approved a
modification to the financial performance measures under Charter's LTIP required
to be met for the 2005 performance units to become performance shares which vest
in March 2008. Such expense is being recognized over the remaining
two year service period.
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are
generally limited liability companies that are not subject to income
tax. However, certain of these limited liability companies are
subject to state income tax. In addition, the subsidiaries that are
corporations are subject to federal and state income tax. All of the
remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, Charter Investment, Inc.
(“CII”) and Vulcan Cable III Inc. (“Vulcan Cable”). Charter is
responsible for its 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, 2007 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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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, 2007.
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, 2007, 2006, and 2005, 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. 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, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
Current
and deferred income tax benefit (expense) is as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current
expense:
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(2 |
) |
State
income taxes
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
income tax expense
|
|
|
(11 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
(188 |
) |
|
|
(177 |
) |
|
|
(95 |
) |
State
income taxes
|
|
|
(10 |
) |
|
|
(25 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax expense
|
|
|
(198 |
) |
|
|
(202 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income expense
|
|
$ |
(209 |
) |
|
$ |
(209 |
) |
|
$ |
(115 |
) |
A portion
of income tax expense was recorded as a reduction of income (loss) from
discontinued operations in the years ended December 31, 2006 and
2005. 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
5.3% for the year ended December 31, 2007 and 5% for the years ended
December 31, 2006 and 2005 as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income taxes
|
|
$ |
493 |
|
|
$ |
407 |
|
|
$ |
298 |
|
Statutory
state income taxes, net
|
|
|
74 |
|
|
|
58 |
|
|
|
43 |
|
Franchises
|
|
|
(198 |
) |
|
|
(202 |
) |
|
|
(109 |
) |
Valuation
allowance provided and other
|
|
|
(578 |
) |
|
|
(472 |
) |
|
|
(347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209 |
) |
|
|
(209 |
) |
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
discontinued operations
|
|
|
-- |
|
|
|
22 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$ |
(209 |
) |
|
$ |
(187 |
) |
|
$ |
(112 |
) |
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(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, 2007 and
2006 which are included in long-term liabilities are presented
below.
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$ |
3,155 |
|
|
$ |
2,689 |
|
Investment
in Charter Holdco
|
|
|
1,888 |
|
|
|
1,955 |
|
Other
|
|
|
19 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
5,062 |
|
|
|
4,649 |
|
Less:
valuation allowance
|
|
|
(4,786 |
) |
|
|
(4,200 |
) |
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$ |
276 |
|
|
$ |
449 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Investment
in Charter Holdco
|
|
$ |
(707 |
) |
|
$ |
(737 |
) |
Indirect
Corporate Subsidiaries:
|
|
|
|
|
|
|
|
|
Property,
plant & equipment
|
|
|
(29 |
) |
|
|
(31 |
) |
Franchises
|
|
|
(205 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
(941 |
) |
|
|
(963 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$ |
(665 |
) |
|
$ |
(514 |
) |
As of
December 31, 2007, the Company has deferred tax assets of $5.1 billion,
which include $1.9 billion of financial losses in excess of tax losses allocated
to Charter from Charter Holdco. The deferred tax assets also include
$3.2 billion of tax net operating loss carryforwards (generally expiring in
years 2008 through 2027) of Charter and its indirect corporate
subsidiaries. Valuation allowances of $4.8 billion exist with respect
to these deferred tax assets of which $2.9 billion relate to the tax net
operating loss carryforwards.
The
amount of any benefit from the Company’s tax net operating losses is dependent
on: (1) Charter and its subsidiaries’ ability to generate future
taxable income and (2) the unexpired amount of net operating loss carryforwards
available to offset amounts payable on such taxable income. Any
future “ownership changes” of Charter's
common stock, as defined in the applicable federal income tax rules, would place
significant limitations, on an annual basis, on the use of such net operating
losses to offset any future taxable income the Company may
generate. Such limitations, in conjunction with the net operating
loss expiration provisions, could effectively eliminate the Company’s ability to
use a substantial portion of its net operating losses to offset future taxable
income. Although the Company has adopted the Rights Plan as an
attempt to protect against an “ownership change,” certain transactions and the
timing of such transactions could cause an ownership change including, but not
limited to, the following: The issuance of shares of
common stock upon future conversion of Charter’s convertible senior notes;
reacquisition of the shares borrowed under the share lending agreement by
Charter (of which 24.8 million were outstanding as of December 31, 2007); or
acquisitions or sales of shares by certain holders of Charter’s shares,
including persons who have held, currently hold, or accumulate in the future
five percent or more of Charter’s outstanding stock (including upon an exchange
by Mr. Allen or his affiliates, directly or indirectly, of membership units of
Charter Holdco into CCI common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
The
deferred tax liability for Charter’s investment in Charter Holdco is largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite lived. If certain exchanges, as described
above, were to take place, Charter would likely record for financial reporting
purposes additional deferred tax liability related to its increased interest in
Charter Holdco and the related underlying indefinite lived franchise
assets.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
The total
valuation allowance for deferred tax assets as of December 31, 2007 and
2006 was $4.8 billion and $4.2 billion, respectively. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will be
realized. Because of the uncertainties in projecting future taxable
income of Charter Holdco, valuation allowances have been established except for
deferred benefits available to offset certain deferred tax liabilities that will
reverse over time.
Charter
and Charter Holdco are currently under examination by the Internal Revenue
Service for the tax years ending December 31, 2004 and
2005. Management does not expect the results of these examinations to
have a material adverse effect on the Company’s consolidated financial condition
or results of operations.
In
January 2007, the Company adopted FIN 48, Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109, which provides criteria
for the recognition, measurement, presentation and disclosure of uncertain tax
positions. A tax benefit from an uncertain position may be recognized only if it
is “more likely than not” that the position is sustainable based on its
technical merits. The adoption of FIN 48 resulted in a deferred tax
benefit
of $56 million related to a settlement with Mr. Allen regarding ownership of the
CC VIII preferred membership interests, which was recognized as a cumulative
adjustment to the accumulated deficit in the first quarter of
2007. The Company has not taken any significant positions that it
believes 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 that each
of the transactions described below was on terms no less favorable to the
Company than could have been obtained from independent third
parties.
Charter
is a holding company and its principal assets are its equity interest in Charter
Holdco and certain mirror notes payable by Charter Holdco to Charter and mirror
preferred units held by Charter, which have the same principal amount and terms
as those of Charter’s convertible senior notes and Charter’s outstanding
preferred stock. In 2007, 2006, and 2005, Charter Holdco paid to
Charter $51 million, $51 million, and $64 million, respectively, related to
interest on the mirror notes, and Charter Holdco paid an additional $0, $0, and
$3 million, respectively, related to dividends on the mirror preferred
membership units.
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, $231 million, and $205
million for the years ended December 31, 2007, 2006, and 2005,
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, 2007, 2006, and 2005, the management fee charged to the
Company’s operating subsidiaries approximated the expenses incurred by Charter
Holdco and Charter on behalf of the Company’s operating
subsidiaries. The Company’s credit facilities prohibit payments of
management fees in excess of 3.5% of revenues until repayment of the outstanding
indebtedness. In the event any portion of the management fee due and
payable is not paid, it is deferred by Charter and accrued as a liability of
such subsidiaries. Any deferred amount of the management fee will
bear interest at the rate of 10% per year, compounded annually, from the date it
was due and payable until the date it is paid.
Mr. Allen,
the controlling shareholder of Charter, and a number of his affiliates have
interests in various entities that provide services or programming to Charter’s
subsidiaries. Given the diverse nature of Mr. Allen’s investment
activities and interests, and to avoid the possibility of future disputes as to
potential business, Charter and Charter Holdco, under the terms of their
respective organizational documents, may not, and may not allow their
subsidiaries
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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”),
Click2learn, Inc., Trail Blazer Inc., Action Sports Cable Network (“Action
Sports”) 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, 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.
The
Company received or receives programming for broadcast via its cable systems
from Oxygen Media and Trail Blazers Inc. The Company pays a fee for
the programming service generally based on the number of customers receiving the
service. Such fees for the years ended December 31, 2007, 2006,
and 2005 were each less than 1% of total operating 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 $8 million, $8 million, and $9 million for the years ended
December 31, 2007, 2006, and 2005, 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.
The
Company recognized the guaranteed value of the investment over the life of the
initial carriage agreement (which expired February 1, 2005) as a reduction of
programming expense. For the year ended December 31, 2005, the
Company recorded approximately $2 million as a reduction of programming
expense. The carrying value of the Company’s investment in Oxygen was
approximately $33 million as of December 31, 2006.
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
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
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, $2 million, and $3 million for
the years ended December 31, 2007, 2006, and 2005, respectively, for customized
development of the i-channels and the local content tool
kit.
On June
30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for the
purchase of 100,000 digital video recorder (“DVR”) units. The
software for these DVR units is being supplied by Digeo Interactive, LLC under a
license agreement entered into in April 2004. Pursuant to a software
license agreement with Digeo Interactive for the right to use Digeo's
proprietary software for DVR units, Charter paid approximately $2 million, $3
million, and $1 million in license and maintenance fees in 2007, 2006, and 2005,
respectively.
Charter
paid approximately $10 million, $11 million, and $10 million for the years ended
December 31, 2007, 2006, and 2005, respectively, in capital purchases under an
agreement with Digeo Interactive for the development, testing and purchase of
70,000 Digeo PowerKey DVR units. Total purchase price and license and
maintenance fees during the term of the definitive agreements are expected to be
approximately $41 million. The definitive agreements are terminable
at no penalty to Charter in certain circumstances.
CC VIII. As part of the
acquisition of the cable systems owned by Bresnan Communications Company Limited
Partnership in February 2000, CC VIII, Charter’s indirect limited liability
company subsidiary, issued, after adjustments, the CC VIII interest with an
initial value and an initial capital account of approximately $630 million to
certain sellers affiliated with AT&T Broadband, subsequently owned by
Comcast Corporation (the "Comcast sellers"). Mr. Allen
granted the Comcast sellers the right to sell to him the CC VIII interest
for approximately $630 million plus 4.5% interest annually from February
2000 (the "Comcast put right"). In April 2002, the Comcast sellers
exercised the Comcast put right in full, and this transaction was consummated on
June 6, 2003. Accordingly, Mr. Allen became the holder of
the CC VIII interest, indirectly through an affiliate.
At such
time through 2005, such interest was held at CC VIII and was subject to a
dispute between Mr. Allen and the Company as to the ultimate ownership of the CC
VIII interest. In 2005, Mr. Allen, a Special Committee of independent
directors, Charter, Charter Holdco and certain of their affiliates, agreed to
settle a dispute related to the CC VIII interest. Pursuant to the
settlement, CII has retained 30% of its CC VIII interest (the "Remaining
Interests"). The Remaining Interests are subject to certain transfer
restrictions, including requirements that the Remaining Interests participate in
a sale with other holders or that allow other holders to participate in a sale
of the Remaining Interests, as detailed in the revised CC VIII Limited Liability
Company Agreement. CII transferred the other 70% of the CC VIII
interest directly and indirectly, through Charter Holdco to CCHC. Of
the 70% of the CC VIII interest, 7.4% has been transferred by CII to CCHC for
the CCHC note (see Note 10). The remaining 62.6% has been transferred
by CII to Charter Holdco, in accordance with the terms of the settlement for no
additional monetary consideration. Charter Holdco contributed the 62.6% interest
to CCHC.
As part
of the Settlement, CC VIII issued approximately 49 million additional Class B
units to CC V in consideration for prior capital contributions to CC VIII by CC
V, with respect to transactions that were unrelated to the dispute in connection
with CII’s membership units in CC VIII. As a result, Mr. Allen’s pro
rata share of the profits and losses of CC VIII attributable to the Remaining
Interests is approximately 5.6%.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
As part
of the debt exchange in September 2006 described in Note 9, CCHC contributed the
CC VIII interest in the Class A preferred equity interests of CC VIII to CCH I.
The CC VIII interest was pledged as security for all CCH I notes. The
CC VIII preferred interests are entitled to a 2% accreting priority return on
the priority capital.
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 $203 million of face value at December 31,
2007.
24.
|
Commitments
and
Contingencies
|
Commitments
The
following table summarizes the Company’s payment obligations as of December 31,
2007 for its contractual obligations.
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
and Operating Lease Obligations (1)
|
|
$ |
99 |
|
|
$ |
22 |
|
|
$ |
18 |
|
|
$ |
21 |
|
|
$ |
11 |
|
|
$ |
8 |
|
|
$ |
19 |
|
Programming
Minimum Commitments (2)
|
|
|
1,020 |
|
|
|
331 |
|
|
|
316 |
|
|
|
102 |
|
|
|
105 |
|
|
|
110 |
|
|
|
56 |
|
Other
(3)
|
|
|
475 |
|
|
|
374 |
|
|
|
65 |
|
|
|
34 |
|
|
|
2 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,594 |
|
|
$ |
727 |
|
|
$ |
399 |
|
|
$ |
157 |
|
|
$ |
118 |
|
|
$ |
118 |
|
|
$ |
75 |
|
|
(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, 2007, 2006, and 2005, were $23
million, $23 million, and $22 million,
respectively.
|
|
(2) The
Company pays programming fees under multi-year contracts ranging from
three to ten years, typically based on a flat fee per customer, which may
be fixed for the term, or may in some cases escalate over the
term. Programming costs included in the accompanying statement
of operations were $1.6 billion, $1.5 billion, and $1.4 billion, for the
years ended December 31, 2007, 2006, and 2005,
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, 2007, 2006, and 2005, was $47 million,
$44 million, and $44 million,
respectively.
|
|
·
|
The
Company pays franchise fees under multi-year franchise agreements based on
a percentage of revenues generated from video service per
year. The Company also pays other franchise related costs, such
as public education grants, under multi-year
agreements. Franchise fees and other franchise-related costs
included in the accompanying statement of operations were $172 million,
$175 million, and $165 million for the years ended December 31, 2007,
2006, and 2005, respectively.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
|
·
|
The
Company also has $136 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.
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.
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.
The
Company’s employees may participate in the Charter Communications, Inc. 401(k)
Plan. Employees that qualify for participation can contribute up to
50% of their salary, on a pre-tax basis, subject to a maximum contribution limit
as determined by the Internal Revenue Service. The Company matches
50% of the first 5% of participant contributions. The Company made
contributions to the 401(k) plan totaling $7 million, $8 million, and $6 million
for the years ended December 31, 2007, 2006, and 2005,
respectively.
26.
|
Recently
Issued Accounting
Standards
|
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. The Company will adopt SFAS 157 effective January 1,
2008. 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 157 to
fiscal years beginning after November
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
15, 2008 for nonfinancial assets and
nonfinancial liabilities. The Company does not expect that the
adoption of SFAS 157 will have a material impact on its financial
statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option
for Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115, which allows measurement at fair value of eligible
financial assets and liabilities that are not otherwise measured at fair
value. If the fair value option for an eligible item is elected,
unrealized gains and losses for that item shall be reported in current earnings
at each subsequent reporting date. SFAS 159 also establishes presentation
and disclosure requirements designed to draw comparison between the different
measurement attributes the company elects for similar types of assets and
liabilities. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company does not expect that the adoption of SFAS 159 will have
a material impact on its financial statements.
In
December 2007, the FASB issued SFAS 141R, Business Combinations: Applying the
Acquisition Method, and SFAS 160, Consolidations, which provide
guidance on the
accounting and reporting for business combinations and minority interests in
consolidated financial statements. SFAS 141R and SFAS 160 are
effective for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. The Company is currently assessing the impact
of SFAS 141R and SFAS 160 on its financial statements.
Charter
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
Company’s accompanying financial statements.
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,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
-- |
|
|
$ |
1 |
|
Receivable
from related party
|
|
|
27 |
|
|
|
24 |
|
Notes
receivable from Charter Holdco
|
|
|
402 |
|
|
|
867 |
|
Other
assets
|
|
|
33 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
462 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
22 |
|
|
$ |
27 |
|
Payable
to related party
|
|
|
-- |
|
|
|
-- |
|
Convertible
notes
|
|
|
402 |
|
|
|
408 |
|
Notes
payable to related party
|
|
|
-- |
|
|
|
445 |
|
Deferred
income taxes
|
|
|
425 |
|
|
|
315 |
|
Other
long term liabilities
|
|
|
27 |
|
|
|
-- |
|
Preferred
stock — redeemable
|
|
|
5 |
|
|
|
4 |
|
Losses
in excess of investment
|
|
|
7,473 |
|
|
|
5,912 |
|
Shareholders’
deficit
|
|
|
(7,892 |
) |
|
|
(6,219 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
462 |
|
|
$ |
892 |
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
Condensed
Statement of Operations
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
64 |
|
|
$ |
59 |
|
|
$ |
76 |
|
Management
fees
|
|
|
15 |
|
|
|
30 |
|
|
|
35 |
|
Gain
on extinguishment of notes receivable from Charter Holdco
|
|
|
63 |
|
|
|
-- |
|
|
|
-- |
|
Change
in value of derivative
|
|
|
98 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income
|
|
|
240 |
|
|
|
89 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in losses of Charter Holdco
|
|
|
(1,443 |
) |
|
|
(1,168 |
) |
|
|
(865 |
) |
General
and administrative expenses
|
|
|
(15 |
) |
|
|
(30 |
) |
|
|
(35 |
) |
Interest
expense
|
|
|
(64 |
) |
|
|
(59 |
) |
|
|
(73 |
) |
Loss
on extinguishment of convertible notes
|
|
|
(63 |
) |
|
|
-- |
|
|
|
-- |
|
Change
in value of derivative
|
|
|
(98 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
(1,683 |
) |
|
|
(1,257 |
) |
|
|
(973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(1,443 |
) |
|
|
(1,168 |
) |
|
|
(862 |
) |
Income
tax expense
|
|
|
(173 |
) |
|
|
(202 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,616 |
) |
|
|
(1,370 |
) |
|
|
(967 |
) |
Dividend
on preferred equity
|
|
|
-- |
|
|
|
-- |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss after preferred dividends
|
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
$ |
(970 |
) |
Shareholder’s
deficit and Equity in losses of Charter Holdco, as of and for the year ended
December 31, 2006, include the gain on the Charter convertible notes exchange to
reflect the substance of the transaction, which was that the Charter convertible
notes were extinguished on a consolidated basis but remained outstanding for
parent company only purposes (See Note 9). Notes payable to related party,
as of December 31, 2006, reflect the full accreted
value of the convertible notes held by CCHC subsequent to the
exchange. The convertible notes received in the exchange held by
CCHC, were transferred to Charter Holdco in August 2007, and subsequently
cancelled in November 2007.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
Condensed
Statements of Cash Flows
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss after preferred dividends
|
|
$ |
(1,616 |
) |
|
$ |
(1,370 |
) |
|
$ |
(970 |
) |
Equity
in losses of Charter Holdco
|
|
|
1,443 |
|
|
|
1,168 |
|
|
|
865 |
|
Changes
in operating assets and liabilities
|
|
|
-- |
|
|
|
1 |
|
|
|
-- |
|
Deferred
income taxes
|
|
|
172 |
|
|
|
202 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
(1 |
) |
|
|
1 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
from Charter Holdco
|
|
|
-- |
|
|
|
20 |
|
|
|
132 |
|
Investment
in Charter Holdco
|
|
|
(4 |
) |
|
|
(1 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(4 |
) |
|
|
19 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydown
of convertible notes
|
|
|
-- |
|
|
|
(20 |
) |
|
|
(132 |
) |
Net
proceeds from issuance of common stock
|
|
|
4 |
|
|
|
1 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
4 |
|
|
|
(19 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 |
|
Loss
from continuing operations
|
|
$ |
(381 |
) |
|
$ |
(360 |
) |
|
$ |
(407 |
) |
|
$ |
(468 |
) |
Net
loss applicable to common stock
|
|
$ |
(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, 2007, 2006 AND 2005
(dollars
in millions, except where indicated)
|
|
Year
Ended December 31, 2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,320 |
|
|
$ |
1,383 |
|
|
$ |
1,388 |
|
|
$ |
1,413 |
|
Operating
income (loss) from continuing operations
|
|
$ |
(8 |
) |
|
$ |
146 |
|
|
$ |
66 |
|
|
$ |
163 |
|
Loss
from continuing operations
|
|
$ |
(473 |
) |
|
$ |
(402 |
) |
|
$ |
(333 |
) |
|
$ |
(378 |
) |
Income
(loss) from discontinued operations, net of tax
|
|
$ |
14 |
|
|
$ |
20 |
|
|
$ |
200 |
|
|
$ |
(18 |
) |
Net
loss applicable to common stock
|
|
$ |
(459 |
) |
|
$ |
(382 |
) |
|
$ |
(133 |
) |
|
$ |
(396 |
) |
Basic
and diluted loss from continuing operations
per
common share
|
|
$ |
(1.49 |
) |
|
$ |
(1.27 |
) |
|
$ |
(1.02 |
) |
|
$ |
(1.03 |
) |
Basic
and diluted loss per common share
|
|
$ |
(1.45 |
) |
|
$ |
(1.20 |
) |
|
$ |
(0.41 |
) |
|
$ |
(1.08 |
) |
Weighted-average
shares outstanding, basic and diluted
|
|
|
317,463,472 |
|
|
|
317,696,946 |
|
|
|
326,960,632 |
|
|
|
365,331,337 |
|
In the
fourth quarter of 2006, loss from continuing operations and income from
discontinued operations, net of tax include $16 million and $18 million,
respectively, of income tax expense related to asset sales that occurred in the
third quarter of 2006.